A corporation is a sort of legal entity that enables individuals to run a business with specific advantages, protections, and tax regulations.
What a Corporation is?
The businesses we’re familiar with as consumers, have a wide range of forms. One of these is a corporation, which is a type of legal structure meant to provide its owners with protection from certain risks as they perform their company. With the exception of their own investment in the company (limited liability), founders are typically not held personally responsible for the losses of the corporation. Through this legal separation, a person or group of individuals may be able to reduce some of the risks they assume while devoting time and resources to a business.
Similar to people, businesses are able to make and borrow money, enter into agreements, engage in legal disputes, and abide by the laws that are applicable to them. Corporations pay income tax on their profits, in contrast to various other forms of corporate ownership structures like partnerships or limited liability companies (LLCs).
How is a corporation formed?
Depending on the type of business you’re running and what requirements it has, forming a corporation may appear a little different. In general, the process includes making a number of decisions, such as where it will be located, who will oversee it, and whether to register the corporation with the government.
Forming a corporation typically involves the following steps:
1. Select the business structure. One of the many legal structures that can be used when founding a business is a corporation. Other types include partnerships, limited liability firms, and sole proprietorships (LLCs). Each structure has its own set of advantages and rules.
2. Decide on a location. The location of a corporation is crucial because it affects the taxes your company may have to pay, any licenses it might need to apply for, the rules it will have to obey, and any financial incentives or perks it could be eligible for.
3. Make up a name for it. Any name can be used for a corporation, although normally names that are already in use by another firm that is registered in the same state are not permitted.
4. Obtain a federal employer identification number (EIN). The EIN functions similarly to a company’s SSN. The majority of corporations must apply for an IRS federal employment identification number since they must file tax returns and pay taxes.
5. Choose directors. You might need to choose a board of directors to manage the corporation and its interests depending on the state where you’re founding your organization. The board of directors of publicly traded companies is often charged with representing the interests of the company’s shareholders.
6. File articles of incorporation. These are filed with the secretary of state’s office and are sometimes referred to as “certificates of incorporation” or “charters.”
The working process of a corporation
An organization is given a defined ownership structure by the legal name of “corporation.” The assets and liabilities of a company become legally distinct from the people who own it after that company incorporates, or goes through the process of becoming a corporation. This means that if the corporation incurs debts or is involved in a scenario like a litigation, only the corporation itself is liable. If the corporation is unable to pay its debts, it often cannot assert a claim against the owners’ personal assets.
Understanding how this functions differently from other ownership structures may be helpful. One general partner often assumes unlimited liability in a limited partnership form, whilst all other partners only have limited liability.
Types of corporations
The most typical types of corporations are listed below:
- When we think of a “corporation,” we frequently think of C corporations, which can be any number of businesses, from a small neighborhood grocery store chain to global enterprises like Google or Amazon. C corporations typically provide owners with greater protection than other types of ownership arrangements because, according to the law, they are wholly distinct legal entities from the persons who own them. A higher price may be associated with this benefit. For instance, a C corporation’s income may be taxed twice: once on corporate profits and once again if any dividend payments are made to shareholders.
- S companies (also known as S corps) are similar to C corps in that they are both considered as separate legal entities that are not dependent on their owners. However, there are a few significant variations. For starters, a S corporation is limited to 100 shareholders. The profits of a S corporation can typically be “passed through” to the owners’ personal income, which means they aren’t subject to an additional corporate tax like many C corporations are. Separate from registering with the municipal or state government, a business must submit an application to the Internal Revenue Service in order to receive S corporation status.
- B corporations (B corps) are for-profit companies that are also motivated by a mission, therefore they often need to show both financial success and societal value. They normally pay the same taxes as C companies do. B corps are required to provide an annual report in several states that includes information about their finances as well as how they carried out their objective.
- Similar to B corps, close corporations are smaller businesses that normally cannot be traded publicly, however this too varies on the jurisdiction.
- Nonprofit corporations include mission-driven organizations such as charities and, for example, academic institutions. Nonprofits are tax exempt — they are not required to pay taxes on their profits, but they must follow some rules that govern how their profits should be spent. Nonprofits, for example, cannot pay dividends or contribute to political campaigns.
Pros and cons of corporations
Pros: Corporations are treated as a separate legal entity from the person or people who own them. This separation has a significant advantage over other types of ownership structures in that if the company faces liability, such as a lawsuit, its owners can be protected from risk to some extent.
Furthermore, many types of corporations can sell shares to a larger pool of investors, even on the public market, which can be critical for a business that intends to grow and sustain over time.
Cons: Forming a corporation may be more expensive than other types of ownership structures. Some businesses may also have to pay taxes twice. First, the corporation may be required to pay taxes on its profits; second, if the corporation pays dividends, shareholders are needed to pay additional taxes as part of their personal income tax.
Corporations, in addition to being potentially more expensive, may necessitate more work to operate and maintain.
A corporation VS a company
A company is a broad term that refers to a wide range of commercial enterprises. A company can be a one-person operation or a large multinational corporation with millions of employees.
A corporation, on the other hand, is a special legal designation that allocates a company a specific ownership structure. Depending on the chosen ownership structure, a company’s owners can go through the process of “incorporating” to legally separate the business from their personal assets, which can offer the owners some degree of protection against different liabilities.
A corporation is a type of a company that is organized to be treated as an entity, distinct from its owners.