What is Corporation? – Definition, Formation, Types, and More
A corporation is a legal person, subject to obligations under the law, and created by one or more natural persons for a specific purpose.
Although corporations are not necessarily for profit, they tend to be more associated with entities for commercial purposes, that is, companies.
In any case, a corporation is an entity made up of people, companies, or other legal entities, which may take the form of a company, non-governmental organization, union, or other association.
The owners of the corporation, who are the shareholders, usually delegate the management to other people who make up a board of directors.
Thus, those who make decisions about the corporation are not their owners but the managers.
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How to Form a Corporation?
Corporations are often forming in the state where the business operates, but it doesn’t necessarily have to be.
Some are training in states designed for business, such as Delaware or Nevada.
However, this means more paperwork.
You have to register the corporation as a foreign entity in the state where your business operates and pay taxes to the state.
The next step is to create Articles of Incorporation, filed in the state in which the corporation is making.
The name and physical address of the business.
A description of the goods and services of the business.
The name and address of the registered agent or the person authorized to receive special news
The number of shares issued and to whom
And then create by statute, which are the rules of the corporation.
They include, at a minimum, How often the board of directors meets and when.
Whether the business operates on a calendar or by fiscal year
How long can board members serve?
The rules to change in the statutes
The bylaws can be amending as a need once the corporation is cut.
What are the Types of Corporation?
1. Corporacion General (Corp., Inc. or Co.)
It is the most formal structure in organizational terms, being the most widely using by companies of all sizes.
It is the equivalent of a Limited Company whose capital is representing by shares.
A general corporation can have an unlimited number of shareholders/owners, and its patrimonial responsibility (personal assets) is fully protecting from the corporation’s responsibility.
The responsibility of a shareholder is usually limited to amount invested in the business.
Therefore it is who wins or loses with the possession of these shares.
2. Limited Liability Company (LLC or LTD)
It represents an alternative to a simple partnership between people (associations) since it allows combining the best of both structures.
The advantages of a corporation in terms of its holders’ limited liability and the tax advantages of a partnership.
It would represent a Limited Liability Company, whose owners are members/partners and not shareholders.
Members are not personally liable for the company’s liabilities, and both profits and losses are allowing to be transferring to the personal earnings of their owners.
3. Non-Profit Corporation
It is the appropriate structure for religious, educational, charitable, or scientific organizations that benefit society.
This type of structure’s net income should be cast-off for similar purposes: nonprofit, not to enrich its managers, members, or directors.
Most nonprofit corporations are tax-exempt, although the US tax office must approve this.
4. Corporation “S”
It is the same as a General Corporation, also known as a C Corporation, which opts for special tax treatment.
It is a unique form of a corporation where profits or losses are transferring directly to its holders.
This avoids double taxation, which is a negative aspect of general corporations.
To obtain this status, it is necessary to file a presentation with the IRS (Internal Revenue Service) within 75 days of incorporation through form 2553.
Unlike a General Corporation, the number of shareholders is incomplete to 75.
On the other hand, they have to be US residents, so this structure prohibits non-residents.
Additionally, an “S” Corporation cannot have among its holder’s general Corporations, other S Corporations, LLCs, Funds, or simple associations.
What are the Pros and Cons of Corporation?
Before creating a corporation, consider what you hope to gain from this separate entity.
The significant advantages of having a corporation are
- As in other businesses, corporations provide liability protection to their owners, who are calling as shareholders.
- Companies looking to raise money from investors will find it more comfortable as a corporation, selling ownership interests.
- Corporations pay taxes, but much less than what an individual pays.
- Potential employees may find that working for a corporation, with the possibility of having the benefits of ownership, is much more attractive than working for a private company.
- The corporation may offer a medical reimbursement plan, deducting health insurance costs for its employees while benefiting them by tax exemption.
While corporations can offer owners some security.
- The downsides are significant and very expensive.
- Corporations are expensive and complicated.
- Once established, corporations spend significant sums of money to keep up with changing business regulations and paperwork.
They are recommending for large organizations with many employees.
- Corporations pay federal, state, and often local taxes.
- Corporations pay taxes in dividends to their shareholders, who in turn pay taxes on their income.
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