Unlike sole proprietorships or partnerships, a corporation legally exists as an entity entitled to act separately from the persons with membership interests in it. Corporations can exist indefinitely and issue stock (also called shares) to members. While a corporation may only exist on the papers in which it is organized, these documents, if drafted correctly, can create legal powers to act as a strong and powerful business.
Benefits of Corporations
One of the main benefits of incorporation is that, because of the corporation’s separate legal existence, shareholders of the corporation have limited personal liability for acts of the corporation. If the corporation is sued, only the corporation’s assets may be used to satisfy any judgments against the business. Of course, shareholders may lose their stock investments in the corporation, but they will not lose any other personal assets or property.
Corporations are usually managed by a board of directors; thus, investors will presumably reap the rewards of educated business decisions based on the corporation’s needs and the current economic conditions it faces.
Corporations can obtain financing through offerings of stock or through bonds that are convertible to equity at a later date. Corporations can have an infinite existence; if a shareholder dies, the shareholder’s stock may be inherited, or purchased by another shareholder if an agreement exists for the purchase. For that matter, shares of a corporation are easily transferred through sale or gift.
Disadvantages of Corporations
While incorporation yields substantial benefits with regard to liability and flexibility of transferring assets, it comes with a price. Incorporation can be costly and the corporation must maintain corporate status in each state in which the corporation does business. To maintain corporate formalities, good business practice for corporations includes holding meetings and recording minutes of the meetings on a regular basis.
Another potential disadvantage for corporations is double taxation through tax on the corporation’s earnings and tax on the shareholders’ dividend earnings. Corporations can be organized as S-corporations, which provide for pass-through taxation, but only certain corporations will qualify with the Internal Revenue Service for this election.
Creating a Corporation: Articles of Incorporation and Bylaws
Corporations are a statutory creation, so requirements for corporate existence may vary by state. But all states require that articles of incorporation be filed with the secretary of state for a corporation to exist. Most states require the following elements to appear in the articles of incorporation: the name of the corporation, the name and address of each incorporator, initial director and registered agent, the purpose of the corporation and the number of shares and classes, as well as the rights of each share class that the corporation can issue.
Optional provisions could include a statement on the minimum capital to begin business, limits on the liability of directors or shareholders if consistent with state law, the par value of shares, definition and limits on specific corporate powers, statements on debts and a stated duration of existence.
Many corporations typically provide for the management and running of corporate affairs through corporate bylaws, but some provisions may be considered important enough to include them in the articles of incorporation. Generally, bylaws may be amended by a vote of the directors, while amending the articles of incorporation requires a vote of the shareholders. Shareholder votes are generally more difficult, so provisions included in the articles of incorporation are usually items that are considered fundamental to the corporation’s existence. For assistance in drafting bylaws, articles of incorporation or other organizational documents, contact a business lawyer.
Preparing to Meet With Your Business Law Attorney
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