The Most Popular Form of Corporation
The "C-Corporation" designation merely refers to a standard, general-for-profit, state-formed corporation. This is the most popular form of corporation.
To be formed, an Incorporator must file Articles of Incorporation and pay the requisite state fees and prepaid taxes with the appropriate state agency (usually, the Secretary of State – Corporations Division).
Separate Legal and Tax Life
A corporation, which is properly formed and operated as a corporation, assumes a separate legal and tax life distinct from its shareholders. A corporation pays taxes at corporate income tax rates and files its own corporate tax forms each year (IRS Form 1120).
Management and Control in Corporations
Normally, a corporation's management and control is vested in the Board of Directors who are elected by the shareholders of the corporation. To maintain a corporation’s good standing and thus receive the benefits that incorporation has to offer, individuals in a corporation must assume certain roles.
The illustration below presents a brief overview of the hierarchy of power observed in a corporation.
SHAREHOLDERS:
- Owners of the Corporation
- Elect and Remove Directors
- Possess Ultimate Power
- Possess NO Power in Daily Corporate Activities
DIRECTORS:
- Elected by Shareholders
- Responsible for Long=term Goals and Policy Decisions
- Serve for a Pre-determined Period, Usually 1 Year
- Appoint and Remove Officers
- NO Involvement in Daily Activities
OFFICERS:
- Appointed by Directors
- Responsible for Setting and Supervising Management
- Report Directly to Directors
MANAGEMENT:
- Supervise Daily Operations
- Reports to Officers
STAFF:
- Implements Policies
- Brings Concepts to Life
Number of Persons Required
In most states, one or more persons may form and operate a corporation. Some states, however, require that the number of persons required to manage a corporation be at least equal to the number of owners. For example, if there are two shareholders, there must also be a minimum of two directors.
Corporate Formalities
To retain the corporate existence, and thus the benefits of limited liability and special tax treatment, those who run the corporation must observe corporate formalities. Thus, even a one-person corporation must wear different hats depending on the occasion.
For example, one person may be responsible for being the sole shareholder, Director, and Officer of the corporation; however, depending on the action taken, that person must observe certain formalities: Annual meetings must be held, corporate minutes of the meetings must be
taken, Officers must be appointed, and shares must be issued to shareholders. Most importantly, however, the corporation should issue stock to its shareholders and keep adequate capitalization on hand to cover any "foreseeable" business debts.
Shareholder Liability for Corporate Debts
Where corporate formalities are not observed, shareholders may be held personally liable for corporate debts. Thus, if a thinly capitalized corporation is created, funds are commingled with employees and officers, stock is never issued, meetings are never held, or other corporate formalities required by your state of incorporation are not followed, a court or the IRS may "pierce the corporate veil" and hold the shareholders personally liable for corporate debts.
Fringe Benefits
Corporations may often offer their employees unique fringe benefits. For example, owner-employees may often deduct health insurance premiums paid by the corporation from corporate income. In addition, Corporate-defined benefit plans often afford better retirement options and benefits than those offered by non-corporate plans.
Avoiding Double Taxation
Generally, the corporation is taxed for its own profits; then, any profits paid out in the form of dividends are taxed again to the recipient as dividend income and the individual shareholder's tax rate. However, most small corporations rarely pay dividends. Rather, owner-employees are paid salaries and fringe benefits that are deductible to the corporation. The result is that only the employee-owners end up paying any income taxes on this business income and double taxation rarely occurs.
Duration of a Corporation
As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers, or directors or by transfer of its shares from one person to another.
Constitutional Protections for Corporations
Although a corporation is not a "citizen" under the U.S. Constitution, a corporation may exercise some of the constitutional protections granted to natural persons such as: Right to Due Process and Equal Protection, Freedom of Speech, Right to Counsel
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