Your Guide to Business Entity Types: Corporations
Corporations are one of the most popular types of business entities. This is because they provide the most protection from liability for their owners and directors. Incorporating a business allows the company to act as its own legal entity and allows stocks to be publicly traded.
Today, we’ll be discussing the essential points of what a corporation is, what’s required to incorporate a business and more. Continue reading to learn more, and if you are starting a new business, reach out to Morris Law Group. Our Edina attorneys can help you determine if incorporating your business is the right choice for you and provide you with legal advice, services, and representation. Reach out to our team today.
What Is a Corporation?
Technically speaking, a corporation is a business that has filed Articles of Incorporation or the Charter with the Secretary of State’s office in the state in which it chooses to incorporate. A corporation provides limited liability to its owners and board of directors, is managed by the board of directors and officers, and can be taxed under one of a couple different subchapters of the Internal Revenue Code.
Articles of Incorporation
The Articles of Incorporation require the name and address of the corporation, the business in which it will be engaged, and the type and amount of stock the corporation will issue. A corporation is subject to the laws of the state in which it incorporates, the state in which it is headquartered, and the state in which its primary business is conducted, i.e. its production facilities. The Model Business Corporation Act (MBCA), and its many revisions, provide a basis for many state statutes governing corporations.
Charters and Bylaws
A corporation is also required to have a charter and bylaws, commonly referred to as the corporation’s governing documents. The bylaws dictate the rules of governance for the corporation, including board and shareholder meetings, notice and quorum for such meetings, number and qualifications of directors, voting standards, and officer appointments.
Management of a Corporation
A corporation’s management is overseen by a board of directors, elected by the shareholders. Day-to-day management of the corporation is conducted by its officers, who are in turn appointed by the directors.
Liability
Shareholders of a corporation are shielded from personal liability unless otherwise noted in the Articles of Incorporation. Therefore, if the corporation fails, the shareholders will lose their capital investment, but their personal assets cannot be reached for the debts and obligations of the corporation.
While directors and officers are not directly shielded from liability, as long as they act in the best interest of the corporation, they are shielded from liability for their actions. This is generally referred to as the Business Judgment Rule.
The Business Judgment Rule is a general combination of the Duty of Care, Duty of Loyalty, and of the Duty of Good Faith and Fair Dealing that directors and officers owe, in whole and individually, as fiduciaries of the corporation. As long as the directors and officers are not negligent, usurping corporate opportunities, or otherwise acting in bad faith involving the corporation’s interests, the directors and officers will be shielded from liability for their decisions and/or actions.
Taxes
For the purpose of federal income taxation, a corporation is taxed under subchapter C of the Internal Revenue Code, generally referred to as a C-Corp for the purpose of taxation. However, if a corporation has chosen to be taxed as a small business corporation, it may be taxed under subchapter S of the Internal Revenue Code, generally referred to as an S-Corp for the purpose of taxation.
A C-Corp is a separate tax-paying organization required to file an annual income tax return. Whereas an S-Corp is taxed more like a partnership in that it uses pass-through taxation of its individual shareholders. The individual shareholders for both C and S corps are required to report the profits or losses on their personal federal income tax returns. However, the difference being, that C-Corp profits are taxed twice, once at the corporate level and again at the individual shareholder level, while S-Corp profits are only taxed once at the individual shareholder level.
Registering a Company With the State as a Corporation
The decision to incorporate a business can be one that leads your company to great success. However, the process of incorporating a business can be complicated — that’s why Morris Law Group is here to help. If you are starting a new business and would like to incorporate your business in the state of Minnisota, our Edina law team can help you through this complex process. Reach out to Morris Law Group today and we’ll start with a no-obligation, free consultation so you can learn more about how we can help you. Serving the Minneapolis, Saint Paul and Western Wisconsin, Twin Cities Minnesota metro area.