What is a Corporation?
A corporation is a separate and distinct legal entity that is recognized and authorized by a government to conduct business and/or provide business services. A corporation, under its own name, has its own rights, privileges, and liabilities that are separate from its owners and managers.
For instance, a corporation can open a bank account, buy and sell real estate, sue or be sued or go bankrupt. One of the primary advantages of incorporating is that a corporation's owners (shareholders) and officers cannot be held personally liable for a corporation's liabilities. Other reasons include, but are not limited to, tax savings, and distribution
of shares of stocks for capital, and increased credibility and visibility to the public.
What do they require?
A corporation must be formed according to the laws and governance of the state of incorporation. This usually requires filing the Articles of Incorporation with the appropriate state agency, usually the Secretary of State, and payment of the required state fees and taxes.
A corporation is also required to create and maintain a board of directors, corporate officers, annual shareholder meetings, and separate records. Many states, however, allow corporations that have only one shareholder
to have that shareholder act as the sole director and hold all officer positions.
How is a corporation taxed?
A traditional corporation, also known as a C-corporation, is subject to double taxation. What this means is that a C-corporation pays a corporate tax on its corporate income. After this first tax, the C-corporation distributes its profits to its shareholders, who will then pay income tax on those dividends.
A way to avoid double taxation is to elect to be taxed as a pass-through entity, like a sole proprietorship. A corporation electing this type of taxation is known as an S-corporation. The corporate profits of an S-corporation pass through to the owners, who then pay taxes on the dividends at their individual tax rates. Therefore, maintaining the tax records and books of a corporation are of utmost importance.
The existence of a corporation begins with the Articles of Incorporation being filed with the appropriate state authorities, usually the Secretary of State.