Corporations FAQs | Legal Form Articles

How is a corporation formed?
The corporation is an artificial entity. It is created by filing Articles of Incorporation with the proper state authorities. This gives the corporation its legal existence and the right to carry on business. The Articles of Incorporation act as a public record of certain formalities of corporate existence. Upon filing of the Articles of Incorporation, payment of the proper fee, and acceptance by the state corporation department, the corporation officially begins its legal existence. Until the state has accepted the articles, the corporation will not shield its incorporators from liability. (Please see below for more information about limited liability.) Adoption of corporate bylaws, or internal rules of operation, is often the first business of the corporation, after it has been given the authority to conduct business by the state. The bylaws of the corporation outline the actual mechanics of the operation and management of the corporation.

What must be included in a corporation’s Articles of Incorporation?
The central legal document for any corporation is the Articles of Incorporation. This form outlines the basic structure of the corporation and details those matters that are relevant to the public registration of the corporation. The name, purpose, owners, registered agent, address, and other vital facts relating to the existence of the corporation are filed with the state by using this form.

For comprehensive instructions for completing and filing your articles, please see our Articles of Incorporation Kits, available for all 50 states.

How is a corporation structured?
In its simplest form, the corporate organizational structure consists of the following levels:

Shareholders: who own shares of the business but do not contribute to the direct management of the corporation, other than by electing the directors of the corporation and voting on major corporate issues.
Directors: who may be shareholders, but as directors do not own any of the business. They are responsible, jointly as members of the board of directors of the corporation, for making the major business decisions of the corporation, including appointing the officers of the corporation.
Officers: who may be shareholders and/or directors, but, as officers, do not own any of the business. Officers (generally the president, vice president, secretary, and treasurer) are responsible for day-to-day operation of the corporate business.

What benefits do shareholders enjoy by virtue of their ownership of stock?
The primary benefit of being a shareholder is the right to a share of ownership in the assets of the corporation. However, the business profits of the corporation may also be shared with the shareholders in the form of dividends. The decision of the corporation to issue dividends on stock, however, is within the realm of the board of directors.

What role do shareholders play in the operation of a corporation?
The main responsibility of the shareholders is to elect the directors of the corporation. The shareholders also have the authority to vote on extraordinary business actions of the corporation. These actions are generally limited to decisive activities of the corporation, such as the sale of all of the assets of the corporation, the merger of the corporation, or the dissolution of the corporation. Shareholders, finally, generally have the right to approve any amendments to the Articles of Incorporation. Shareholders’ authority to direct the business only comes from the right to undertake these few actions. Their power must also always be exercised as a group. An individual shareholder has no power to direct the management of the corporation in any way, other than to buy or sell shares of stock

How are directors elected?
The election of the directors of the corporation takes place at the annual meeting of the shareholders, although directors can be elected for terms that last for more than one year. At the annual meeting, the president and treasurer of the corporation (both officers of the corporation; see below) will present their annual reports on the activities and financial state of the corporation. The shareholders will then elect (generally by secret ballot majority vote) the directors for the following year.

Please note that in the forms available on our site, the initial board of directors is specified in the Articles of Incorporation which are prepared and filed with the state. This listing of the directors is to comply with many states’ requirements. The directors who are selected in the articles may then be approved by the shareholders at their first meeting, or may be rejected and new directors elected.

What role do the directors play in the operation of a corporation?
The board of directors of a corporation has two main responsibilities. The first is to appoint and oversee the officers who will handle the day-to-day actions of actually running the business. The second responsibility is for setting out the corporate policies and making most major decisions on corporate financial and business matters. The policies of the corporation are first contained in the corporate bylaws that will be prepared by the board of directors. Subsequent corporate policies can be outlined in board of directors resolutions, unless they conflict with the bylaws. In such a case, the bylaws must be formally amended by the board of directors, with the consent and approval of the shareholders. Thus, it is the directors who have the actual central authority and responsibility in a corporation.

Note that the directors of the corporation must act as members of the board of directors. Individual directors, acting alone, have no authority to bind the corporation or, for example, to enter into contracts or leases for the corporation. The directors must act as a board of directors. Most states, however, allow corporations to have only a single director. This sole director must, however, continue to act as a board of directors.

Who is responsible for managing the corporation?
This differentiation of responsibilities in corporate management is crucial and often difficult to grasp. The shareholders only have the right to elect the directors and vote on major extraordinary business of the corporation (for example, on a merger, complete sale of the corporation, dissolution, or amendments of the Articles of Incorporation). The directors’ role is much wider. They have the power to authorize the corporation to enter into contracts, purchase property, open bank accounts, borrow or loan money, and other such significant actions. The board can also delegate this authority to its officers, but, and this is crucial, it must do so in writing with a specific board of directors resolution. In many corporations, in fact, much of the actual operations are handled by the officers. However, all of the officers’ authority to operate on behalf of the corporation stems directly from the board of directors.

How are officers appointed?
The board directors will hold annual meetings at which time they will appoint corporate officers.

What role do officers play in the operation of the corporation?
To the officers of a corporation fall the responsibilities of running the business. Their powers, however, are dictated solely by the board of directors. Officers can be given very broad powers to transact virtually all business for the corporation, or they can be tightly limited in their authority. A single shareholder can act as both the sole director and the sole officer of a corporation in most states. The officers, however, even in this circumstance, still derive their authority from resolutions of the board of directors. Prudent businesses often require copies of the authorizing resolutions in the course of large transactions.

There may be many levels of corporate officers. Traditionally, there are four main officers: president, vice-president, treasurer, and secretary. Their specific powers should be outlined by the directors in the corporate bylaws and their authority to transact individual business deals should be detailed in board of directors resolutions. In general, the president acts as the corporation’s general manager, handling the day-to-day operations. The vice-president normally acts only in the absence of the president, although this officer can be given specific responsibilities. The treasurer handles the corporate funds and is responsible for the accounting books. The secretary handles the corporate records (minutes, resolutions, etc.) and is also generally responsible for the corporate stock and corporate stock transfer book

What are the advantages of organizing your business as a corporation?
One of the most important advantages to the corporate form of business structure is the potential limited liability of the founders of and investors in the corporation. The liability for corporate debts is limited, in general, to the amount of money each owner has contributed to the corporation. Unless the corporation is essentially a shell for a one-person business or unless the corporation is grossly under-capitalized or under-insured, the personal assets of the owners are not at risk if the corporation fails. The shareholders stand to lose only what they invested. This factor is very important in attracting investors as the business grows.

A corporation can have a perpetual existence. Theoretically, a corporation can last forever. This may be a great advantage if there are potential future changes in ownership of the business in the offing. Changes that would cause a partnership to be dissolved or terminated will often not affect the corporation. This continuity can be an important factor in establishing a stable business image and a permanent relationship with others in the industry.

Unlike a partnership, in which no one may become a partner without the consent of the other partners, a shareholder of corporate stock may freely sell, trade, or give away his or her stock unless this right is formally restricted by reasonable corporate decisions. The new owner of such stock is then a new owner of the business in the proportionate share of stock obtained. This freedom offers potential investors a liquidity to shift assets that is not present in the partnership form of business. The sale of shares by the corporation is also an attractive method by which to raise needed capital. The sale of shares of a corporation, however, is subject to many governmental regulations on both the state and federal levels.

Taxation is listed both on an advantage and as a disadvantage for the corporation. Depending on many factors, the use of a corporation can increase or decrease the actual income tax paid in operating a corporate business. In addition, corporations may set aside surplus earnings (up to certain levels) without any negative tax consequences. Finally, corporations are able to offer a much greater variety of fringe benefit programs to employees and officers than any other type of business entity. Various retirement, stock option, and profit-sharing plans are only open to corporate participation.

What are the disadvantages of organizing your business as a corporation?
Due to the nature of the organizational structure in a corporation, a certain degree of individual control is necessarily lost by incorporation. The officers, as appointees of the board of directors, are answerable to the board of management decisions. The board of directors, on the other hand, is not entirely free from restraint, since it is responsible to the shareholders for the prudent business management of the corporation.

The technical formalities of corporation formation and operation must be strictly observed in order for a business to reap the benefits of corporate existence. For this reason, there is an additional burden and expense to the corporation of detailed recordkeeping that is seldom present in other forms of business organization. Corporate decisions are, in general, more complicated due to the various levels of control and all such decisions must be carefully documented. Corporate meetings, both at the shareholder and director levels, are more formal and more frequent. In addition, the actual formation of the corporation is more expensive than the formation of either a sole proprietorship or partnership. The initial state fees that must be paid for registration of a corporation with a state can run as high as $900.00 for a minimally capitalized corporation. Corporations are also subject to a greater level of governmental regulation than any other type of business entity. These complications have the potential to overburden a small business struggling to survive.

Finally, the profits of a corporation, when distributed to the shareholders in the form of dividends, are subject to being taxed twice. The first tax comes at the corporate level. The distribution of any corporate profits to the investors in the form of dividends is not a deductible business expense for the corporation. Thus, any dividends that are distributed to shareholders have already been subject to corporate income tax. The second level of tax is imposed at the personal level. The receipt of corporate dividends is considered income to the individual shareholder and is taxed as such. This potential for higher taxes due to a corporate business structure can be moderated by many factors, however.

What is an S-Corporation?
The S-corporation is a certain type of corporation that is available for specific tax purposes. It is a creation of the Internal Revenue Service. S-corporation status is not relevant to state corporation laws. Its purpose is to allow small corporations to choose to be taxed, at the Federal level, like a partnership, but also to enjoy many of the benefits of a corporation. It is, in many respects, similar to a limited liability company. The main difference lies in the rules that a company needs to meet in order to qualify as an S-corporation under Federal law.

In general, to qualify as an S-corporation under current IRS rules, a corporation must meet certain requirements:

It must not have more than 75 shareholders
All of the shareholders must, generally, be individuals and U.S. citizens
It must only have one class of stock
Shareholders must consent to S-corporation status
An election of S-corporation status must be filed with the IRS

The S-corporation retains all of the advantages and disadvantages of the traditional corporation except in the area of taxation. For tax purposes, S-corporation shareholders are treated similarly to partners in a partnership. The income, losses, and deductions generated by an S-corporation are “passed through” the corporate entity to the individual shareholders. Thus, there is no “double” taxation of an S-corporation. In addition, unlike a standard corporation, shareholders of S-corporations can personally deduct any corporate losses.

The following forms found in our Corporation Forms section relate to the topic of this article:

Corporation Forms Combo Packages – These Corporation Forms Combo Packages contain some of the most popular and most often used corporate forms. They take the guesswork out and save you time and headaches by always including the right forms.

Articles of Incorporation – Articles of Incorporation (aka Certificate of Incorporation) for use in various states. This document is used to legally create a corporation.

Board of Directors Agreements and Forms – Board of Directors related forms including Minutes, Notices, Waivers and much more for use in all states.

Bylaws – Corporate Bylaw Kits for use in all states. Every corporation must have a set of bylaws. They provide the framework for the management of the business and contain the basic rules on how the corporation is to be run. They cover the shareholders, directors, officers and stock of the company.

Pre-Incorporation Kits – Pre-Incorporation Kits provide tools for determining the details of a corporation’s purpose, structure and type prior to incorporation. Available for all states.

Resolutions – Various Corporate Board of Directors and Shareholder Resolutions covering a variety of situations for use in all states.

Shareholders – Corporate Shareholder related forms, including Minutes, Notices, Proxies, Waivers and much more for use in all states.

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