How to Create a Corporation

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  • 0:08 Corporations
  • 1:31 Shareholders and Directors
  • 3:25 S Corporations
  • 5:41 Lesson Summary
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Lesson Transcript
Instructor: Ashley Dugger

Ashley has a JD degree and is an attorney. She has taught and written various law courses.

A corporation is a complex business structure that allows for the separate existence of the business from the individuals that run the business. This lesson explains corporations and how to create a corporation.

Corporations

There are many different types of business structures. One of the most popular is the corporation, also known as the C Corp. It's a complex business structure involving numerous legal and administrative requirements. For those reasons, corporation status is used mainly by larger or established companies, like McDonald's, Coca-Cola and Microsoft. A corporation is a business structure where the business is a separate entity from the individuals that run the business. This feature makes the corporation different from a sole proprietorship or a partnership.

Also unlike sole proprietorships or partnerships, a corporation can only be created by officially incorporating according to state law. State laws vary, so incorporation procedures also vary. In general, all states require that the business file articles of incorporation with the state and pay a filing fee. The articles of incorporation serve as the business' charter. The articles are a formal document that creates the corporation. Once properly filed, the state will issue the company a certificate of incorporation.

Shareholders and Directors

Note that the owners of an incorporated business are known as shareholders. Since the corporation is an independent entity from the shareholders, the corporation is held legally liable for its own business debts, taxes, liabilities and obligations. The shareholders have limited liability, meaning that they generally can't be held individually liable for the corporation's responsibilities. Each shareholder can generally only be held liable up to the amount of his or her investment in the company. This doctrine serves to protect a shareholder's personal assets when that shareholder isn't individually responsible for the wrongdoing.

When creating a corporation, most states require that the company issue stock certificates to the initial owners of the corporation. These certificates represent each shareholder's ownership interest, or investment, in the corporation. After incorporation, additional stock may be sold in order to raise capital for the business.

The company will also be required to establish a board of directors at the time of incorporation. The shareholders elect the directors. The directors are the managers, or trustees, of the corporation. Lastly, most states also require the company to develop and pass bylaws before officially incorporating. Bylaws are rules maintained by the company that set out the organization and operation of the corporation.

S Corporations

Note that there's also a second type of corporation, known as an S Corp. This business structure is a variation of the C Corp, offering shareholders pass-through taxation in the majority of states. Both types of corporations offer limited liability for shareholders, but the corporation's tax status significantly differs between the two types.

One of the main disadvantages of a C Corp is that the business is taxed on its profits. Portions of these profits become the shareholders' salaries, bonuses and dividends. The shareholders then pay individual income taxes on the money they receive from the corporation. This practice is known as double taxation because business profits are taxed both when received by the business and when passed on to the shareholders.

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