The Process of Forming a Corporation

Katie Moore, Ashley Dugger
  • Author
    Katie Moore

    Katie Moore has an MBA in Business Management from Rice University and a Bachelor’s degree in Finance and Sociology from The University of Houston. She has over 8 years of teaching experience with some experience in online education.

  • Instructor
    Ashley Dugger

    Ashley has a JD degree and is an attorney. She has extensive experience as a prosecutor and legal writer, and she has taught and written various law courses.

Learn how to start a corporation and see the steps to forming a corporation. Compare the C Corp and S Corp and explore the requirements for setting up a corporation. Updated: 04/26/2022

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Forming a Corporation

A corporation is a formal institution independent from its shareholders and separate from its business. Legally, corporations have a lot in common with people regarding their rights and obligations in life. They can sign agreements, make loans, bring an action in court, employ people, possess property, and pay taxes. Unlike its owners, a corporation enjoys legal autonomy. Several legal obligations and rights that apply to persons also apply to corporations.

Forming a Corporation happens when several investors, each of whom owns shares in the corporate entity, join together to form a new company and work toward a shared purpose. The great majority of businesses exist to maximize profits for their owners. Non-profit corporations, on the other hand, include groups like charities and fraternal entities.

Limited liability is an essential characteristic of a corporation since it protects owners from being held personally liable for the business's liabilities. Large companies such as Microsoft Corp., Toyota Motor Corp, and Coca-Cola Co. are all examples of corporate entities. Some organizations, like Alphabet Inc., which is most known for its use of the term Google, operate both under their corporate time and separate company identities.

The laws of a corporation, often known as the bylaws of the firm or simply the bylaws, refer to a legal statement outlining the most important regulations and procedures that control the organization's daily activities. There are many ways these standards can help a company run more effectively, consistently, and reliably.

C corporations (C Corp) are one of the most prevalent business formats company owners use. Companies organized under a C corporation are treated separately from their owners. In the Internal Revenue Code, they are known as C companies since they are subject to subchapter C's rules and regulations.

Benefits of Corporations

Limited liability, easier transference of stock, sustainability of operation, and improved access to financing are just a few of the benefits of setting up a corporation. Corporate law and its advantages will be determined by the company's pre-set.

If there is a concern about protecting personal assets, a company is the best option. A corporation's debts and legal requirements are not the responsibility of its investors, even if the company may not have sufficient funds in resources to pay them back.

As a result, corporations are more flexible in passing ownership and ensuring that the firm will continue for generations to come. Moreover, ownership of this form of business can be easily transferred, even though the bylaws or incorporation documents govern the particular specifics of the transfer. For instance, a shareholder can quickly transfer their share if they desire to quit a company. Likewise, if a proprietor dies, their ownership shares might be transferred to another person.

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Understanding the Roles of Shareholders and Directors

At the time of incorporation, the earliest shareholders of a company are often its founders, and in smaller companies, the founders may be the only shareholders. A small corporation's limited shareholders may comprise persons active in daily corporate activities. A shareholder could be an individual, firm, or institution that possesses equities in a particular company. A shareholder is a firm's proprietor, usually measured by the number of shares owned.

A stakeholder may not possess part of the firm. However, they own some stake in the success of a firm much like the shareholders. On the other hand, their passions might or might not have anything to do with money. They are the legal proprietors of the company's stock. However, the shareholder has a restricted role in the corporation because they have neither authority nor the responsibility to oversee its daily operations. Shareholder rights differ relative to the type of investment possessed and the relevant law. During general meetings, some owners have the authority to propose specific company actions. As a result, these agenda issues are frequently included in company proxy reports.

Investors have a stake in the company's profits and assets and can cast votes on vital managerial choices if they join the ranks of shareholders. Shareholders of Chevron Corporation, for instance, voted in favor of a plan to cut pollution from the company's goods in May 2021.

Officers and directors are responsible for running a corporation. A board of directors is a collective of directors who work together. The board of directors elects the corporation's top decision-makers. It is in charge of its day-to-day operations and has full power to carry out all its functions.

Directors have a fiduciary duty because of their position of authority over the company's assets. Moreover, since they represent the people they work for, they should do so. For instance, a company's board of directors has a say in everything from strategic planning to repurchase programs to dividend declarations.

As elected by shareholders, the board of directors' primary responsibility is to represent the interests of shareholders in a publicly-traded company. Legally speaking, directors must put the shareholders' interests before their own. An organization's board of directors is responsible for overseeing its operations and evaluating its performance. A director, for example, might encourage the company to work harder to meet the profit goals set by the company's shareholders.

How to Start a Corporation

  • Selecting a Name

According to the country's Corporation Division, the name of a corporation should conform to the regulations. As far as legal requirements are concerned, the division should be consulted by the owners. It is unnecessary to register a brand name with the country once a suitable and legally available name has been identified. The company is automatically recorded when the articles of incorporation have been filed. The owner must file a fictitious or assumed name assertion with the jurisdiction in which the business is located if the company is to operate under a different name.

  • Selection of Directors

The board of directors is responsible for making significant decisions about the company's policies and finances. Through their authority, the stock is issued, officers are appointed, salaries are set, and loans are granted to the corporate entity and repaid by the corporation. Before a company is even open for business, the corporate entity's shareholders typically appoint a board member. Owners often assign themselves to the management board, but this isn't required. A single director is permitted in most jurisdictions, no matter how many shareholders there are. Companies with two or more partners should have at least two directors, while those with multiple owners must have three directors. A corporation can only have one director in other regions if it has only one shareholder.

  • Articles of Incorporation Filing

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Frequently Asked Questions

What is the purpose of forming a corporation?

The personal assets of a corporation's proprietors are better protected than those of any other sort of business. For example, if a company is sued, its shareholders are not individually responsible for the firm's liabilities even when a corporation may not possess the assets to fulfil the debt.

What is required to form a corporation?

One must engage a lawyer, designate directors and authorized agents, design bylaws, issue shares, and complete articles of incorporation, including IRS papers, to form a corporation. The legal criteria for creating and maintaining a corporation are corporation requirements. In addition, there are standards to fulfil when the business is in existence, ranging from what material must be contained in filings to how it will be operated.

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