Corporation

Corporation- Meaning

A corporation is a group of persons or organizations who are authorized to act as a single entity separate from its owners recognized as such in law. It does all those things which one individual can do. For instance, enter into contracts, sue or can be sued, purchase or sell something. Also, it can borrow money, pay taxes, hire employees, etc. Hence it carries a limited liability i.e. the shareholders carry a liability to the extent they own their shares in the corporation. So, they don’t need to pay from their pockets. Corporations can be for profit or not for profit. And can be publicly or privately held.

The jurisdiction divides the corporation into two kinds: whether or not can issue stock and whether or not are profit-oriented. Further, we divide the corporations based on the number of owners: Corporation Aggregate and Corporation Sole. Corporation Sole has a single incorporated office consisting of a single natural person only. But Corporation Aggregate is our subject matter today.

Types of Corporation

C Corporation

C are those corporations as per, United States Federal Income Tax Law which is taxed as per the Subchapter C of Internal Revenue Code. So, it pays taxes out of the earnings as a separate legal entity before distributing the dividends to the shareholders.

S Corporation

S corporations are those corporations under Subchapter S of the Internal Revenue Code as per, United States Federal Income Tax Law who meet certain federal requirements. The corporation does not pay the taxes as a corporation But distributes to the shareholders. Hence, the shareholders pay taxes on their tax returns at their tax rates.

Formation of Corporation

The following is the step by step procedure of the formation of the corporation:

  • Choosing a business name.
  • Checking the availability.
  • Registering a DBA (Doing Business As) name.
  • Appointing Directors.
  • File Articles of Incorporation.
  • Mention the corporate bylaws.
  • Draft a shareholder’s agreement.
  • Conduct the initial BOD (Board Of Directors) meeting.
  • Stock Issuance.
  • Acquire permits and licenses.
  • Register with the IRS (Internal Revenue Service) and local agencies.

Generally, corporations are formed in the state in which they operate their business. But it is not necessary to do that.

Corporation

Features of a Corporation

It has a separate legal entity completely different from its owners. So, it carries various rights and responsibilities.

Double Taxation

It pays taxes on profits as a corporation. If the corporation pays a dividend to the shareholders, they need to pay taxes on those dividends also. This amounts to double taxation.

Easy Capital Acquisition

 

Management

Shareholders don’t take care of day to day operations. They hire the Board of Directors who then hire employees. These employees work

Dividends

 

Limited Liability

The shareholders carry a limited liability to the extent of their investment in the corp. They are not personally liable to pay any obligations from their own pockets. Creditors cannot seek shareholder’s assets to claim their debts.

Ownership

The ownership is easily transferable from one shareholder to another.

Perpetual Existence

It doesn’t get affected by the death, inability or insolvency of any person. Even though the country’s charter may provide some time limit for the existence of the corporations. So, the corporation may continue to operate if the time limit extends.

Advantages of a Corporation

  • The great advantage is that there is liability protection to the shareholders.
  • There is an easy transfer of ownership.
  • The capital acquisition is easy.
  • There is no effect on the corporation if someone dies, disables, becomes insolvent.
  • The corporation tax rates are comparatively lower compare to the personal income tax rates.
  • Corporations provide various benefits to the employees. Some of them are tax-deductible for the employees.

Disadvantages of a Corporation

  • The major disadvantage is double taxation. So, Sometimes there are chances we end up with paying double tax.
  • There are some government regulations. Hence, it is not easy to establish a Corporation.
Sanjay Bulaki Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

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