A company is a legal organisation formed by individuals, stockholders, or shareholders with the intent of profiting. Corporations may enter into contracts, sue and be sued, own properties, pay federal and state taxes, and borrow money from banks.
A company is formed through a legal process known as incorporation, in which legal documents containing the primary purpose of the organisation, its name and address, as well as the number of shares and types of stock issued, are drafted.
The incorporation process confers a distinct feature on the corporate company that protects its shareholders from personal liability in the case of a litigation or legal argument.
What are the Most Common Corporation Types?
A company may be formed by a single shareholder or by a group of shareholders who join together to achieve a common purpose. A corporation may be set up as a for-profit or non-profit organisation.
The majority of companies are for-profit, and they are created to generate income and provide a return to their shareholders based on their percentage ownership in the company.
Charitable organisations, which are devoted to a specific social cause such as educational, religious, science, or academic purposes, fall under the category of not-for-profit organisations. Rather than distributing profits to shareholders, not-for-profit organisations invest them in furthering their goals.
The following are the three most common forms of company formations:
C Corporation is a form of corporation.
The most popular type of business incorporation is a C Corporation, which has almost all of the characteristics of a corporation. Profits are distributed to owners, who are taxed as individuals, while the company is taxed as a corporate organisation.
S Corporation is the second choice.
S Corporations are formed in the same way as C Corporations, but they vary in terms of owner restrictions and tax implications. An S Corporation has up to 100 members and is not taxed separately; instead, the gains and losses are borne by the shareholders on their individual tax returns.
Non-Profit Corporation (Non-Profit Corporation) (Non-Profit
Charitable, educational, and religious groups often use it to work without making a profit. A non-profit organisation is tax-exempt. Any contributions, gifts, or sales earned by the organisation are kept in the organisation and used for activities, expansion, or future plans.
What Is the Process of a Corporation?
Before a company may begin operations, it must name a board of directors, and the members of the board of directors are elected by shareholders at the annual general meeting. Each shareholder has one vote per share and is not allowed to participate in the corporation’s day-to-day operations. Shareholders, on the other hand, may be elected to the corporation’s board of directors or as executive officers.
The board of directors is made up of people who have been chosen to represent the interests of shareholders. They are in charge of making big decisions that impact shareholders, as well as developing strategies to direct the corporation’s management and day-to-day operations.
The shareholders owe a duty of care to the board of directors, and they must behave in the best interests of the shareholders and the company.
What are the Benefits and Drawbacks of Forming a Corporation?
- Separate legal entity – A legal entity that is separate from its owners and is capable of doing business, owning property, entering into contractual contracts, borrowing money, sueing and being sued, and paying taxes.
- A company is owned by its stockholders, shareholders, or members, and it is governed by a board of directors. The continuation of this legal entity is unaffected by their death or failure to fulfil their duties; only amendments to the company’s charter would allow it to be expanded or liquidated.
- Limited liability – Business owners are only responsible for the money they put into the company. For compensation owed by the shareholders, creditors and lenders have no claim on the owners’ personal properties.
- Individual stockholders do not need to get permission from other stockholders to sell their stocks or shares in publicly owned companies. Stocks or bonds, regardless of their volume, can be freely exchanged in the market.
- Competent management – Day-to-day company activities , not be handled directly by investors or shareholders. They elect the board of directors, which hires a competent management team later.
- Capital – Corporations can raise money by selling securities and issuing bonds.
Costs of incorporation – Forming a company is more expensive than forming a sole proprietorship or partnership.
Double taxation – Two taxes are collected, one from corporate profits and the other from dividend payments to shareholders.
Companies must file annual reports and tax returns, as well as keep financial records, permits, and other relevant documents, in addition to their incorporation documents.
What Happens When a Corporation Dissolves?
A corporate entity’s life span is determined by whether or not its charter is changed or the object of its creation has reached its pinnacle. The transfer will be aided by a procedure known as liquidation, which will be supported by a liquidator.
The company’s properties will be sold, with the proceeds going to creditors first to settle debts. Whatever is left will be distributed to shareholders. Creditors of an insolvent or bankrupt corporation typically force an involuntary liquidation.