Do You Know These 7 Basic Facts about Corporations?
Pros and Cons of Corporations
Corporations are businesses that are separate entities from their owners. Most of them have shareholders. These shares can be closely held by only a few individuals, or they might be offered for sale to the public so they're "publicly held".
There is also such a thing as a non-stock corporation. This can be either a non-profit or a for-profit business, and it can be very closely held or formed for a specific short-term purpose.
How Does a Corporation Get Started?
The process of starting a corporation—called "incorporating"—is somewhat complicated if only because of the number of documents that must be prepared and filed. Corporate bylaws must be drafted to govern policy for the corporation when it's formed. Corporations must also submit Articles of Incorporation to the state in which they're doing business.
Other tasks in the incorporation process involve electing officers and other general business startup tasks.
What are the Different Types of Corporations?
The two basic types of corporations are those with stock and those with no stock. Corporations can also be non-profits.
Who Owns a Corporation?
A corporation is owned by its shareholders or stockholders, each of whom owns a piece of the corporate pie. Each of these individuals has invested money in the business entity. Most corporations are closely held with shares owned by just a few individuals.
Who Runs a Corporation?
Corporations have a board of directors at the highest level, and this board sets policy and manages oversight. It makes sure that the corporation is acting according to its mission and its bylaws and that it complies with federal, state, and local rules and regulations.
Corporate executives are one level down from the board, and they run the day-to-day operations of the business.
They might also be shareholders and some might sit on the board of directors depending on how the corporation is structured. These executives are paid employees.
How Do Corporate Owners Get Paid?
Shareholders receive dividends from the corporation's profits based on the number of shares of stock they own. Corporate owners and others who work as employees are paid based on salaries, but they might also receive dividends as part of their benefits packages.
How Does a Corporation Pay Taxes?
Corporations are taxed separately from their owners at the corporate tax rate. Because a corporation is a separate tax entity, it pays taxes based on its net income or profits each year. IRS Form 1120 is prepared to calculate the tax liability of the corporation.
Corporations have a unique issue in the business world—"double taxation". The corporation is taxed on its profits, then the owners or shareholders of the corporation are also taxed on the dividends they receive based on those profits.
But corporations have an option. They can elect to be taxed as Subchapter S corporations and notify the IRS of this election. In this case, profits are taxed only once when they're passed down to shareholders, but some restrictions apply.
What Liability Do the Owners of a Corporation Have?
The debts and liabilities of corporations are also separate from those of the owners. This separation is sometimes called a "corporate shield" because the corporate structure shields the owners and employees from personal liability.