Everything You Should Know About Setting Up a Corporation - LLC.org

When you think of corporations, most people immediately think of a large business with an international presence. Most of these businesses are indeed corporations, but almost anybody can start a corporation if they follow the correct steps. Corporations are the most complex business structure possible, but also offer protections that other business structures do not.
Read on to learn about this process and determine if a corporation is a right fit for your business.
Corporations are a business structure that allows the owners to create a separate legal entity from themselves. A concept known as “corporate personhood” allows these businesses to operate as their own entity, including entering into contracts, loan agreements, and legal proceedings. The owners and shareholders of the corporation are not held liable for corporate debts and obligations. In other words, business owners aren’t obligated to use their personal assets to cover business debts.
As part of forming a corporation, a defined two-level structure is assigned within the business. The first level is made up of owners, who are typically shareholders. The second level is the active management level, including corporate officers and a board of directors. Shareholders can be officers, but do not have to be.
Corporations can be formed in a number of ways, with the type of corporation influencing the structure and tax status of each business. Below is a list of different corporate structures. You’ll notice a limited liability company is not on the list, as LLCs are not corporations.
A C corporation is the most basic form of a corporation. These businesses can have unlimited shareholders and are able to become public and even be listed on the stock exchange, allowing members of the public to purchase shares of the company and become partial owners. This ability to sell shares of ownership is often enticing to companies who will seek significant investments from multiple sources.
C corporations do not have to exist publicly, though they can. They can also issue stock privately to stockholders, allowing owners to maintain more control over the pool of shareholders.
One defining feature of a C corporation is its tax status. These companies file and pay corporate income tax returns in addition to shareholders paying federal income taxes through their dividends.
Once a C corporation has been established, entrepreneurs can choose to convert to an S corporation. This is technically not a business structure but is instead a type of elected tax status. S corporations elect to pass their corporate income, losses, deductions, and credits to their shareholders for the purpose of federal taxes. Shareholders will still pay individual income taxes related to dividends, but no corporate tax will be levied.
There are some limitations on S corps, such as a cap of 100 shareholders who must all be citizens of the United States.
Aside from C and S corps, there are other less common forms that can be used in certain scenarios.
Most small businesses with one or two owners will not choose to form a corporation. However, in some cases, this will be the best structure. Corporations offer the strongest protection from personal liability, which is the main driver for most people choosing this. Industries that are more prone to litigation and risk may choose a corporation for that reason.
A corporation is also a good choice if you want to have a public company that sells shares, or any other distinction between shareholders and officers.
The record-keeping and reporting requirements for a corporation are much more strict than other structures, so a corporation is only the right choice if you are able to keep up with these regulations. This includes tax requirements and the additional work of double-taxation.
No other type of business entity offers as much liability protection as a corporation. If a corporation is sued or owes large amounts of money, the shareholders will never be personally responsible for those debts and legal outcomes. These businesses can go entirely bankrupt without a financial impact on the shareholders.
In sole proprietorships and partnerships, the death of an owner can mean the automatic dissolution of the company. Corporations offer much more flexibility to transfer ownership and maintain the business securely. Because stock ownership is split between multiple shareholders, there is ownership maintained in the event of a departure or death. The bylaws and articles of corporation for each individual business will lay out the exact steps to be taken in these scenarios.
Corporations are able to easily raise funds by selling stock, especially when the stock is publicly traded. Other entities do not have the ability to get funding this quickly, both in the early stages as well as later in a business’ lifespan.
While some corporations, like C corps, are subject to double taxes, others may not. S corps allows for income to be split between the business and shareholders, meaning it is taxed at different rates, or to entirely pass through the income to be reported on only personal income taxes.
Unlike other structures, the application process to start a corporation can take a long time. Extensive paperwork is required to document the details of the organization and its ownership, likely with the help of lawyers and multiple rounds of edits.
Maintaining a corporation is also more complex than other business structures. A corporation needs to adhere to its own bylaws and articles of incorporation, as well as follow state corporate laws to maintain its board of directors, hold annual meetings, and create annual reports. States may also have restrictions on what corporations can and cannot do.
Most corporations will face double taxation, where the business itself is taxed as an entity and the shareholder is taxed based on their personal profits. S corporations are able to avoid this, but can only be formed in certain scenarios, and they may be watc