Understanding how corporations work

What Is a Corporation? How To Make a Corporation and How They Work

Starting a business is an exciting venture, and choosing the right structure is crucial for your success. Why form a corporation? Understanding what a corporation is and how to make a corporation can be the key to setting your business on the path to success.

Understanding Corporations

A corporation is a legal entity that is separate from its owners. This separation provides legal and financial protections, making it a popular choice for many businesses. As an independent entity, a corporation can own property, incur liabilities, and is responsible for its own debts and legal obligations.

Corporation Structure

Running a corporation requires a structured governance that typically includes: 

  1. Shareholders who own the company
  2. A board of directors who oversee officers and broader strategy, and 
  3. Officers who manage the day-to-day operations. 

This structure provides a clear hierarchy, division of responsibilities, and agency allowing the team to efficiently run the corporation.

The Advantages of Incorporation

Incorporating a business offers several benefits over other business structures:

  • Limited Liability: One of the biggest advantages is the separation of personal assets from business assets. This protects your personal wealth from business liabilities.
  • Attracts Investors: Corporations find it easier to raise capital as they can issue stock, create preferred shareholders, options, and other financial instruments that attract investors more readily.
  • Ownership Liquidity: transfer of stock ownership is easier and more flexible than with S-corps or partnerships. This improved liquidity makes the business more valuable to investors.

One disadvantage is business incorporation costs, which are typically higher than other entity structures.

How to Make a Corporation

Forming a corporation may seem intimidating, so always work with an attorney knowledgeable in how to make a corporation. Here are 6 critical steps on how to make a corporation:

  1. Select a Business Name: Your business name should be unique and compliant with state regulations. Check your secretary of state’s website for details.
  2. Create and File Articles of Incorporation: These are the official documents that establish your corporation. While boilerplate versions are available online, an attorney is best qualified to draft documents most suitable for your needs.
  3. Draft Bylaws: Bylaws govern how your corporation operates. Again, an attorney is best qualified to draft documents that meet your needs.
  4. Select Key Personnel: Choose your board of directors and corporate officers. This is arguably the most important step in how to make a corporation. Be sure the right people are on the bus.
  5. Issue and Distribute Shares: Determine your share structure and distribute shares to owners. Be thoughtful about maintaining investor relations going forward.
  6. Create Compliance and Regulation Guidelines: Ensure your corporation adheres to legal and regulatory requirements such as taxes and licenses.

Business incorporation costs are higher than forming sole proprietorships and partnerships due to the Articles of Incorporation, Bylaws, and share issuances. However, this paperwork is a structure which can scale larger than pass-through entities.

Corporate Tax Considerations

Understanding the tax implications of a corporation is critical. Corporations are a common target for tax law changes, making future earnings difficult to project. Converting from a different entity structure to a corporation can be a taxable event, so consult with your CPA before executing an entity conversion or changing tax elections.

This article was written by a CFOshare employee with assistance from generative AI for rhetoric, grammar, and editing. The ideas presented are a combination of the author’s expertise, original ideas, and industry best practices.

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