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Forming a Corporation - Why do it?

Aug 17, 2007
A corporation is a legally created body that serves to separate the operations of a business from its owners. The act of incorporation is a form of business registration that accomplishes that fact and allows the liabilities of a company to be legally registered with the state. When a business is incorporated it also has to have a defined management and organizational structure and must meet certain conditions in order to maintain its corporate status.

In order to become incorporated the officers of a company must file articles of incorporation with the state and pay all applicable filing fees, levies and other registration costs. In most states it is not legally required to have a lawyer in order to incorporate but most businesses use their lawyers and accountants to prepare the articles of incorporation for the business.

There are many advantages for a business to incorporate. They include the separation of liabilities and interests between the company's operators and its owners of shareholders. This allows the business to operate and accumulate debts and responsibilities which are not the total responsibility of the shareholders and directors of the corporations. It is also much easier to raise investment funds for a corporation rather than other forms of business registration.

One disadvantage of having a C corporation business designation is what is called double taxation. That is because any profits that a corporation makes are taxed first as income of the corporation and then again as income to the shareholders of the corporation. Other downsides include the requirement to have a specified management and organizational structure, and the need to have a Board of Directors, annual meetings, and prepare reports to regulatory bodies.

There are a number of forms of corporate registration in the United States. They include standard business or C corporations and S corporations. C corporations have to pay income tax on all income after expenses. S corporations have a special tax status that allows them to avoid having the corporation treated as a separate entity for income tax purposes. To get S corporate status a business has to apply to the Internal Revenue Service a 2553 Form for an exemption and if this is granted then the income is only taxable to the owners or shareholders of the corporation.

The organizational structure of a registered corporation must identify three distinct groups; shareholders, directors, and officers. The officers are normally appointed by the Board of Directors, who is elected by the shareholders. The officers run the company on a day to day basis and report on activities to the Board of Directors. The Board of Directors then reports to the shareholders at an annual general meeting of the corporation.

Many corporations also have a Chief Executive Officer who is the public spokesperson of the corporation and ultimately responsible for the direction and operation of the business.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes afree weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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