A corporation is an entity recognized by state statute as separate and apart from its owners. A corporation is formed by the filing of Articles of Incorporation with the Secretary of State by the incorporator or promoter. The incorporater needs to gather subscriptions from intitial investors, hold an organizational meeting where the subscriptions are approved, bylaws adopted, initial directors appointed, and the officers are elected. Concurrently with the organizational meeting the incorporator ceases to have status with the corporation and the shareholders become the new owners.
Unless otherwise provided for in its articles of incorporation, a corporation has perpetual existence. Even after the death or withdrawal of shareholder, the corporation, as a separate entity, will continue to exist. A corporation is generally known for its free transferability of interests. Generally any shareholder may donate or sell portion of shares absent by any agreement among the shareholders to the contrary. The formalities of incorporation as well as the cost of qualifying in each state in which a corporation intends to do business are disadvantages of using a corporation.
Generally the shareholders of a corporation will not be held personally liable for the corporation's debts or liabilities and shareholder's losses are generally limited to thier individual investment in the corporations stock. Individuals who purport to act for a corporation while knowing that no corporation exists, are jointly and severally liable and of course the shareholders of a small or emerging corporation may be required to personally guarenteefinancing or other obligations endered into between the corporation and a bank or other creditor. A shareholder may also be liable to third parties.
Management is separate from corporate ownership. A corporation is an artificial entity, which can only act through its agents. A corporation has centralized management through its board of directors, which in turn, elects the officers who run the day to day business operations. Although directors are not involved in the day to day management they may be liable to shareholders or creditors based upon a breach of fiduciary duty.
There are more formalites involved in the operation of a corporation as opposed to the operation of other business entities and the corporation is governed by its articles of incorporation and bylaws. The corporation must also hold annual meetings of its shareholders and directors, keep accurate records and minutes, file extra tax forms, and register in other states where it intends to do business. All corporations must continuously maintain a registered agent and registered office within its state of operation. If a corporation fails to properly adhere to corporate formalities, liabilites may result as a consequence.
There are several types of investment vehicles available to a corporation, thereby making the corporation the most flexible structure for obatianing capital. Common stock and preferred stock are most fequently issued as equity instruments. In addition, a corporation may issue bonds or other debt instruments which may be convertible into equity at a later date as an added inducement for purchasers of such securities. However a corporation must be careful not to issue to much debt in relation to its stock, or the corporation will be thinly capitalized. If the corporation is too thinly capitalized, the debt may be deemed equity for non-tax purposes. The IRS may recast the debt as equity for tax purposes and thereby create potentially adverse tax consequences.