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Building your own company takes time, and many of the necessary steps are confusing. So, what is a corporate entity, and how does the formation of one work?
Corporations
Businesses come in all shapes and sizes, and each one comes with its own unique freedoms and restrictions. Corporations are distinct entities that are separate from the owners. These entities can enter into contracts, borrow or loan money, pay assets, and manage employees. In many ways, a corporation is almost like its own person.
Think of a corporation like an 18-year-old. When a person turns 18, they have almost all of the legal rights as an adult and can make legal decisions on their own. However, while turning 18 can be an exciting time of freedom and autonomy, you are still a teenager, and you may be under your parent’s guidance for a short period between high school and college.
Corporations are independent legal entities, but they still rely on the administrative structures of a regular business, and the shareholders can take part in profits. The most crucial benefit to corporations is that investors reap the benefits without taking as many risks.
For example, shareholders at Alphabet Inc., the corporation behind Google, benefit from Google’s success, but they don’t have to take a huge risk on new technologies or shifts in the industry. Similar to a bond vs. a stock, corporations have a less volatile growth period over time.
Forming a Corporation
The choice to form a corporation and doing so are two very different things. There are endless forms, filings, and documents that have to be meticulously reviewed before you can create a lasting and successful enterprise.
To create a corporation, you will need to:
- Appoint a Registered Agent
- Register a corporate name
- Complete license and permit applications
- File tax and employer identification paperwork
- Prepare and file articles of incorporation
- Create bylaws
- Draft business contracts
- Appoint directors
- Establish corporate compliance
- Create a records book
- Consult legal professionals about insurance policies
- Handle federal and state administrative proceedings
- Hold the initial board of directors meeting
- And more
These steps take time and resources that you may not have available right now. That’s why it is critical to understand what you need ahead of time so you can be prepared.
There are also different types of corporations to choose from:
- C corporations: owned by shareholders, these entities have more financial freedom to handle important matters and write off employees and benefits for tax purposes
- S corporations: also managed by shareholders and a board, these entities can pass losses, income, and deductions for tax purposes and may have built-in gains along the way
Choosing a suitable corporation for you is half the battle. In many cases, the right choice depends on what you want to get out of the business and how quickly you want the organization to grow.
Other Business Entities
For some business owners, a corporation may not be the best option. Thankfully, there are many different types of entities you can choose from depending on your goals, including:
- Limited Liability Corporation (LLC)
- Limited Liability Partnership (LLP)
- General Partnership
- Limited Partnership
- Sole Proprietorship
- Non-profit organization
Ultimately, the best choice for you depends on what you’re current business does, your future aspirations and the market. Incorporation and formation are important decisions, so take the time to understand your options fully before getting started.
For more information and legal guidance pertaining to corporations and business entities, contact Purdy & Bailey, LLP.