What is a Corporation

Shares and Shareholders

A share of stock is the unit of ownership of a corporation. Each share of stock represents a percentage of ownership of the company. For example, if a corporation issues one share of stock the shareholder (stock owner) would then own 100% of the corporation. 

Shares can be structured into classes. Each class, termed a share class, holds different rights and privileges. A corporation can have multiple classes and each class can hold any number of shares.

Authorized Shares: the number of shares the corporation is allowed to issue.
Issued Shares: the total number of shares actually issued to shareholders.
Share Class: a group of shares that has a unique set of rights and privileges.

Board of Directors

When a corporation is formed, the state’s required number of directors must be appointed until the first shareholders’ meeting.

A corporate director is in charge of the adoption, amendment, and repeal of operational bylaws as well as the election, supervision, and removal of officers.

After forming the corporation, the incorporator(s) — or initial director(s), if named on the formation documents — should call an organizational meeting.

During this initial meeting, either the incorporator(s) will officially elect the board of directors or the initial director(s) will appoint the officers.

Bylaws

Bylaws are the rules that determine how a corporation will be governed and run. You can think of bylaws as a constitution for a corporation. It makes the rules and priorities clear for everyone involved.

TIP: There are bylaws templates available to help business owners form corporations.

A corporation’s bylaws will supplement any rules set forth by the federal government or the state.

Corporate bylaws should include:

• How the corporation will be governed, including the role of directors and officers
• How meetings are held, voting procedures, electing officers or directors
• How records will be kept and managed
• How legal documents will be executed
• How disputes will be handled
• How bylaws will be added/amended in the future
• The date of the annual shareholders’ meeting
• How to negotiate contracts
• Who will file annual reports
• How the corporation will issue stock
• Fiduciary duties to the corporation (i.e. acting in the best interests of the corporation)
• What constitutes a quorum for voting purposes
• How the day to day operations of the corporation will be conducted

What is a Quorum? A quorum is the minimum number of members of an assembly that must be present at a meeting to make the meeting valid, or any of the votes held therein.

Corporate Taxes

A corporation pays taxes based on the current federal corporate tax rate of 21%. The owner of a corporation must pay tax on any dividends they receive.

Double Taxation

Corporations distribute their profits to shareholders in the form of dividends. Shareholders then have to pay personal income tax on these dividends. Because the profits of the company have already been taxed at the corporate level, corporations are said to be “double taxed”. 

Most small business owner’s choose to Form an LLC because of more favorable taxation.

The tax rate on ordinary dividends is the same as the individual federal income tax rate, which means it will vary depending on your income.

A corporation can choose to be taxed as a standard C corporation (C corp) or as an S corporation (S corp).

Types of Corporations – Tax Options

There are three main types of corporations. Each type is taxed differently.

A nonprofit corporation is a not for profit entity that is registered at the state level as a nonprofit corporation. The nonprofit corporation can register for tax-exempt status with the IRS as a 503(c).

A C corp is a corporation that is taxed as a default corporation with the IRS. This type of corporation is currently taxed at 21% on profit. Dividends paid to shareholders are also taxed.

A corporation can elect to be taxed as an S corp. An S corp tax model allows the business owner to avoid double-taxation but also negates the investor benefits offered by corporations. It’s best to elect S corp status as an LLC.

Corporate Law

A corporation is a legal entity that protects a business owner’s personal assets from the corporation’s debts, creditors of a corporation, and from lawsuits brought against the corporation.

Corporate law dictates the formation, funding, dissolution, and governance and operations of a corporation. Corporations are governed by both federal laws and state laws.

The U.S. Securities and Exchange Commission (SEC) also governs corporations and acts to protect investors, maintain fair markets, and support capital formation.