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Shareholders are the owners of the corporation. Unlike other entities where the actions of one owner obligate all the owners, a corporate shareholder cannot bind other owners of the firm by their actions solely as a shareholder. The shareholders of the corporation elect the corporate directors and ratify the bylaws which set forth the management procedures of the corporation. The shareholders of the corporation meet at least once a year, to elect a board of directors. The directors are responsible for managing the business and affairs of the corporation, setting corporate policy, choosing and supervising corporate officers, declaring dividends, and recommending fundamental changes. Usually, the directors must be elected by enough of the owners to represent a simple majority of the outstanding shares, although a higher vote requirement can be required. Thus, those who hold a majority of the shares have ultimate control over the corporation. Corporate officers are responsible for managing the day to day affairs of the corporation. The roles and duties of directors and officers are often scrutinized using highly developed standards of performance. This is the most common corporate structure. The corporate management style is very flexible. Usually, the larger a corporation is, the more control rests in the hands of top management. At the other end of the spectrum, closely held firms are often actively managed by its shareholders. A disadvantage of the corporate form of business is the observance of corporate formalities, such as creating a board of directors, having annual shareholder meetings, and adhering to state and federal reporting standards. Limited Personal
Liability: In today's business environment it is
more important than ever to protect yourself and your
personal assets by incorporating your business as a legal
entity separate and apart from your personal affairs. Your
home, cars, boat, savings, and investments could all be at
risk and used to satisfy any lawsuits, debt or liability
incurred by the business. By separating personal liability
from that of your business, you can limit the impact that
business credit worthiness and lawsuits have over all
aspects of your personal life. The shareholders of a
Corporation are personally liable for the debts and
liabilities of the Corporation only to the extent of the
value of their shares. As stated above, a corporate
shareholder cannot bind other owners of the firm by their
actions solely as a shareholder. This has the effect of
protecting personal assets from claims brought against the
company and vice versa. Forming a corporation or limited
liability company can provide the protection needed to give
you peace of mind and make your business even more
successful and profitable. In addition, limited liability
allows a corporation to issue debt as a source of funding. A
corporation's debt will have its own credit rating which
relates to the operation and administration of the business
separate but is separate and apart from the personal
liability issues of shareholders. Distributions: Corporate earnings remain
within the company until they are paid out. Profits are
distributed to shareholders via dividends, redemption of
shares, or the repurchase of shares by the corporation.
Dividends are declared at the discretion of directors. Taxation:
The profits
of a regular corporation (C Corporation) are subject to
double
taxation. In effect earnings are taxed twice;
once at the corporate level and again when profits are
distributed as dividends to their shareholders. If a
corporation meets specific IRS requirements, a corporation
can file for Subchapter S
Corporation status. This allows owners of an S
Corporation to elect to be taxed only at the personal level,
thus avoiding tax at the corporate level. The IRS
requirements for electing S Corporation status are listed
below under S Corporation. Transferability: Corporate organization
provides the greatest flexibility for the transfer of
ownership. Shares of the business can be easily transferred,
without significant adverse effects to ongoing operations.
The firm can have an unlimited number of stockholders, and
can also raise capital by issuing corporate bonds. By
creating an identity separate from its owners, the business
achieves a level of viability and continuation which lasts
beyond the involvement of its founders, managers, directors,
and specific shareholders. Formation: Corporations are created in accordance
with state statutes & procedures. Incorporators file the articles
of incorporation with the appropriate state agency. The
requirements of the articles of incorporation are determined
by state statutes. States require that all new business
corporations must name at least two corporate officers, a
President and a Secretary. However, one person can hold a
director position and all officer positions. Still have
questions? View our Business
Terms or
Contact
Us
Only the
following states in Proactive Management's service area
offer Close Corporation Status: Management and
Control: This is a corporation whose shares, or
at least voting shares, are held by a single shareholder or closely knit group of
shareholders. Generally, there are no public investors and
its shareholders are active in the conduct of the business.
A Close Corporation can be managed in the traditional manner
by a board
of directors or it can elect to be run by
shareholders. In the latter case, the shareholders perform
the duties of the board of directors. Shareholders are
usually active in the management of the company due to the
limited number of shareholders permitted. Limited Personal
Liability:
The shareholders of a Close Corporation are personally
liable for the debts and liabilities of the Close
Corporation only to the extent of their capital
contribution. However, those shareholders managing the
affairs of the business in lieu of the board of directors
are subject to liability as if they were members of the
board. Distributions:
Same as
Regular
Corporations Taxation:
Taxation of
the corporation depends on the type of close corporation
formed, a C Corporation or a Subchapter S Corporation. The
profits of a Regular
Corporation
(C
Corporation) are subject to double
taxation
once at the corporate level and again when profits are
distributed as dividends to their shareholders. If a
corporation meets specific IRS requirements a corporation
can file for Subchapter S
Corporation status and generally avoid tax at the
corporate level. Also, the owners of an S Corporation may
personally deduct losses the same as a partnership. The IRS
requirements for electing S Corporation status are listed
below under S
Corporation. Transferability:
Transferability is limited to a close
knit group of no more than 30 to 50 shareholders. Since
shareholders are so involved in the operation of the
business, limits on the transferability of shares and
prohibitions against public investors are some of the
attractions of this form of corporation. By limiting
transferability using restrictions such as the
right
of first refusal and buy-sell
agreements in the articles of incorporation or
bylaws, corporate ownership is restricted to those who are
most closely tied to the ongoing operation and continued
success of the business. Formation: A close corporation will have in its
articles
of incorporation a provision stating that "this
corporation is a Close Corporation." Bylaws are generally
not required if provisions normally included in bylaws are
included in the shareholder's agreement. A corporation may
be formed initially as a close corporation, or it may amend
its articles of incorporation to include a statement to that
effect. Still have
questions? View our Business
Terms or
Contact
Us
Like C Corporations, S Corporations must maintain corporate formalities such as a board of directors, shareholder meetings, annual meetings, and annual reporting. Limitations: The major limitation on the use of S corporation status is that only "eligible" corporations may elect S corporation status. Some of the requirements for S Corporation eligibility are:
If at any time
the corporation fails to meet the above requirements, the S
Corporation status will automatically terminate. Liability:
Same as
Regular
Corporation Distributions:
Distributions are determined by pro
rata stock ownership since there is only one class of stock.
Otherwise, same as a Regular
Corporation. Taxation:
S
Corporation shareholders avoid double
taxation
by having
the firm's income pass through to individual owners so that
income tax is figured only one time on the individual
shareholder's tax return. Transferability:
Limited
compared to other corporations since there is just one class
of owners. The articles
of incorporation and bylaws should provide that shares
cannot transfer to an ineligible shareholder, thus
automatically terminating S Corporation status, unless
agreed to by the other shareholders. Capital financing can
also be accomplished by selling bonds. Formation: For legal purposes, under state law,
the S Corporation is no different than any other regular
corporation. To elect to be an S Corporation, a corporation
must file a Form 2553 election with the Internal Revenue
Service. This election form requires the written consent of
all existing shareholders of the corporation. Still have
questions? View our Business
Terms or
Contact
Us
A limited liability company is an unincorporated business entity that shares some of the aspects of S Corporations and Limited Partnerships, and yet has more flexibility than these more traditional business entities. The LLC is a fairly new type of business entity that is designed to be taxed like a partnership but offer its members limited liability like that enjoyed by the shareholders of a corporation. The LLC is designed to provide its owners with limited liability and pass-through tax advantages without the restrictions imposed on S Corporations and Limited Partnerships. Limited Personal
Liability:
The members (owners) and managers of an LLC, like the
shareholders of a corporation, are personally liable for the
debts and liabilities of the LLC only to the extent of their
capital contribution. Distributions: As in a partnership, the
members decide how to allocate the income and losses, and
thus the tax liability among themselves. Amounts paid out
which are not guaranteed are considered distributions. Taxation:
Default
taxation for an LLC is pass through taxation. An LLC with
just one member defaults to sole proprietor tax status and
LLCs with two or more members defaults to partnership tax
status. However, LLC can elect to change from their default
tax status to corporate tax status, by petitioning the IRS
for an entity
classification election. To make this election, the business
entity seeking a change in status must already have received
or applied for its own employer
identification number. Transferability:
Subject to
approval by other members; duration typically limited in
time; operating agreement restrictions may limit the
possibility. Also, transferability of ownership interests is
generally limited unless otherwise addressed in the articles
of incorporation. Multiple classes of ownership interests
are permitted. Formation: Must file articles
of organization which are similar to the Articles of
Incorporation a corporation must file. Organizers must file
documentation with the appropriate state agency. The
requirements of the Articles of Organization are set out in
state statutes. Still have
questions? View our Business
Terms or
Contact
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