Corporation Guide

A corporation is a type of business entity—formed at the state level—that has many of the same legal rights as an individual person in the eyes of the law. A corporation can enter into contracts, own property, hold assets, and sue and be sued—all separately from their owners. This separation is called limited liability, and it’s one of the main benefits of starting a corporation.

To start a corporation, you’ll need to appoint a registered agent, name your corporation, file paperwork and pay a fee to your state’s Secretary of State. You can incorporate your business yourself or hire us to do it for you.

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Corporation Vs LLC

Here, we’ll go over how corporations and LLCs are different and what they have in common.

Limited Liability

Both LLCs and corporations offer their owners limited liability. Here’s how it works.

If you start selling something without forming an LLC or corporation, you’re automatically a sole proprietor (or a general partnership, if you’re doing it with more than one person). Sole proprietors don’t pay any corporate taxes or pay any filing fees to maintain their business, but they also don’t have any legal separation between themselves and their business. In other words, they have no limited liability.

Both LLCs and corporations require filing paperwork, paying filing fees, and other upkeep. But they also provide strong liability protections to their owners. If your LLC or corporation is sued, and it’s been properly formed and maintained, you won’t have to dip into your own personal assets to settle business debts.

Corporate Management Structure

LLCs and corporations are quite different when it comes to management structure.

Unlike in an LLC, where an unlimited number of members can manage their LLC themselves or hire a manager to do so, corporations are subject to defined models of corporate governance. The most commonly adopted corporate structure works like this:

  • Owners, called shareholders, elect a board of directors.
  • The board of directors oversees the corporation, appointing officers.
  • The officers manage the corporation’s day-to-day operations.

These roles often intersect—for example, a CEO might sit on the board and hold shares in the company.

Private corporations (for example, small family-owned businesses) have more freedom when it comes to management structure. Public corporations are subject to stricter regulations.

Corporate Taxes

Corporations are taxed differently than LLCs. Corporations have to pay the federal tax rate (21%) on the company’s taxable income (revenue minus expenses). Then, when a corporation distributes profits to its shareholders, the profits are taxed again at the personal level. This is informally called the “double tax,” and is one of the least popular features of a corporation. Some corporations (and LLCs) are eligible to apply for the S-Corporation tax status, which allows the corporation to avoid the corporate tax rate and distribute money to their shareholders, who then pay taxes on profits on their personal tax returns.

Transferring Ownership

Transferring ownership in a corporation is much easier than in an LLC. In a corporation, ownership is represented by shares of stock, which can be bought and sold. In an LLC, ownership is represented by a percentage of membership interest. How membership interest can be transferred is defined in the operating agreement.

Because of this, corporations are a popular choice for business owners looking to raise capital through investors. Investors can become shareholders by buying shares of stock.

Record-Keeping

Unlike LLCs, corporations are required by law to keep certain records. The requirements vary state to state, but in general include your Articles of Incorporation, corporate bylaws, meeting notes, and financial and tax records.

Different Types of Corporations

C-Corporation

C-Corporation is a tax classification, not an entity type. It’s the default tax status of every corporation that doesn’t elect to change its tax status to S-Corporation.

S Corporation

S-Corporation is a tax election available to certain corporations. S-Corps are taxed pas “pass through” entities, which means that profits pass through to the owners’ personal tax returns rather than being taxed first at the federal corporate tax rate.

B Corporation

A benefit corporation, or B Corporation, is a relatively new business entity that’s available in 36 states. B Corporations have a specific mission to benefit the environment or society.  In a traditional corporation, directors and officers have a fiduciary duty to shareholders to maximize profit. In a B Corporation, officers and directors also consider non-financial interests as well.

Nonprofit Corporation

A nonprofit corporation is a corporation that exists to benefit the public, the shared interests of a group, or a religious organization. Nonprofit corporations don’t issue stock or distribute profits to their members. When properly formed and maintained, some nonprofits receive tax-exempt status.

How to Incorporate

  1. Name your corporation. This is a bit more involved than it sounds, as each state has its own rules for what you can and can’t name a corporation. (Hint: Your name will need an entity identifier like “Inc” or “Corp”). You’ll also want to check that your name or something that complements it is available as a domain name.
  2. Choose a registered agent. This is someone designated to receive service of process on behalf of your corporation. You’ll need their information ready to fill out your paperwork.
  3. File Articles of Incorporation with your state’s Secretary of State’s office or equivalent agency and pay a filing fee. This is the step that forms your entity.
  4. File your Beneficial Ownership Information Report. This is a federal filing that discloses ownership information to the federal government.

How Our Incorporation Service Works

  1. Head to the Business Formation Sign Up Form. It will take you through a series questions required to start your corporation.
  2. Add on free branding tools. When you hire us to start your corporation, you get a free domain name for a year, plus 90-day free trials of a pre-built business website, phone number, professional email, and SSL security.
  3. Pay our fee ($100) plus the state’s filing fees. This price includes a year of registered agent service. We’ll file your corporation and send you confirmation when it’s official.

Corporation FAQs

Who are the owners of a corporation?

The owners of a corporation are called shareholders. In a corporation, ownership is represented by shares. A shareholder (or stockholder) holds ownership of a corporation in the form of shares or stocks.

Can a corporation be owned by one person?

Yes! In this case, the sole owner of the corporation would hold 100% of the shares.

Do all companies start out as corporations?

No. In fact, most businesses start out as sole proprietors. A sole proprietor is an individual who starts selling goods or services without filing paperwork to formally create a business entity with the state. Sole proprietors are legally considered one and the same as their business, so there are no special maintenance or record-keeping requirements (and also no liability protections) associated with being a sole proprietor. A sole proprietor can form an LLC or a corporation anytime and gain liability protection.

What are fiduciary duties?

Fiduciary duties are the responsibilities of someone entrusted to protect the assets of a beneficiary. In the case of public corporations, the board of directors are considered fiduciaries, and so have responsibilities to the shareholders of the corporation to protect their investments.

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