A corporation is a legal business entity that separates its owners/shareholders from the actual company operations. This structure allows for limited personal liability and is generally perceived as a more professional or legitimate than other entities like sole proprietorships and partnerships. In addition, corporations offer a number of tax benefits depending on the specific structure.
To incorporate, owners file a document with the state that legally establishes their corporation’s existence. This process varies by location, but the two components of incorporation are universal: articles of incorporation and corporate bylaws. Corporate bylaws function as a corporation’s internal rule book, outlining how it will be operated and managed. This includes defining where to locate the corporation’s headquarters, what rights shareholders and officers have, how many members are needed for a quorum at meetings and other logistical aspects of the company.
Once incorporated, corporations can pursue any lawful business and create long-term value. They are governed by a board of directors who make major decisions and oversee the day-to-day operation. Corporate bylaws must be drafted, and annual meetings are required to assess past performance and plan for the future.
One of the primary reasons to incorporate is to limit personal liability. If a lawsuit against the corporation is successful, a plaintiff can only take the corporation’s assets, not the personal assets of its owners/shareholders. Additionally, corporations can raise capital by selling shares of stock. This structure is also typically preferred when a business intends to grow to the point of an IPO (initial public offering). Corporate status requires significant paperwork and adherence to heavy regulations, which can be expensive and time-consuming to maintain.