How Is a Corporation Formed?
A corporation is formed by filing articles of incorporation in the state where the corporation has its business Headquarters. A corporation is distinguished from a sole-proprietorship or general partnership primarily because the corporation offers its owners (shareholders) protection from individual liability. In other words, the owners of the corporation will not be personally liable for corporate debts, negligence, or breaches of contract provided the corporation has been properly maintained. This is particularly true in the State of Nevada.
Further, a corporation is different from other forms of business entities in that it is taxed as a separate entity. The corporation has its own tax ID number and files its own income tax return. Many small business owners find it useful to allow income to build up within a corporation or reinvest corporate income because, often times, the corporate income tax rate is lower than the business owner’s individual income tax rate.
Maintaining Asset Protection by Incorporating
In order to maintain the asset protection advantages associated with operating a business as a corporation, it is important to observe the formalities of operating a corporation. Specifically, the corporation must have a comprehensive set of bylaws setting out the rules of the corporation. Additionally, the corporation must have at least an annual meeting of the board of directors to elect officers and conduct other necessary business.
Further, the owners must keep separate financial records for the corporation. For example, if the owners use the corporation’s checking account like a personal checking account, the courts will look past the corporate veil and find the individual was operating as a sole proprietorship and not a corporation.
The corporation allows individual owners to divide the corporation into shares. These shares are memorialized using stock certificates. Allowing the ownership of the corporation to be divided among more than one individual is useful for many reasons. First, it allows the corporation to raise capital by selling its shares. Second, it allows for the democratic management of the corporation when there are multiple owners.
In addition, if the majority of stock certificates are issued to minorities (including women) it will allow the corporation to be classified as a minority owned business. Consequently, the corporation may often be given preferential treatment by government entities.
The corporation is not just a one-time set up operation. To keep and protect its status it must keep good records, comply with state filing statutes and have an appropriate headquarters base.
The Required Corporate Operations
The Operations of a Corporation require that the different levels of management (Directors, Stockholders, Officers, Employees, etc.) fulfill their respective obligatory responsibilities in a cohesive and appropriate manner that will be performed in best interest of the Corporation.
In addition, there are certain essential functions that must be performed and records that must be kept for maintaining the structural integrity of the legal veil and the viability of the company.
Some Essential Functions Necessary to Maintain Corporate Veil
- Initial Directors Filing
- Create & accept Bylaws
- Directors Initial & Annual Meetings
- Stockholders Initial & Annual Meetings
- Initial & Annual Election of Directors
- Initial & Annual election of Officers
- Necessary Corporate Resolutions
- Necessary Certificates of Authority
- Initial & Annual State Filings
- Initial & Annual Penalty of Perjury Declaration
- Corporate Asset Encumbrance
- Stock Distribution & ledger
- Selling, Merging or Dissolution
- Changes or Consolidation of Assets, Business, etc.
- Annual Notices & Proxies
- Banking Documentation and Authority
The essentials cannot be ignored if a Company is to remain active and effective in protecting its Directors, Officers and Stockholders. Corporate America will assist in performing many of these functions on behalf of the Corporation and will continuously be available as consultants to assist the respective parties in their duties. This is the main reason for having Corporate America form and maintain their companies.