24 May What’s a Corporation?
By: Barry E. Haimo, Esq.
May 24, 2016
What’s a Corporation?
Starting and running a business requires hard work and dedication. But it also requires smart planning to ensure your venture will thrive and be successful.
Part of that planning is deciding what kind of structure you want your business to have. One of the most valuable, enduring, and time-tested business structures is the corporation.
The main benefits of forming a corporation are as follows:
- Limited personal liability of the shareholders
- Separate legal entity
- Centralized management
- Potential tax benefits
- Ability to raise investment capital
- Ease of developing creative compensation structures
- Perpetual existence
Let’s break each of these down to get a better understanding of the formation and benefits of a corporation, and if forming a corporation would be best suited for your business.
Limited personal liability of the shareholders. When people talk about corporations, they’re usually talking about C corporations. As mentioned above, a corporation is an independent legal entity with limited liability. This means that the corporation is legally responsible for actions and debts rather than the shareholders.
So if someone was going to sue the corporation, the business’s assets are at risk as opposed to the personal assets of the owners. Forming a corporation is a great way to expand your business while protecting your personal assets.
Separate legal entity. Forming a corporation allows you to separate yourself from your business. You may be able to remain anonymous, enjoy your privacy, and protect you and your family’s assets.
Centralized management. An appointed board of directors oversee the daily operations of the corporation and manage operations. The board of directors keeps the interest of the shareholders as a top priority. In fact, they have a fiduciary obligation to do so.
Potential tax benefits. Corporations can help you and your business do the following:
- Issue stock options to gain outside investment capital or attract the best qualified personnel
- Save on income taxes by keeping some profits within the corporation
- Make gifts of ownership to your family without paying a gift tax or giving up management
- Be more appealing to contractors who may require your business to be a corporation before signing a contract
Note that these tax benefits do come with increased requirements and high administrative fees. For this reason, corporations are suggested for larger, more established companies.
That being said, do not underestimate the significance and popularity of corporations that elect to be treated as a small business corporation under Subchapter “S” of the Internal Revenue Code. The taxation of this entity is beyond the scope of this post but will be featured later, so stay tuned.
Ability to raise investment capital. Venture capitalists are more drawn to corporations for their size, stability, and possible financial gains. The use of corporate venture capital is growing exponentially, and is a fantastic strategy for taking your business to the next level.
Ease of developing creative compensation structures. Forming a corporation can separate you from your investments, your business, and your healthcare management. You can set up healthcare plans for you and your employees that will leave compensation and reimbursements up to your corporation.
Perpetual existence. Another advantage of forming a corporation is that it does not dissolve when its owners or shareholders change or die. Someone else can take over without having to create a new company and it will live on as its own entity.
Forming a Corporation
In order to form a corporation, there are several steps you have to follow to ensure your corporation is legal under Florida law. Those steps include:
- Choosing a corporate name. Your company name must have the words “company,” “corporation,” “incorporated,” or the abbreviations “Co.,” “Corp.,” or “Inc.” in the title. Your name must also be different from other businesses.
- Preparing and filing a certificate of incorporation. You need to file Articles of Incorporation with the Florida Department of State Division of Corporations. The articles must have the name and address of the business, the business’ purpose, the number of shares allowed to be issued, the names and addresses of officers, directors, and the incorporator, and the information of the registered agent for service of process.
- Appointing a registered agent who agrees to accept legal documents for the corporation if it is sued.
- Setting up a corporate record book to keep important documents, meeting minutes, and stock certificates and stubs.
- Preparing corporate bylaws to set general rules for running your corporation.
- Preparing a shareholder’s agreement to address shareholder meetings, voting, transferability of shares, death, disability, etc.
- Appointing corporate directors and holding the first Board of Directors meeting to establish officers, adopt bylaws, select a bank, and determine the fiscal year, among other tasks.
- Issuing stock to each shareholder.
After you’ve formed your corporation, it’s important to ensure you comply with requirements under Florida law to retain the benefits of having the corporation. The simplest things to do are to file an annual report, pay income taxes, and comply with other regulatory requirements. The other ways to ensure that a creditor of a shareholder cannot “pierce the corporate veil” are beyond the scope of this post and will be covered later, so stay tuned.
Interested in learning more about whether a corporation is right for you and your business and what you can do to protect your assets? Give us a call today, and we’ll set up a consultation.
Barry E. Haimo, Esq.