Corporation Formation

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By definition, a corporation is a business that operates as a separate, legal entity that is guided by a group of officers known as the board of directors. In the eyes of the law a corporation is a legal entity that in a sense, has a life of its own. As a separate entity, a corporation exists independently from the owners/shareholders and its employees. There are many advantages associated with forming a corporation including having the right to file lawsuits, buy and sell property and to contract. But the most significant feature of a corporation is that it protects its owners from personal liability for corporate debts and obligations, with some applicable limits. Under law, a corporation is given the right to exist by the state that issues its charter. However, if you incorporate a business in one state in order to reap the benefits of its liberal laws regarding running corporations but do business in another state, you must file for qualification in that other state which involves paying a fee to do.

What Is Required when Forming a Corporation?

Forming a corporation involves filing an application for a charter with the respective state. Upon filing this application, the person starting the corporation is legally required to put on record some facts which include:

  • The reason the corporation is being formed
  • The personal information of the incorporator(s)
  • The amount and types of capital stock the corporation will be authorized to issue
  • The rights and privileges of the stock holders

Why Consider Starting Incorporation?

There are several advantages associated with incorporation with the main advantage being to limit the liability of the owner. In a sole proprietorship or partnership, the owner is personally liable for the debts and liabilities of the business. This means creditors are allowed to go after their personal assets to collect business debts. But when the business is incorporated, the owner is protected from all such liability. In the worst case scenario, a corporation can go bankrupt, which means those holding stock may lose their initial investment, but the corporator is protected, which means creditors cannot go after their personal assets. Here are a few other reasons you should seriously consider incorporating:

Corporations Have Perpetual Existence

Another reason why forming a corporation is an attractive way to start a business is that the life of the corporation is not dependent upon the life of any one person. In other words, a corporation can keep on running indefinitely even if the sole proprietor or a partner dies.

Shares are Transferable

Another benefit of forming a corporation is the ease of transferability. A corporation and all of its assets and accounts can be transferred by the simple assignment of a stock certificate. This is far different from a partnership as a partner cannot transfer his/her interest in a business to another without the express consent of all other partners.

Can Raise Investment Capital

A corporation can raise capital by selling stock or borrowing money. No taxes have to be paid on money a corporation raises through the sale of stock. And, if a corporation wants to expand, the owner can sell off some of the stock and still remain in control of the business. Investors tend to be more willing to open their wallets when they’re given the assurance of knowing they’ll have a piece of the action in the form of stock.These are just some of the reasons why corporation formation is such a popular way to start or run a business. Of course, there are some disadvantages to running a corporation. Incorporation is costly and involves the filing of many formal, legal papers such as by-laws, articles of incorporation and board resolutions. Additionally corporations must be in compliance with quarterly or annual reportorial requirements with the SEC and other agencies that require these reports.