Corporations

A corporation is a legal entity considered to be a person under Pennsylvania law, meaning it can sue or be sued by another party. Corporations also have rights and obligations. Corporations are separate from their owners or shareholders and have many different advantages and disadvantages. A corporation is not the best business structure for all businesses, but for many businesses, this type of structure offers a balance that other types of business entities do not offer.

At RJ Fichera Law Firm , we will help you identify the best business structure for your company or help you transition from a sole proprietorship or another structure into a corporation. We will discuss all the factors that go into forming and operating a business. 

Contact us at 610-768-9255 to schedule a Free Consultation and to learn more about corporations and your business idea.

What is a Corporation?

A corporation is a business entity with a separate legal identity from its owners (called shareholders). As a separate legal entity, a corporation can sue and be sued, enter into contracts, own assets, take out loans, and pay taxes. Corporations often use the designation “Inc.” after the business name.

Shareholders own an interest in a corporation and receive its profits, usually in the form of dividends. However, they typically aren't involved with the day-to-day management of the business. Instead, the shareholders elect a board of directors who oversee the business and hire senior management.

An important feature of a corporation is its limited liability. Shareholders are not personally liable for debts of the business. Their liability is limited to their interest in the corporation.

Corporations can be for-profit (both privately owned or publicly traded) and non-profit.

How Is a Business Incorporated?

The specific steps for incorporating a business vary between states. Generally, the process involves the following four steps.

1. Filing articles of incorporation with the relevant state government office. One or more of the shareholders file the articles of incorporation. The articles usually include information such as the corporation's primary purpose and shareholder structure.
2. Creating corporate bylaws. Typically created at the first shareholders' meeting, the bylaws set out the basic rules around how the corporation will operate and address things like regular and special meetings, voting rights, and corporate officers.
3. Issuing stock. Stock is issued to shareholders via stock certificates.
4. Electing a board of directors. The shareholders elect a board of directors at a general meeting. This election is very important because board members can play strategic roles in the corporation.

Before incorporating, you should weigh the pros and cons of the business structure to decide whether it's right for your business.

Advantages of a Corporation

Corporations offer many advantages, some of which are listed below.

• Limited personal liability. As a corporation is a separate legal entity, shareholders' are generally protected from the corporation's creditors. Any liability is limited to their individual investment in the business. This means that shareholders' personal assets are protected if a corporation is sued or goes bankrupt.
• Easy transfer of ownership. Shares in a corporation can easily be transferred. While the corporate bylaws will set out the specific rules for buying and selling shares, a shareholder can leave a corporation simply by selling their shares. This flexibility of ownership also ensures a business continues to operate through ownership changes.
• Quick capital raising. A publicly-traded corporation can quickly raise additional capital by issuing more stock in the business.

These advantages should be balanced against the potential disadvantages of incorporation.

Disadvantages of a Corporation

The disadvantages of a corporation are less numerous, but they can be significant.

• More costly and complex to set up and run. Incorporation incurs more costs and takes more time than setting up a sole proprietorship or partnership. Once it's up and running, a corporation is also subject to a stricter regulatory framework. This includes ongoing documentation and filing requirements, such as filing annual reports, keeping minutes at shareholder meetings, maintaining detailed financial records, and opening a separate corporate bank account.
• Potential double taxation. In some circumstances, the profits of a corporation are taxed twice, both at an entity level and at a shareholder level.

As you can see, these advantages and disadvantages may benefit or work against you – it all depends on the business and your goals. A corporate lawyer can discuss these things with you, helping you narrow down exactly what business structure will work best.

Fortunately, when it comes to corporations, there is more than one type, all of which have their own unique angle and purpose. Exploring these options can help you determine if one corporation type will help you reap the benefits but do so in a more strategic manner.

Types of Corporations

Aside from being incorporated as a corporation, you may want to consider a specific type of corporation. Below are brief descriptions of specific corporation types.

1. C corporations

A C corporation is a legal entity or structure that the government taxes separately from its owners. Many larger companies structure themselves as C corporations for federal income tax purposes, and they're also eligible to receive an unlimited number of both foreign and domestic shareholders.

Governments consider the distribution of earnings and profits as dividends to be subject to income tax, and it taxes the profits of the company both at the corporate level and on an individual's tax returns. Exceptions to this rule include both distributions in the corporation's liquidation and the termination of shareholder's interest.

2. S corporations

S corporations are entities that elect to pass their corporate income, losses, credits and deductions directly to their shareholders for tax purposes. By structuring themselves as a partnership, they're able to avoid double taxation of a C corporation. They tax income at the shareholder level instead of the corporate level, and they distribute payments to shareholders tax-free.

Some corporate penalties, such as the personal holding company tax or the accumulated earnings tax, also don't apply to S corporations. Similar to C corporations, this type of entity follows the law of the state in which it resides. The requirements for becoming an S corporation typically include:

• Meeting the eligibility requirements
• Possessing only a single class of stock
• Having 100 or fewer shareholders

3. Limited liability companies

A limited liability company (LLC) has elements of both a partnership and a corporate structure. This type of corporation offers limited liability protection to owners, protecting them from being financially responsible for any damages the company causes.

Unlike a C corporation, a board of directors typically isn't necessary for an LLC, and its owners may decide to structure this type of corporation as a partnership. LLCs also have pass-through taxation, meaning that only the owners pay income taxes on their personal share of the business, rather than the entity itself. LLCs can be an ideal option for single owners.

4. Nonprofits

Nonprofit organizations use surplus revenues as a means to achieve goals for a wide variety of causes. Like traditional corporations, they typically have a board of directors that makes key decisions on behalf of the organization.

Rather than relying on profits, these entities usually rely on funding from donors or the government, typically in the form of grants. They use their funds to support their designated cause and are exempt from taxes. Private donations to nonprofits are also typically exempt from taxes.

5. Certified Benefit Corporations

Also referred to as B corporations or B corps, certified benefit corporations have a dual purpose to generate a profit while promoting a public benefit. While the status doesn't offer any tax breaks, its value is reputational. B corporations aren't available in every state.

B corporations, or simply B corps, are private, for-profit business entities that produce some type of public benefit on behalf of their shareholders. B corps aim to meet high standards of social and environmental performance while also meeting the standards that their shareholders developed. While there are no tax benefits to B corps, companies with this designation may be able to improve their relationships with customers and achieve important social missions while also achieving high profits.

6. Closed corporations

Closed corporations are companies with a small, select number of shareholders who are often closely associated with the business. These corporations aren't public companies, and although the laws vary by state, it's often a requirement that they have fewer than 35 total shareholders. Closed corporations are typically exempt from many of the requirements for traditional corporations, such as the creation of a board of directors and mandatory annual shareholder meetings.

A corporation must meet strict eligibility rules to elect S corp status. The number of shareholders is limited to 100, and specific rules exist to determine shareholder eligibility.

Factors to Consider before Incorporating

Before you incorporate, you may want to consider the below six factors.

1. Complexity. What type of business do you have and how complex is its structure or management of it?
2. Liability. How much does personal liability matter to you?
3. Number of Owners. Is it just you, and do you want to maintain sole ownership or will ownership be divided among others?
4. Capital. Do you need to raise capital, and if so, how much?
5. Taxation. Double taxation is a hallmark of corporations, and as such, how does this affect the business?
6. Survivorship. If something happens to you (e.g., you become incapacitated in some way or die), do you want the company to survive?

Considering these factors with a corporate lawyer will help identify if a corporation is right for your business.

Contact Our Law Firm Today

If you need to incorporate a business, do it strategically and smartly. At RJ Fichera Law Firm , we help clients form corporations and plan for their futures. Contact us by completing the online form or calling us at 610-768-9255, and we will schedule a Free Consultation to discuss your business venture.

Please check out our FAQs Page under Corporate/Business Succession for additional information.