What is a corporation?
A corporation is a business legally considered to be its own business entity. This permits this type of business to operate almost entirely as an individual does, from the ability to enter into a contract to borrowing money. Some of the more notable examples of corporations are Amazon, Apple, and Microsoft.
A major purpose of forming a corporation, when starting a business, or scaling it, is the limited liability protection it offers shareholders. Limited liability allows shareholders to enjoy the benefits of purchasing stock or dividends in a corporation without worrying that they - and therefore, their private assets - will be held accountable if a company faces debt. In short, this features is what it sounds like: It limits the liability of an individual for the financial doings of a larger entity.
The structure of a corporation
Most corporations consist of the following three divisions:
Board of directors: A group of people elected by the company’s shareholders whose purpose is to manage their investments and communicate about the performance of the company’s stock. The board can then internally elect its members to officer positions, like President, Treasurer, and Secretary. This is also the body that institutes the corporate bylaws, a set of guidelines for delineating power and how to govern within the board.
Employees: The company staff who implement everyday operations and are answerable to the officers of the board.
Shareholders: These are people who have purchased a “slice” of the corporation through its stock. This entitles them to a portion - proportionate to the number of shares they hold - of the revenue if the company were ever to be sold. Owning stock is also what grants shareholders a say in the company, namely the election of its board of directors.
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How to become a corporation
Corporations are recognized as such through the state where they operate. Therefore, the exact process of how to become a corporation varies slightly depending on your location in the United States. Broadly speaking, though, these are the six steps to becoming a corporation:
Select your name. After finding a unique name that isn’t already registered with the state, you have to add on a particular word at the end that identifies you as a corporation. Standard requirements are “Incorporated” or “Limited.” Not sure of what name to use? Consider using a business name generator for inspiration.
Appoint directors. In the beginning, it’s common to see owners list themselves as directors. The number of directors, and specifications about who this person can be, also vary across states.
File for incorporation. Also known in some states as a certificate of incorporation, this is the formal application to become a corporation. It’s usually submitted to the filing office in your state’s Department of State. If you are seeking to do business in another state (not the one in which you incorporated), then you will file for qualification in that second location.
Put together bylaws. Assemble the rules you want to guide how the corporation will be run, including what all entities will be responsible for and how they will interact with each other.
Convene a board meeting. The first gathering is for accomplishing some major tasks to finalize the new status of corporation. Those agenda items include instituting the bylaws, issuing stock, appointing officers, and more.
Issue stock. This step formally allocates a company into the hands of shareholders. It’s one of the most essential qualities of being a corporation.
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