What is a Corporation?

A corporation is a legal person that can be created under state law. As a person, a corporation has certain rights and obligations, including the right to do business in its own name and the obligation to pay taxes. Some laws use the words “natural persons.” A natural person refers only to human beings. A corporation can only be referred to as a “person” under the law, and is never referred to as a “natural person.”

Prior to the use of corporations, if a venture failed, persons who invested in it faced the possibility of liability. By using a corporation, people are able to invest fixed sums of money for a new venture, and if the venture makes money, they share the profits. If the venture fails, they merely lose their initial investment.

What Terms do I Need to be Familiar with in Regard to Corporations?

To understand the terminology associated with Corporations, you need to understand the following: Articles of Incorporation; Shareholder; Board of Directors; Fiduciary Duty; Officers of the Corporation; Registered Agent; Bylaws; S Corporation and C Corporation.

What are Articles of Incorporation?

The Articles of Incorporation (in some states referred to as the Certificate or the Certificate of Incorporation) is the document that is filed with the appropriate state agency to start the corporation. In most states, this agency is the Secretary of State but may be called the Department of State, the Division of Corporations, or a similar name.

Typically, the Articles of Incorporation legally needs to contain only a few basic statements. Large corporations often have lengthy Articles of Incorporation, but this just makes it more difficult to make changes in the corporate structure. It is usually better to keep the Articles short and put the details in the bylaws.

What is a Shareholder?

A shareholder is a person who owns stock in a corporation. In small corporations, the shareholders often also act as the officers and directors, but many shareholders do not have these roles in larger corporations. Sometimes small corporations have shareholders who are not officers, such as when the stock is in one spouse’s name and the other spouse runs the business. Specific laws regarding issuance of shares and shareholders’ rights vary from state to state, and are listed in the various state statutes. Typically, shareholders must meet once a year to elect directors and make other major decisions for the corporation.

Who are the Board of Directors?

The board of directors is the controlling body of a corporation that makes major corporate decisions and elects the officers. In most states, a corporation can have one director (who can also hold all offices and own all the stock). In a small corporation, the board members are also usually its officers.

The board of directors usually meets just once a year. Examples of procedures which must be approved by the board of directors include:

  • Electing officers and setting the terms of their employment;
  • Amending bylaws or the articles of incorporation; and
  • Deciding upon corporate mergers, reorganizations or other significant corporate transactions.

What is a Fiduciary Duty?

Directors of a corporation owe “duties of loyalty and care” to the corporation know as Fiduciary Duties.  Generally, this means the directors must act in good faith, with reasonable care, and in the best interest of the corporation. If a director stands to personally gain from a transaction with the corporation, he or she must disclose this fact and refrain from voting on the matter, if possible.

Who are the Officers of a Corporation?

Officers are appointed by the board of directors to run the day-to-day operations of the corporation. Typically, and by law in many states, a corporation will have at least three officers:

  • President
  • Treasurer or Chief Financial Officer
  • Secretary

Officers do not have to be shareholders or directors, but they can be. There is no limit on the number of officers, and usually no limit on the number of offices any one person may hold. In fact, in most cases for small businesses, the same person can hold all of the corporation’s offices.

At the initial meeting of the board of directors, the stock is issued and the officers and board of directors are elected. The officers can be changed later by a meeting, and vote, of the board of directors.

What is a Registered Agent?

The registered agent (in some states referred to as the resident agent) is the person designated by the corporation to receive legal papers that may be served on the corporation. The registered agent should be regularly available at the registered office of the corporation. The registered office can be the corporate office, the office of the corporation’s attorney, or the office of the registered agent.

Typically, a registered agent is:

  • An officer of the corporation; or
  • Another entity established in the state of incorporation (commonly referred to as a domestic entity) that can serve as a Registered Agent for other corporations.

In most states, the person accepting the position as registered agent must sign a statement that he or she understands the duties and responsibilities of the position.

What are Bylaws?

Bylaws are the rules governing the structure and operation of the corporation. Typically, the bylaws will set out rules for the board of directors, officers, and shareholders, and will explain corporate formalities.

What are the types of Corporations?

Generally, there are two types of corporate structures a person incorporating the same can chose from, an S Corporation or  C Corporation.  The type of corporation affects how it will be taxed as well as other legalities of the structure.

What is an S Corporation?

An S Corporation pays no income tax and may only be used for small businesses. All of the income or losses of the corporation for the year are passed through to the shareholders, who report them on their individual returns. At the end of each year, the corporation files an information return, listing all of its income, expenses, depreciation, etc., and sends each shareholder a notice of his or her share as determined by percentage of stock ownership.

What is a C Corporation?

A C corporation pays taxes on its net earnings at corporate rates. Salaries of officers, directors, and employees are taxable to them and deductible to the corporation. However, money paid out in dividends is taxed twice. It is taxed at the corporation’s rate as part of its profit, and then at the individual stockholders’ rates as income, when distributed by the corporation to them.


What are the Advantages of an S Corporation?

Using this method avoids double taxation and allows the pass-through of losses and depreciation. For tax purposes, the business is treated as a partnership. Since tax losses are common during the initial years due to start-up costs, many businesses elect S status and switch over to C Corporation status in later years. Be aware that once a corporation terminates its S status, there is a waiting period before it can switch back. Typically, S corporations do not have to pay state corporate income tax.

What are the Disadvantages of an S Corporation?

If stockholders are in high income brackets, their share of the profits will be taxed at those rates. Shareholders who do not materially participate in the business cannot deduct losses. Some fringe benefits, such as health and life insurance, may not be tax deductible.

What are the Advantages of a C Corporation?

If taxpayers are in a higher tax bracket than the corpo­ration and the money will be left in the company for expansion, taxes are saved. Fringe benefits, such as health, accident, and life insurance, are deductible expenses.

What are the Disadvantages of a C Corporation?

Double taxation of dividends by the federal government can be a big disadvantage. Also, most states have an income tax that only applies to C corporations and applies to all income over a certain amount.
As a separate legal entity, a corporation must submit a tax return each year with the IRS. For corporations with a fiscal year ending December 31, tax returns are due on March 15. A corporation must file a tax return even if it does not have income or no tax is due. C corporations file tax returns on Form 1120 or 1120A.
Some states, including California, also have a state corporate income tax. Corporations that anticipate a tax liability of $500 or more must estimate their taxes and make quarterly estimated tax payments. Corporations with employees are required to pay federal (and sometimes state) payroll and unemployment taxes.

NOTE: Neither of these taxes applies to money taken out as salaries. Many small business owners take all profits out as salaries to avoid double taxation and state income tax. However, there are rules requiring that salaries be reasonable. If a stockholder’s salary is deemed to be too high relative to his or her job, the salary may be considered to be partially a dividend and subject to double taxation.



How Do I Form a Corporation?

A Corporation is typically formed by filing an Articles of Incorporation with the relevant state agency.

Once you are ready to form your Corporation, chose from one of TTC Business Solutions’ Corporate Filing Services to incorporate your Corporation. 


Do I Need to Choose Between an S Corporation and a C Corporation?

Yes. Of note, by default all corporations will be treated as C Corporations unless they specifically elect to become S Corporations.


What are the Requirements to Qualify for S Corporation Status?

To qualify for S Corporation status, the corporation must:

  1. Be a domestic corporation;
  2. Have no more than one hundred shareholders;
  3. None of whom are nonresident aliens or corporations;
  4. All of whom consent to the election (shares owned by a husband and wife jointly are considered owned by one shareholder);
  5. Have only one class of stock;
  6. Not be a member of an affiliated group (only individuals, estates, and certain exempt organizations and trusts qualify)
  7. File IRS Form 2553 with the IRS before the end of the fifteenth day of the third month of the tax year for which it is to be effective, and be approved by the IRS.

Are there Specific Requirements for C Corporation Status?



Should I Run a Name Availability and Trademark Search before Naming the Business?

Yes. Prior to adopting and using the name of your corporation you should always check to make sure that the name is available with your state’s Secretary of State. You should also run a state and federal trademark search to clear use of the same as well as well as any advertising slogans, product or service names you intend to use.

TTC Business Solutions offers a Free Business Name Availability Check as well as trademark Research Report Services to determine if your Corporation’s name is available.



What Tax Advantages are Associated with C and S Corporations?

For more specific tax advice on the application of the advantages of an S or a C Corporation you may wish to consult with a licensed tax attorney or other tax professional.