When you create a corporation, you form a legal entity that is distinct from its owners. It can own assets, enter into contracts, incur debt, hire employees, and sue or be sued—all separate from its owner(s). Corporations are defined by law and exist in perpetuity, unlike partnerships or sole proprietorships, which cease to exist upon the death of an individual.
As long as you adhere to the legal requirements of your state, it’s fairly simple to become a corporation. The process involves obtaining an employer identification number (EIN) from the IRS, completing state registration forms, and creating corporate bylaws. You then file articles of incorporation with your state’s secretary of state.
Once you’re a corporation, you can issue shares to shareholders and hold shareholder meetings. Shareholders elect a board of directors to manage the business and set policies. Then, the corporation’s chief executive officer and other officers manage daily operations. Corporations keep detailed record-keeping, and they must follow corporate governance guidelines.
As the oldest and most common type of business, corporations are the backbone of large companies around the world. However, the costs and complexity of this structure often make it less than ideal for small businesses. For example, corporations must pay both federal and state taxes on profits. And they must report dividends to shareholders, which are then taxed again on the shareholder’s personal income tax returns. Still, it’s important to consider all the pros and cons of each type of business structure when deciding what entity type is right for your company.