What Is a Corporation? 7 Steps to Forming a Corporation

A corporation is a business entity that the government recognizes as a distinct legal personality and separate entity from the group of people who created it. It’s common for small businesses and large businesses alike to file as this legal entity or business structure.

A corporation is a kind of business organization that can seek profit, enter into contracts, pay taxes, issue stock, and so on as a separate legal entity from any of its business owners. In other words, even though shareholders, executives, managers, and employees run this type of company, the government does not legally consider any of them to be the same as the corporation itself.

This distinction allows the business to survive and thrive as a legal person even if all the founding members have left—so long as they haven’t resorted to liquidation of the company. It also shields all the individuals involved in the business from being personally affected in the unfortunate event of a lawsuit against the corporation.

There are many different types of corporations. Here are seven of the most common you’ll encounter:

1. 1. C corporation: This corporate structure means the government must tax shareholders’ own assets separately from corporate assets. Other names for C corporation include C-corporation or simply C corp.
2. 2. Conglomerates: Corporations that own and operate a host of subsidiaries (smaller corporations under their bigger umbrella) are conglomerates.
3. 3. Multinational corporation: These corporations operate in multiple different countries and can have a global reach. Some multinationals merge with foreign corporations to become international conglomerates; as a result, they see some of the largest corporate profits in the world.
4. 4. Municipal corporation: This term is a synonym for local government. Cities operate as their own legal entities and can even enter into contracts. The public as a whole is responsible for choosing city directors.
5. 5. Nonprofit corporation: In contrast to a for-profit corporation, nonprofits are corporations that the government does not tax. A nonprofit does not seek to make profits but to provide a service of some kind to society.
6. 6. Public corporation: A corporation owned and operated by the state itself is a public corporation. This term can be somewhat confusing as it can also refer to a corporation that issues stock for outside investors (the public) to invest in.
7. 7. S corporation: Smaller companies that meet certain requirements can file as an S corporation (or S corp) or as a subchapter S, and avoid the corporate tax rate entirely. Instead, shareholders simply pay personal income taxes to account for the business’s earnings. This type of structure can be particularly useful for small businesses.

If you’d like to utilize the business structure of a corporation for legal and tax purposes, there are some important steps you need to follow. Keep these seven actions in mind:

1. 1. Choose a business name. A new corporation cannot legally have the same name as any other corporation. Do your best to come up with a distinct, unique name, and be ready to choose a different option if it becomes apparent another business has beat you to it.
2. 2. File articles of incorporation. You must file legal documents called articles of incorporation with the state in which your corporation will be doing business. This solidifies your business structure as a distinct legal entity from you and your partners.
3. 3. Write up corporate bylaws. Each corporation runs according to its own unique set of corporate laws. These set up the expectations for shareholders, the board of directors, and so on, including how the corporation will distribute stocks.
4. 4. Appoint a board of directors. Shareholders will elect a board of directors if you decide to go public as a company. But when you’re just starting out, you’ll need to put your heads together to decide who will be the initial directors for your company.
5. 5. Issue stock if you wish. Issue the initial shares of stock to your board of directors, as they will be the earliest stockholders in your company. As time goes by, you’ll be able to issue more shares.
6. 6. Prepare for taxation and regulation. Corporations need to be ready to interact with government entities like the IRS (Internal Revenue Service) and SEC (Securities and Exchange Commission). Prepare to adhere to all relevant corporate taxes and regulations and be diligent about record-keeping in the event of an audit.
7. 7. Do business. Now that your corporation is legally formed, you can move on to the day-to-day operations of running a company. Do your best to maximize profits while remaining socially responsible.

If you’d like to avoid using the corporate structure, there are other types of businesses you can form. Here are three of the most common:

1. 1. Joint partnership: A joint partnership is an agreement between owners to run a company together—however, the company is not legally separate from the owners. This means partners have personal liability in the event of a lawsuit and cannot shield themselves in the same way they would be able to if they had filed as a corporation. Partnerships do not pay taxes as distinct legal entities—instead, all members of the partnership file their own personal income tax returns.
2. 2. Limited liability company (LLC): An LLC can shield individuals from the seizure of personal assets even more effectively than a corporation can in the event of a lawsuit. Alongside the limited liability protection this legal status offers, you’ll also enjoy an avoidance of double taxation (taxation as both as an individual and again as a corporation) that is common to certain corporate business structures.
3. 3. Sole proprietorship: A business run by a single individual whom the government does not consider to be legally separate from the business itself is a sole proprietorship. This means sole proprietors are able to avoid double taxation just by filing their own personal taxes—their business doesn’t owe taxes of its own—but they also have personal liability.

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