Learn More About Corporations

A Corporation is a separate entity unto itself. It has the power to do things that an individual can do, such as purchase land and enter into contracts. It even has its federal identification number, similar to an individual having a social security number. As a result, corporations benefit from liability protection, allowing their Shareholders, Directors, Officers, and employees to shield their assets, in most circumstances, from business creditors and individuals (or other business entities) who seek remedies stemming from the negligence or wrongdoings of the Corporation. This protection, however, may be pierced (“Piercing the Corporate Veil”) if a Corporation does not take the necessary steps to ensure that the entity is separate from its Shareholders, Directors, Officers, and employees. Consequently, it is vital to speak to a skilled business attorney who can advise you on maintaining your company’s liability protection.

A Corporation is also one of the most formalized entities, requiring such considerations as annual shareholder meetings, extensive annual filings, and highly detailed financial records. Corporations are also one of the most eligible business entities to raise outside capital through the sale of their stocks (also called shares, which are essentially a percentage of the organization’s ownership based upon the number of total shares). Private Corporations often go “Public” through an Initial Public Offering. Public Offering occurs by soliciting investors in exchange for the shares mentioned above, whereby an investor hopes to receive an annual payment in the form of dividan ends as determined by the Board and based on the Corporation’s annual profit and other factors. The investor may also hope that the shares increase in value whereby he may sell his ownership in the Corporation, in the form of shares, to another individual (or sometimes back to the Corporation) for profit.

A Corporation is one of the most common types of business entities. The entity may take on several forms, including, but not limited to, Stock Corporations, Nonstock Corporations, and Professional Corporations. A Corporation may further be characterized as a Nonprofit Corporation or Subchapter S Corporation, based upon the Corporation’s purpose and IRS tax classifications. A Corporation is controlled by Shareholders, managed by the Board of Directors, and operated by Officers and Employees. It is important to note that it is possible, in limited circumstances, for a member of the Board (“Director”) also to be a Shareholder. Furthermore, ownership in a corporation does not necessarily mean that you are a part of its management or operations.

Corporations derive their authority from state statutes, and most are subject to federal law and monitored federally. In the Commonwealth of Virginia, a Corporation is organized under Virginia Statutes §13.1-601 et seq. for Stock Corporations (the “Virginia Stock Corporation Act”) and §13.1-801 et seq. for Nonstock Corporations (the “Virginia Nonstock Corporation Act”)

Corporations are subject to what is known as ‘Double Taxation.’ Under this tax structure, a Corporation is taxed for all remaining profit left at the end of the calendar year. After that, when the Corporation issues dividends to its shareholders, they are taxed on the dividends. Therefore, money taxed at the end of the calendar year and distributed later as dividends have been taxed twice. Experienced business attorneys and corporate accountants will be able to assist Corporations in maximizing their tax value to avoid or reduce the costly effects of ‘Double Taxation.’

Your first step is to determine which state you wish to set up your Corporation. Often it is the state where your principal place of business will be located or where you will be conducting most of your business transactions. It is important to note that a Corporation may have two domiciles in different states. If you file in one state and operate in multiple states, you will often need to register the Corporation as a Foreign Corporation in the states where you are working and secure a Registered Agent in each state. A physical location is necessary to serve process (a P.O. Box is often not legally sufficient). Once this location is selected, you will file your Articles of Incorporation (or Nonstock Articles of Incorporation for a Nonstock Corporation) with the appropriate division of that state’s Secretary of State. For example, in Virginia, the Articles of Incorporation are filed with the Commonwealth of Virginia’s State Corporation Commission.

The Articles of Incorporation (“Articles”) is a document that outlines the purpose, structure, and Directors (may be elected after that) of the Corporation. The requirements for filing, including initial fees payable to that state’s respective agency, vary from state to state. Therefore, it is imperative to consult a skilled business attorney, preferably one also knowledgeable in intellectual property law, who can assist you with these filing requirements as well as assist with a general business name search and trademark search which can help ensure that: (1) your business name is not already in use and (2) you are not infringing upon another business entity’s Trademark. It is important to note that when filing your Articles with a state agency, they often accept your Corporation’s name as you label it so long as there is not another entity with the same name filed in that state and not grossly obscene. However, this acceptance is not federal and may lead to future federal Trademark claims.

Bylaws: Internal, Governing Document for a Corporation
The appropriate state agency has approved the next step after your Articles is to have a skilled business attorney draft the mandatory Bylaws on the Corporation’s behalf. The Bylaws are a comprehensive, internal document, a copy to be kept at the Corporation’s principal place of business, of the Corporation that describes in detail such considerations as the structure and governance of the company, how the company is operated, shareholder disputes, dissolution procedures, voting rights, duties and responsibilities of Directors, and indemnification clauses.

After your Bylaws have been drafted, approved, and signed, it is vital to register for an Employer Identification Number (EIN), also known as a Federal Tax Identification Number, with the IRS. A skilled business attorney, or tax attorney, can file an EIN on your Corporation’s behalf by having you sign a Form SS-4 authorizing the attorney as a Third Party Designee to act on your behalf. The EIN will not only be used for tax purposes but also to open bank accounts in the Corporation’s name and for employee tax withholdings. It is also important to note that you should register your organization with the Virginia Department of Taxation if your Articles were filed in the Commonwealth of Virginia.