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A Corporation is a legal entity that exists separately from the people who create it. A corporation is owned by its shareholders and run by a board of directors elected by the shareholders. In a large corporation, the directors hire corporate officers to manage the day-to-day operations of the business. In a small corporation, the directors and the corporate officers are usually the same individual( s).

Corporations are created by filing “Articles of Incorporation” with the Secretary of State and by adopting bylaws. There are certain formalities a corporation must adhere to, including:

  • Procedures for annual shareholder meetings
  • The election of the board of directors
  • Maintenance of corporate records
  • Adoption of bylaws
  • Complete separation of personal and business finances
  • Proper filings with the Secretary of State.

Although many of the requirements may seem unnecessary for a small corporation, they are important to preserve the corporate form.

Advantages — A corporation is a legal entity separate from the owners. It is like a person with a life of its own. This creates a wall of separation which normally limits a stockholder’s liability to the amount of investment in the corporation. If an owner dies or wishes to sell his/her interest, the corporation continues to exist and do business. This adds stability to its existence. Once a corporation has been established through the Secretary of State, no other business may register with the Secretary of State using the same name.

Disadvantages — While a corporation limits an owner’s liability, the owner(s) and/or the corporate officers may still be held responsible if the “corporate veil” has been pierced. The “corporate veil” can be pierced in a number of ways, primarily by the personal actions or guarantee of an owner. Corporate profits may be subject to double taxation. A corporation must pay tax on income as a separate legal entity. If profits are distributed to shareholders, they are also subject to taxation as part of the individual shareholder’s income.

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