What is a corporation?
A corporation is defined as a legal entity that is separate from its owners. A corporation assumes the rights enjoyed by individuals i.e. borrowing money, hiring employees, paying taxes and entering into contracts among others. It is often regarded as a ‘legal person’.
Requirements to Make a corporation?
When forming a Corporation, the following must be considered;
1) Corporation Name
The name of the Corporation must end with Incorporated or Limited or Corporation abbreviated as Inc. Ltd and Corp respectively. The name should also be unique i.e. not used by any other Corporation. It also must not contain words like Cooperative or National or any other word that is associated with the federal government.
The State’s Corporation naming rules must again be adhered to. The new name can be reserved for a small fee until the articles of Incorporation is filed. Following the set, rules ensure the chosen name does not violet the Trademark of another company.
2) Appointing Directors
Directors are usually appointed by stockholders or investors so as to make major operational decisions of a Corporation.
3) The articles of Incorporation
This document is filed after the name has been chosen and the directors appointed. It is also referred to as a ‘charter’ or a ‘certificate of incorporation’.
A certificate of Incorporation is prepared, signed and filed by the Corporation owner. If the Corporation is co-owned, the owners can both prepare and sign the charter or just appoint one person to sign. The person signing the charter is referred to as the ‘promoter or Incorporator.
The Certificate of Incorporation does not have to be complex or lengthy. It just contains a few details of the company e.g. the name, names of directors and the address of the main office. It may also contain the name of the director who acts as a ‘registered agent’. This is to ensure the members of the public are informed on how to be in touch with the Corporation in case of a lawsuit.
4) Creation of By-laws
These are internal rules that outline how a Corporation is run on a day to day basis. I.e. it states when the directors/shareholders’ meeting will be held, the voting requirements et cetera. Ideally, the by-laws should be adopted during the first board meeting of the directors and are in most cases created by the Corporation owners.
5) The Board of directors meeting
The first board of directors meeting discusses a wide range of issues from setting the fiscal year of the Corporation to adopting laws and issuance of stock among others.
6) Issuing Stock
A Corporation should not do business until the stock has been issued. The stock issue divides business ownership interests and it’s a requirement that must be fulfilled to qualify for corporate legal protection.
Stock must be issued as per security laws which require registration of shares with the Securities and Exchange Commission (SEC). Registration of securities may be a long process that involves both accounting and legal fees. Small Corporations are usually exempted from registration of securities.
When issuing stock, the name of the initial shareholder, the number of shares to be purchased and the mode of payment must all be documented. The stock certificate is then issued.
7) Permits and Licenses
A business license is also referred to as a Tax Registration Certificate. The business Pin identification number is also obtained at this point.
Once the Corporation has been set up and all the above requirements fulfilled, it distinguishes itself from other forms of businesses i.e. Partnership or Sole proprietorship in a number of ways. The following explains some of the characteristics of a Corporation;
Characteristics of a Corporation
- Unlimited Life: Shareholders own Corporations whereas employees manage its daily operations. Issuance of stock, the underperformance of employees or even death of the director will not in any way deter the continuous life of a Corporation. Only the Certificate of Incorporation limits the life of the Corporation but it may as well be extended.
- Limited Liability: Company owners and shareholders are protected from liabilities and debts that might be incurred by the business. Creditors may only claim corporate assets to satisfy their claims.
- Separate Entity: A Corporation is considered a separate legal entity since it has its own name, can enter into contracts that are binding, can own property, can sue as well as be sued, can pay taxes and conducts operations under its name thus considered.
- Regulations by the government: The government protects stockholders through the security laws that control the trading and distribution of shares. Public companies that trade in the Stock Exchange must file respective financial statements with the Securities and Exchange Commission.
- Ease of ownership transfer: Stockholders buy stock and are issued with a stock certificate that shows the number of shares purchased. The stockholder can easily transfer his shares in part or in full without anyone’s approval. Again, any other individual willing to purchase stock may not need approval from shareholders or even the Corporation itself.The Corporation only influences the initial public offer after which it keeps records of who owns how many shares when.
- Professional management: Most Corporations recruit experienced professionals to manage the business. The board of directors that is responsible for hiring is also voted in by the shareholders.
- Capital acquisition: Ease of transferability of ownership and the limited liability of shareholders makes it easier for a Corporation to pool resources from stock buyers to raise the desired amount of capital
- Credibility: A business gains credibility immediately it is incorporated. Incorporated businesses are known to be viable and will attract not only investors but creditors as well.
After meeting the objectives it was formed for, the Corporation can be terminated via a process called liquidation. This process involves the selling of the company assets, paying all the creditors and issuing the remaining assets to the existing shareholders. Liquidation can be a voluntary process overseen by a liquidator or an involuntary process as a result of bankruptcy or insolvency.