A corporation is a limited liability entity. What this means is that generally, none of the owners can be held liable for the obligations of the corporation solely because they are shareholders.
There are always exceptions. For example, controlling shareholders owe a fiduciary duty to minority shareholders and may be held personally liable for a breach of that fiduciary duty.
Unlike most other business entities, only one member is required to form a corporation. One principal advantage of setting up a corporation is ease of formation. The Articles of Incorporation, which set forth general information about your new company, is filed with the Secretary of State for a fee of $115.00. While formation of the corporation is easy, there are still a number of formal requirements that must be adhered to at the infancy of the corporation, such as the election of directors, appointment of officers, and the adoption and preparation of by-laws. Notwithstanding these formalities, the parties may rely upon a very detailed General Corporation Law (GCL) for the day to day rules and regulations governing the operation of the business. Because the GCL is so comprehensive, the parties need not negotiate a detailed agreement covering the structure and operation of the organization.
The corporation is managed through the Board of Directors who appoint officers to run the day to day operations. Shareholders have no right to participate in the day to day management of the corporation. The officers are considered the agents of the corporation, and neither the shareholders nor the directors have the authority to bind the corporation. Ownership of the corporation is transferred more easily than with other business entities through the transfer of shares of stock. A major advantage of the corporation is continuity of life. What that means is that a corporation is not terminated upon the withdrawal, death, or termination of the shareholders, officers, or directors. Generally, capital is raised through equity contributions by shareholders, loans from shareholders, and secured and unsecured loans from third parties.
Unless the corporation is structured as an “S” corporation, the corporation and its shareholders are subject to double taxation. First, the corporation pays federal and state taxes on its income at the corporate tax rate and is not allowed to deduct the dividends issued to its shareholders. Second, the shareholders then pay tax on the dividends they receive from the corporation.
There are however certain ways to avoid minimize the double taxation such as paying salaries to shareholders and implementing shareholder loans. However if the entity will retain most of its income, it may benefit by being organized as a corporation since the marginal rates available to corporations are usually lower than the marginal rates available to individuals.
Qualifying corporations organized as a “S” corporation, can avoid double federal taxation by having its profits, losses and tax credits skip taxation at the corporate level and pass directly through to the shareholders.