HOW TO INCORPORATE

Corporation: Definition, Types, Formation, Maintenance

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A corporation is a business or organization formed by a group of people, and it has rights and liabilities separate from those of the individuals involved.

It may be a nonprofit organization engaged in activities for the public good; a municipal corporation, such as a city or town; or a private corporation (the subject of this article), which has been organized to make a profit.

In the eyes of the law, a corporation has many of the same rights and responsibilities as a person. It may buy, sell, and own property; enter into leases and contracts; and bring lawsuits. It pays taxes. It can be prosecuted and punished (often with fines) if it violates the law. The chief advantages are that it can exist indefinitely, beyond the lifetime of any one member or founder, and that it offers its owners the protection of limited personal liability.

Limited Liability

If you own shares in a corporation that cannot pay its debts and is sued by its creditors, the assets of the company may be seized and sold. But although you can lose your investment, the creditors cannot attach your personal assets (such as cars, houses, or bank accounts) to satisfy their claims.

There are some important exceptions to this rule, however. If the business affairs of a corporation and its shareholders are so entangled that they are, in effect, one and the same, an opponent in a lawsuit may be able to convince a court to "pierce the corporate veil" and impose personal liability, or responsibility, on the active shareholders. Personal liability may also be imposed if the corporation does not comply with required legal formalities or fails to keep proper records.

Forming a Corporation

If you want to form a corporation, you must obtain a state charter. Here are some things to do before you apply:

  • Choose the state in which you want to incorporate. This will usually be the state where your company has its headquarters or where it conducts most of its business. Some people prefer to incorporate in states that impose few regulations or no corporate income tax, such as Delaware, Nevada, and Wyoming.
  • Decide whom you want as officers. Although many states require at least two or three parties to form a corporation, they need not all be shareholders. You may want to ask friends or family members to serve as the initial officers. If you remain the sole shareholder, you alone will control the corporation's activities.

Last updated: Oct 22, 1999




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