Choosing a Legal Entity Form for Your Business: The Corporation

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Suppose you are thinking about starting or growing a business. Have you thought about which form of business entity you will use?  As a business lawyer Memphis, TN calls upon for business “know how” help, we can help guide you in selecting the most advantageous form of legal business entity for your business. We will walk you through the practical and legal considerations.

Generally, the most important issues are the cost to create and maintain the entity, taxation, continuity of existence, ability to transfer ownership interests, management, control and exposure to personal liability.

The most common forms for a business entity include sole proprietorship, general partnership, limited partnership, limited liability company, and corporation.  The choice of entity and ownership structure involves many factors specific to a particular business, which is why you should consult an experienced business lawyer.

In this post, we will focus on the Corporation.

Basic Characteristics of a Corporation 

A corporation is a form of business entity created under a particular state’s statute. The corporation may be owned by one or more shareholders, who may be people or other legal entities. A corporation is treated as a completely separate entity from its shareholders.

Shareholder Liability 

Shareholders of a corporation are generally not liable for corporate debts, obligations and other liabilities. However, in order to maintain this protection, certain statutory formalities related to the formation and operation of a corporation must be strictly followed. Failure to properly follow these rules may cause the shareholders to become personally liable for debts, obligations and liabilities of the corporation.

What Happens if a Shareholder, Officer, or Director Dies? 

The filing documents of a corporation can provide for perpetual existence so that the corporation will not be dissolved but will continue upon the death or withdrawal of any of its shareholders, officers, or directors.

Transferability of Interests and Shares

Shareholders’ interests in a corporation are evidenced by stock certificates, and these are generally freely transferable. The corporation permits the greatest flexibility in the transfer of ownership interests. However, a shareholders’ agreement can be used to restrict the transfer of shares.

Taxation

A corporation must file its own income tax return. One disadvantage to this corporate form is that “double taxation” may occur since income received by the corporation will be taxed at the corporate level and, if distributed to shareholders as dividends, will be taxed again on the shareholders’ individual income tax returns. There are several strategies that can be used to minimize the impact of this double taxation such as salaries to officers, loans from shareholders, and a Subchapter S election. A corporation taxed as an S-Corporation is taxed like a partnership for income tax purposes.

If you need help with setting up your business, or if you’re thinking of changing the way your business is currently set up, contact the trusted business lawyer.


WBThanks to our friends and contributors at Wiseman Bray PLLC who have significant experience in business formation and organization.