Contrary to how they are presented in the media, corporations are not gigantic business entities making billions of dollars a year. Instead, corporations can be used for small business planning as well. Corporations, as an entity, limited the liability of the shareholders and those operating the business, meaning the losses, debts, and liabilities of a corporation are its own, not its shareholders. Corporations are the best corporate vehicle for relatively intricate business planning. Most startup companies initially form as corporations because investors enjoy the flexibility, as well as the certainty, that comes with corporations. In fact, some funds will require a startup to convert into a corporation if they started out as an LLC or partnership before investing.
There are a number of steps that must be taken to form a corporation. First, articles of incorporation must be submitted to the Secretary of State. The articles may be submitted by an incorporator, or a person specifically designated by the founders as being responsible for incorporating the business. If you hire The Taormina Firm to start your corporation, we will serve as the incorporator. The articles dictate who the registered agent of the corporation is, the stock (and par value) that the corporation is allowed to issue, and other important information to meet the corporate formalities required by statute.
Upon the filing of the articles of incorporation, the initial founders of the company (usually the initial board of directors) will adopt the actions of the incorporator and approve the bylaws of the corporation. The bylaws are more detailed than the articles of incorporation, and touch on topics such as board composition, meetings of the board and stockholders, proxy voting, designation and selection of officers, indemnification of the board and officers, and all sorts of other details with regard to the day-to-day operation and management of the company. The initial board may serve until their earlier resignation, death, or removal, or may be term limited and subject to a vote of the stockholders. There are numerous possibilities here. When the bylaws are adopted, an omnibus resolution will also be adopted to officially establish the corporation and its management and control. This resolution may include the selection of a president, CEO, secretary, and other officers necessary for the management of the corporation.
Stock in a corporation, particularly for startups looking for investors, is very important. There are many different types of stock, but two of importance for purposes of this explanation. The first is preferred stock. Preferred stock is a special type of stock used for investors, members of the board of directors, and officers of the company. Preferred stock gives these individuals preferences for dividends and distributions from the company, as well as liquidation preferences. Preferred stock may or may not be voting stock. Because startups are oftentimes beholden to investors, the rights, preferences, and privileges of preferred stock in the corporation will be subject to the terms of the investment vehicle. That is why the articles of incorporation should be drafted to allow the board to create different classes of stock as necessary by virtue of a certificate of designations (otherwise, each time a new class of preferred stock is necessary to be created, the board will have to call a vote of the stockholders, leaving a lot of uncertainty for the company and for investors).
The other primary type of stock is called common stock. Common stock is the most basic form of stock in a company. Common stock typically comes with voting rights (i.e., holders of common stock can vote for new board members and other issues that come before the stockholders), although it does not necessarily have to. For instance, a company may have a separate designation of common stock without voting rights specifically used as an incentive to attract employees. If the corporation is allowed to issue preferred stock under its articles, the common stock will be considered junior stock to the preferred stock. This means that the holders of preferred stock will receive distributions and dividends, and receive preference upon liquidation of the company, before holders of common stock are entitled to the same.
Corporations can be for-profit or not-for-profit. For-profit corporations are subject to double taxation. They are taxed at the entity level (meaning the corporation itself pays taxes) and at the shareholder level (meaning that the shareholders pay taxes for income from the corporation). However, if proper filings are made with federal, state, and local entities, a corporation engaging in charitable or political activity may avoid paying taxes and be considered a "not-for-profit corporation." In Missouri, there is a separate corporate filing that must be made for not-for-profit corporations, and certain formalities must be met before obtaining that status.
If you have any questions about corporations, or if you would like help forming one, please contact The Taormina Firm.