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Learn More About Corporations

Characteristics of the United States Corporation

A Corporation is a separate entity unto itself. It has the power to do things that an individual can do, such as purchase land and enter into contracts, and even has its own federal identification number, similar to an individual having a social security number. Corporations receive the benefit of liability protection, allowing its Shareholders, Directors, Officers and employees to shield their personal assets, in most circumstances, from business creditors and individuals (or other business entities) who seek remedies stemming from the negligence or wrongdoings of the Corporation. This protection, however, may be pierced (“Piercing the Corporate Veil”) if a Corporation does not take the necessary steps to ensure that the entity is separate from its Shareholders, Directors, Officers and employees. Consequently, it is important to speak to a skilled business attorney who can advise you on how to maintain your company’s liability protection.

A Corporation is also one of the most formalized entities, requiring such considerations as annual shareholder meetings, extensive annual filings, and extremely detailed financial records. Corporations are also one of the most suitable business entities to raise outside capital through the sale of its stocks (also called shares; which are essentially a percentage of the ownership of the organization based upon the number of total shares). Private Corporations often go “Public” through the use of an Initial Public Offering by soliciting investors in exchange for the aforementioned shares; whereby an investor hopes to receive annual payment in the form of dividends as determined by the Board and based on the Corporation’s annual profit and other factors. The investor may also hope that the shares increase in value whereby he may sell his ownership in the Corporation, in the form of shares, to another individual (or sometimes back to the Corporation) for profit.

Understanding the Structure of a Virginia Corporation

A Corporation is one of the most common types of business entities as the entity may take on several forms including, but not limited to, Stock Corporations, Nonstock Corporations, and Professional Corporations. Corporation may further be characterized as a Nonprofit Corporation or Subchapter S Corporation, based upon the Corporation’s purpose and IRS tax classifications. A Corporation is controlled by its Shareholders, managed by its Board of Directors (“Board”), and operated by its Officers and employees. It is important to note that it is possible, in limited circumstances, for a member of the Board (“Director”) to also be a Shareholder. Furthermore, ownership in a Corporation does not necessarily mean that you are a part of its management or operations.

Corporations derive their authority from state statutes and most are subject to federal law and monitored federally. In the Commonwealth of Virginia, a Corporation is organized under Virginia Statutes §13.1-601 et seq. for Stock Corporations (the “Virginia Stock Corporation Act”) and §13.1-801 et seq. for Nonstock Corporations (the “Virginia Nonstock Corporation Act”)

Double Taxation of a Corporation in the United States

Corporations are subject to what is known as ‘Double Taxation.’ Under this tax structure a Corporation is taxed for all remaining profit left in the corporation at the end of the calendar year. Thereafter, when the Corporation issues dividends to its Shareholders, the Shareholders are taxed on the dividends. Therefore, money taxed at the end of the calendar year and thereafter distributed later as dividends has been taxed twice. Experienced business attorneys and corporate accountants will be able to assist Corporations in maximizing their tax value to avoid or reduce the costly effects of ‘Double Taxation.’

Starting and Organizing Your Corporation

Your first step is to determine which state you wish to setup your Corporation. Often it is the state where your principal place of business will be located or where you will be conducting the majority of your business transactions. It is important to note that although a Corporation may have two domiciles in different states, that if you file in one state and operate in multiple states that you will often need to register the Corporation as a Foreign Corporation in the states where you are operating, as well as secure a Registered Agent in each state, as a physical location is necessary in order to serve process (a P.O. Box is often not legally sufficient). Once this location is selected, you will file your Articles of Incorporation (or Nonstock Articles of Incorporation for a Nonstock Corporation) with the appropriate division of that state’s Secretary of State. In Virginia, the Articles of Incorporation are filed with the Commonwealth of Virginia’s State Corporation Commission.

The Articles of Incorporation (“Articles”) is a document which outlines the purpose, structure, and Directors (may be elected thereafter) of the Corporation. The requirements for filing, including initial fees payable to that state’s respective agency, vary from state to state. It is extremely important to consult a skilled business attorney, preferably one also knowledgeable in intellectual property law, who can assist you with these filing requirements as well as assist with a general business name search and trademark search which can help insure that: (1) your business name is not already in use and (2) you are not infringing upon another business entity’s Trademark. It is important to note that when filing your Articles with a state agency that they often accept the name of your Corporation as you label it so long as there is not another entity with the same name filed in that state and that it is not grossly obscene in nature. However, this acceptance is not federal and may lead to future, federal Trademark claims.

Bylaws: Internal, Governing Document for a Corporation

The next step after your Articles have been approved by the appropriate state agency is to have a skilled business attorney draft the mandatory Bylaws on the Corporation’s behalf. The Bylaws are a comprehensive, internal document, a copy to be kept at the Corporation’s principal place of business, of the Corporation that describes in detail such considerations as the structure and governance of the company, how the company is operated, shareholder disputes, dissolution procedures, voting rights, duties and responsibilities of Directors, and indemnification clauses.

After your Bylaws have been drafted, approved, and signed, it is important register for an Employer Identification Number (EIN), also known as a Federal Tax Identification Number, with the IRS. A skilled business attorney, or tax attorney, can file an EIN on your Corporation’s behalf by having you sign a Form SS-4 authorizing the attorney as a Third Party Designee to act on your behalf. The EIN will not only be used for tax purposes but to open bank accounts in the Corporation’s name as well as for employee tax withholdings. It is also important to note that if your Articles were filed in the Commonwealth of Virginia you should register your organization with the Virginia Department of Taxation.

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