A corporation offers business owners the advantage of limited liability. This means that the business owner is not personally responsible for the business in any financial and legal way. This ensures that business owners are personally protected. A corporation can be quite complex to manage and can have difficult operation procedures and tax options. Many new business owners do not know if they should start an LLC or Corporation. Below we discuss information surrounding corporations, how they work and how to manage them.

Managing a Corporation – Formation

A corporation is formed when the business needs to attract investors and venture capitalists, when profits will be carried over from year to year and when there are benefits to a more complex business managing system.

Managing a Corporations – Meetings

By law annual shareholders meetings need to be held as well as regular directors meetings. In these meetings the corporation is reviewed and discussed. Corporate minutes of the meetings should be taken, recorded and maintained and copies should be kept at the corporation’s head office.

In shareholders meetings the shareholders have the power to dissolve the corporation, they can elect or remove directors, articles of incorporation and by laws can be amended, sales of assets can be approved and mergers can be approved. Shareholders meetings have to be held once a year, this is a rule set in by all 50 states.

Board of Directors meetings are held annually, typically after the annual shareholders meeting. According to all 50 state laws these meetings should be held once a year and the transactions entered into by the corporation has to be approved.

Managing a Corporation – Directors

A corporation is managed by its board of directors. The directors approve major business decisions. Directors can either be shareholders or officers, although this is not required. Directors are elected by the shareholders and they only serve for a limited time. Every corporation has to have at least one director. Directors of a corporation have to approve of the following procedures: declaring dividends; electing officers as well as setting the terms of their employment; amending bylaws or amending the articles of incorporations they also make decisions on any corporate mergers, reorganisations and significant corporate transactions.

Directors have a high level of duty and care that is owed to the corporation. They have to act, at all times, in good faith, with reasonable care and in the best interest of the corporation. Should there be personal gain for a director in  any transaction, they have to declare it as well as refrain from voting on it.

Managing a Corporations – Documentation

All decisions made by shareholders and directors have to be recorded and maintained. These recordings usually take for minutes of the meetings. The reason for this is that the documentation of decisions will protect the business owner’s limited liability status as well as protection when questioned by creditors and the IRS. Things that need to be documented include the actions of shareholders and directors in meetings, stocks that have been issued to shareholders, purchases of property, approvals of lease agreements, the approval and authorisation of credit and loans, decisions made around state or federal tax as well as stock options or retirement plans.

Managing a Corporations – Separation

Maintaining separation between the directors, officers and owners from the corporation is really important. One way is to make sure the directors sign all documents in the name of the corporation and not in their personal names. Signing documents in their individual names can make them individually liable for the finance obligations. Documents that need to be signed in the corporate name are lease agreements, contracts, banking documents including loans, credit and checking accounts.

Managing a Corporations – Tax

The one con of a corporation is that there are double taxation deductions. The corporation is taxed on profits, and there are taxes on any earnings paid to the shareholders. Corporations have to file and pay taxes on a corporate tax return separate from the owners of the business. The owners are paid a monthly or annual salary like all other employees. The owners then pay tax on their own personal income.