Corporations

Legal Status

Corporations are the most formal of the business entities available. Like limited liability companies (LLC), articles of incorporation and other required documents must be filed with the Arizona Corporation Commission to give the corporation legal existence. Because corporations have been legally recognized for a very long time, they have the added advantage of a large body of governing law. Because LLCs are relatively new, there is less certainty in laws governing their management and operations. To learn more about the legal requirements necessary to form your corporation, contact a business attorney.

Management

Management of a corporation is vested in a board of directors while the day to day operations are run by officers. Management authority of shareholders, the owners of the corporation, is limited to electing directors and voting on significant issues. Of course, shareholders can also serve as directors and officers. When considering the corporate form, it is important to understand that there are far more formal requirements that must be adhered to, including an annual meeting, maintenance of records and minutes of meetings, and additional annual filing requirements that are not required of other business forms. These additional requirements add a significant workload to running a corporation as opposed to an LLC. Unlike an LLC where management is centralized in the membership, it is also easier for corporate founders to lose control of the corporation. The more shareholders brought into the corporate organization, the easier it is for shareholders to elect new directors and change the management and direction of the corporation. To learn more about bylaws and corporate management, contact a business attorney.

Profit and Loss

Generally, a corporation is not a pass through entity.  Under the Internal Revenue Code, it is an entity separate and distinct from its owners. As a result, the corporation pays income taxes. The corporation then distributes its earnings to shareholders. Unlike LLCs or partnerships, which offer some flexibility in how profits and losses are distributed, the corporation distributes its earnings based on each shareholder’s ownership interest. Though it is theoretically possible to create a unique stock structure to pay dividends without regard to capital contribution, this is limited to C-Corporations, which face double taxation. Though corporations are generally deemed C-Corporations, smaller corporations with one class of stock can elect to be treated as S-Corporations. With S-Corporation status, the corporate form is disregarded and the corporation’s earnings pass through to the shareholders much like an LLC. Contact a business attorney to learn more about the distribution of corporate profits and losses.

Termination of the Corporation

Because corporations are legal entities separate and distinct from their owners, corporations survive; their owners and have perpetual existence. Whether a closely held corporation or a few shares of stock, your ownership interest in a corporation can be devised; to your family members. If a closely held corporation, your heirs can continue running the corporation and reaping the benefits of your work. To discuss your needs with a business attorney, contact a business attorney.