How Does a Business Become a Corporation?
Most people are aware that there are two ways to answer the question, “How does a business become a corporation?” In theory, at any given point in time, a company is a legal entity that can file its own reports with the appropriate government agencies. However, a company does not automatically become one based on the formation of an LLC or some other similar option. For instance, a sole proprietorship cannot be changed into a corporation in order to receive protected credit card processing privileges from certain financial institutions, nor can a partnership be turned into a corporation in order to retain the benefit of joint-stock discounts. There are a number of other reasons why a business may choose to reclassify itself as a corporation, but those are the most common.
When a business is formed as a sole proprietorship, there are some advantages and some disadvantages associated with that status. Generally speaking, a sole proprietorship has no stock or property; it only has the provision of using its assets and liabilities for the operation of its business. That essentially limits the business to the production of goods and services, and any potential profits and losses come from those activities. The IRS considers this form of limited liability as being the lowest class of corporate status and imposes the same tax treatments as a C corporation, which is treated as a pass-through entity, meaning that it has to pay tax on its income and assets even though it doesn’t own the property or have any personal shares.
A corporation, by contrast, is a separate entity from its owners and includes stock in the corporation and some form of property. It usually elects to be a public corporation, which allows it to issue shares of stock and is listed on the stock exchange. The corporation may be viewed as a partnership, and there are several different ways in which partners can control the partnership. Partners can use their combined funds to buy or sell shares and therefore control the corporation. They can also share in the profits of the corporation through dividends. A few private corporations incorporate as sole proprietors and some partnerships only include one partner.
In order to answer how does a business becomes a corporation, one would need to know what type of business structure he/she is involved in. Some partnerships, for example, are comprised of two separate individuals who are the Partners. Other types of companies are run by a board of directors with voting rights equal to or greater than shareholders. A limited liability company, or LLC, is a type of company that operates in the same manner as an S corporation but does not have the tax advantages of a C corporation. All of these types of business structures have different ways in which they operate, and the way how a business becomes a corporation largely depends on the way the company was established and the type of business that it is.
There are basically two methods through which how does a business becomes a corporation. One is by incorporating the company and operating it as a corporation, and the other method is through how does a business becomes a partnership. The type of company formation that takes place will affect how the business is conducted.
Forming a corporation requires that a written contract be executed by a majority of the Board of Directors. The purpose of this contract is to formally acknowledge the existence of the business entity, to define the powers of the Board, and to set out the financial accounting and control policies for the company. It is essential that the owners and managers of the corporation remain consistent with the general purposes of the corporation throughout the course of its operations. Any significant deviations from these purposes may cause irreparable harm to the operation of the business. When a partner or stockholder wishes to start a new corporation, he must first complete all of the necessary Articles of Organization.
Partnership formation involves two separate papers. The first document, known as the Statement of partnership, is a document that formally acknowledges the partnership between the partners involved in the business and their ownership of the company. The second, called the Certificate of Incorporation, is an official order from a U.S. court that declares the name of the business, the names and addresses of the Board of Directors, and other information required by state law. After these papers are received by the Secretary of State, they will be submitted to the courts for approval.
Although a partnership is often seen as a safer choice for how does a business becomes a corporation, it is not without risks. A potential partner can simply close the company down and leave it in the hands of another. It is also possible that a partner will depart the company before completing the necessary paperwork. No matter what form of company formation is used, it is essential that all partners involved sign off on the agreement before it becomes effective.