Read a comprehensive overview of the corporate structure, exploring its core elements, benefits, and complexities.
RI
by RED WORLDWIDE INC.
What is a Corporation?
Separate Legal Entity
A corporation is a legal entity that is separate from its owners, the shareholders. It can enter into contracts, own property, and be sued in its own name.
Limited Liability
Shareholders are not personally liable for the debts and obligations of the corporation. Their liability is limited to their investment in the corporation.
Continuous Existence
A corporation's existence is not dependent on the life of its owners. It can continue to operate even if its owners change.
History of Business Structures
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Sole Proprietorships
The earliest form of business structure, where one individual owns and operates the entire business, responsible for all liabilities.
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Partnerships
An agreement between two or more individuals to share in the profits and losses of a business, with each partner responsible for the debts of the partnership.
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Corporations
A legal entity separate from its owners, offering limited liability to shareholders, and allowing for capital raising through the sale of stock.
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Limited Liability Companies (LLCs)
Emerged in the late 20th century, combining the liability protection of corporations with the tax flexibility and operational simplicity of partnerships. Wyoming was the first U.S. state to recognize LLCs in 1977.
The Corporate Code
State Responsibilities
Each state in the U.S. establishes its own corporate code, outlining the rules and regulations governing the formation, operation, and dissolution of corporations within its jurisdiction.
Key Provisions
These codes typically address various aspects, including corporate governance, shareholder rights, corporate finance, and taxation. They provide a framework for the legal and ethical conduct of corporations within each state.
Compliance
Corporations must comply with the specific requirements of the corporate code of the state in which they are incorporated. Failure to comply can lead to legal consequences.
Finding the Corporate Code
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State Government Websites
The most common and reliable source for finding the corporate code of a specific state is the official website of the state government's Secretary of State or Department of Corporations.
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Legal Databases
Online legal databases like Westlaw and LexisNexis provide access to state statutes and regulations, including corporate codes.
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Law Libraries
Law libraries affiliated with universities or bar associations often have physical copies of state statutes, including corporate codes.
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Professional Legal Resources
Attorneys specializing in corporate law can provide guidance and access to relevant resources for finding the corporate code of a specific state.
Reasons to Incorporate
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Liability Protection
Corporations are separate legal entities. This limits liability for business debts and lawsuits, shielding personal assets.
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Tax Advantages
Corporations can take advantage of tax deductions and credits that may not be available to sole proprietorships or partnerships.
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Raising Capital
Corporations can raise capital more easily by selling shares of stock to investors, providing access to funding for growth.
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Business Continuity
The life of a corporation is independent of its owners. If an owner leaves, the business continues, facilitating long-term growth.
Forming a Corporation
To start a corporation, you must file Articles of Incorporation with the Secretary of State in your state.
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Choose a state
Determine where to incorporate based on business needs.
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Choose a name
Make sure it's not already in use.
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Draft articles
Specify company purpose, share structure, and governance.
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File with state
Pay filing fees and obtain a certificate of incorporation.
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Hold first meeting
Elect directors and adopt bylaws.
Corporate Governance
The board of directors is responsible for oversight and guiding the company's strategy.
The CEO is the chief executive officer and leads the day-to-day operations.
Shareholders elect the board of directors and have the right to vote on major corporate decisions.
An Advisory Board is an optional group of industry experts who provide non-binding strategic advice to the leadership team.
Shares and Shareholders
Ownership Structure
Shares represent ownership stakes in a corporation.
Shareholders have rights and responsibilities.
Types of Shares
Common shares offer voting rights.
Preferred shares offer dividends and other benefits.
Shareholder Meetings
Shareholders vote on important corporate matters.
Shareholders elect the board of directors.
Raising Capital: Private vs. Public
A privately held company raises money from private investors. Public companies raise capital by selling shares to the public. Private companies are typically valued at a much lower amount than public companies, though an IPO can bring large amounts of funds to a company.
The S Corporation Election
What Is It?
An S corporation election allows a corporation to avoid double taxation by passing its profits and losses directly to its shareholders.
Shareholders then report this income or loss on their individual income tax returns.
Benefits
This election can be beneficial for small businesses because it eliminates the corporate tax rate and allows for the pass-through of income and losses.
However, it can also impose restrictions on the types of shareholders and ownership structures.
Becoming a Foreign Corporation
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Expanding Operations
A corporation may choose to expand its operations into a new jurisdiction by registering as a foreign corporation. This allows it to conduct business in that state or country, regardless of its original state of incorporation.
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Registration Process
The process typically involves filing a Certificate of Authority with the Secretary of State, paying fees, and appointing a registered agent. The corporation must comply with the laws and regulations of the foreign jurisdiction.
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Legal Implications
Becoming a foreign corporation may subject the company to additional taxes, regulations, and legal requirements in the new jurisdiction.
What is an IPO?
An Initial Public Offering (IPO) is the process through which a private company first offers shares of its stock to the general public. This transformation from private to public company marks a significant milestone in a corporation's growth journey.
Capital Raising
Companies use IPOs to raise substantial capital for expansion, debt repayment, or other strategic initiatives.
Public Trading
After an IPO, shares can be bought and sold freely on stock exchanges, providing liquidity for investors.
Corporate Milestone
Going public increases visibility, enhances credibility, and creates new opportunities for growth and acquisitions.
While IPOs offer significant advantages, they also bring new responsibilities including regulatory compliance, financial reporting requirements, and accountability to public shareholders.
IPOs and Going Public
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Public Offering
Company sells shares to the public.
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SEC Registration
File a prospectus and meet regulatory requirements.
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Underwriting
Investment banks help with the process and set the IPO price.
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Due Diligence
Analyze company financials, operations, and legal aspects.
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Decision
Company chooses to go public or remain private.
An IPO is a significant step for any company. It allows the company to raise capital from the public market. It also provides liquidity for early investors.
Key Takeaways
Corporate Structure: Overview
Understanding corporate structure provides a comprehensive understanding of how companies operate and are governed.
Various forms of corporations offer distinct advantages and disadvantages.
Capital Raising
Corporations raise capital through issuing shares, either privately or publicly through IPOs.
The choice between private and public funding depends on a company's goals, needs, and stage of development.