The corporation is the best known business form. Most big companies that are "household names" are corporations, including companies like Google Inc., Microsoft Corp., and Yahoo! Inc. A corporation has a legal identity that is separate from its owners (usually referred to as "shareholders" or "stockholders"). Although many corporations are large organizations with many employees, it is possible for a single person to form and operate a corporation individually.
Operating as a corporation offers limited liability to shareholders, transferability of ownership interests (shares), and perpetual existence of the corporation, even after original shareholders have left the business. Because most successful, big-name companies are corporations, many believe that operating as a corporation must be advantageous, but this is not always true. In fact, however, corporations often have disadvantages, including "double taxation" and the cost and hassle associated with forming and operating a corporation. Because of these disadvantages, in many cases an LLC will be a better choice for a small citizen media business with owners who are concerned about liability exposure. In fact, unless you plan on taking your business "public" (i.e., selling shares of the company to the general public) in the near future, or you are working with venture capitalists who require you to form a corporation, there generally are few reasons to operate your small business as a corporation.
A few technical points are worth mentioning up front. First, when we mention a "corporation" in this guide, we mean a "C corporation" unless we specify otherwise. Probably all of the big companies you think of as "corporations" are C corporations. There is another type of corporation, however, called an "S corporation," which we discuss briefly on the S Corporation page. The important difference between the two is how they are treated for tax purposes. While S corporations are generally not subject to "double taxation" like C corporations, they still require most, if not all, of the costly and burdensome formalities associated with C corporations, and they offer no significant benefits over LLCs. Second, certain states recognize what is known as a "close corporation," which we discuss briefly on the Close Corporation page. This business form generally allows for greater flexibility and informality in managing business affairs than a C corporation, but it requires creation of a shareholders' agreement and significant limitations on transfer of stock, and LLCs are generally regarded as superior vehicles for obtaining an informal, de-centralized management structure with limited liability.
In determining whether you want to operate as a corporation, you may want to consider the following factors:
You must file articles of incorporation (sometimes called a "certificate of incorporation" or "charter") with your state (usually with the Secretary of State) and pay a filing fee in order to form a corporation. The filing fee generally ranges between $70 and $200 depending on the state, but certain states have higher fees -- for example, Massachusetts ($275) and Texas ($300). See the state pages on forming a corporation for details on state filing fees.
The articles function like the constitution for the corporation. Ordinarily, the document is short and simple, and you can prepare your own in a few minutes by filling in the form provided by your state's filing office, or by drafting your own based on a sample. Generally, all those people who will be initial shareholders may prepare and sign the articles, or they can appoint one person to do so. Each state has its own required version of this document, so the precise requirements may vary. Below is a list of information commonly required by the states:
In other states, you are not required to identify the initial directors in the articles of incorporation (although you may do so if you want). When the initial directors are not named in the articles, the incorporator or incorporators have the authority to manage the affairs of the corporation until directors are elected. In this capacity, they may do whatever is necessary to complete the organization of the corporation, including calling an organizational meeting for adopting bylaws and electing directors.
It is important to keep in mind that, in the articles of incorporation, you designate the number of shares the corporation is authorized to issue -- the corporation is not required to issue all of those shares right away (or ever). It is common practice for corporations to hold on to authorized but non-issued shares in order to add additional owners later or to increase the ownership interest of a current shareholder. In the articles, it is generally a good idea to authorize a large number of shares (several thousand), keeping in mind that the number of authorized shares may be tied to the corporation's state franchise tax liability. For instance, in Delaware, it is a good idea for new corporations to authorize 3000 shares, because this is the maximum number of shares that a corporation can authorize and still qualify for the minimum $35.00 annual franchise tax.
You can find the required forms and sample articles of incorporation for the fifteen most populous U.S. states and the District of Columbia in the state pages on forming a corporation.
If you want to amend the articles, you can do so by filing articles of amendment with the same official to whom you submitted the original articles. There is usually a prepared form for doing this.
Corporations are required to write and keep a record of their bylaws, but do not have to file them with a state office.
Bylaws are the rules and procedures for how a corporation will operate and be governed. Although there is no set criteria for bylaws content, they typically set forth internal rules and procedures for the corporation, touching on issues like the existence and responsibilities of corporate offices, the size of the board of directors and the manner and term of their election, how and when board and shareholder meetings will be held, who may call meetings, how the board of directors will function, and to what extent directors and officers will be indemnified against liabilities arising out of performance of their duties. A comprehensive discussion of bylaw content is beyond the scope of this Guide.
Drafting bylaws can be complex, but there are strategies for writing satisfactory bylaws without the expense of hiring a lawyer. FindLaw has posted links to the bylaws of many corporations. Some of these may prove useful as templates, although many of these companies have bylaws that are more complex than your small business would ever need. For a small fee (approximately $15), Nolo Press offers a software program, eForm: Corporate Bylaws, which helps you generate bylaws.
The incorporator(s) (i.e., person(s) filing the paperwork) or initial director(s) (if named in the articles of incorporation) generally have the authority to adopt a corporation's original bylaws at the corporation's organizational meeting.
Bylaws may be changed without officially filing amendments.
As an alternative to the ordinary "C corporation" discussed on the Corporation page, you may carry on your online publishing activities as an "S corporation." An S corporation has the same basic organizational structure as a C corporation, with some of the potential tax advantages of a partnership. A corporation obtains "S" status by filing Form 2553 with the IRS. An S corporation generally does not pay federal income tax at the entity level, except for tax on certain capital gains and passive income. Instead, the corporation's profits and losses "pass through" to shareholders, and profits are taxed at individual rates on each shareholder's Form 1040. However, an S corporation must file an annual tax return on Form 1120S with the IRS.
S corporations are formed in the same way as C corporations, but with the "S" tax designation filed with the IRS via form 2553 within two-and-a-half months of the date of formation. Federal law imposes certain requirements on a corporation in order to qualify for "S" status: (1) the corporation may have no more than 100 shareholders; (2) all shareholders must be individuals, estates, or certain trusts (i.e., no corporations, LLCs, or partnerships); (3) no shareholder may be a nonresident alien; and (4) the corporation may only have one class of stock. There are additional requirements, which you can learn about by reading the Instructions for Form 2553.
Your election of "S" status for federal tax purposes does not guarantee that the profits of your S corporation will not be taxed at the state level. The District of Columbia, for example, does not recognize "S" status and subjects the profits of S corporations to the ordinary state corporate income tax. Other states, such as California and Illinois, still tax the profits of S corporations, but at much lower rates than for C corporations. You can find more information about your state's tax laws in the state pages on forming a corporation.
S corporations generally are preferable to C corporations for small businesses because they require basically the same amount of paperwork, but may incur less tax than a C corporation. One drawback of an S corporation, when compared to a partnership or LLC (which have the same potential tax benefits as S corporations), comes with the inflexibility of profit distribution. With an S corporation, profit distributions must be pro rata to stock ownership, not practical contribution to the success of the business or any other relevant criteria. Thus, if a person owns 10% of the company, but does 90% of the work, he or she may only be allocated 10% of the profits. (Keep in mind, however, that this person could be compensated for work through a salary.) Another drawback is that S corporations are generally subject to the same operating formalities required of ordinary corporations, and this makes them a somewhat costlier and more cumbersome option than an LLC or partnership. For details, see the Corporation section.
Some states, such as California and Texas, have special provisions allowing you to create what is known as a "statutory close corporation." Close corporations generally are formed in the same way as ordinary corporations, but the articles of incorporation for a close corporation must state that the corporation shall be considered a "close corporation" and impose restrictions on transfer of shares of stock. Close corporations also must have a limited number of shareholders -- often 35 or 50 shareholders maximum. For state-specific requirements on forming a close corporation, see the state pages on forming a corporation.
The major reason for forming a close corporation is that it allows shareholders to operate the business under the terms of a shareholders' agreement, which can provide for greater flexibility and informality in managing the affairs of the business (as compared to an ordinary corporation). Shareholders of a close corporation may agree to waive certain operating formalities, such as required shareholder or board meetings. Pursuant to the terms of such an agreement, they can also dispense with the need to form a board of directors and name corporate officers, and they (the shareholders) may run the corporation themselves in a de-centralized fashion. (Incidentally, they may also agree to a distribution of corporate profits other than proportionally based on share ownership.) The downside is that a shareholders' agreement that allows shareholders to manage the corporation may make the shareholders liable for acts or omissions for which the corporate directors are usually liable.
Operating as a close corporation is not popular among incorporators. Negotiating and drafting an effective shareholders' agreement may be a complex and costly undertaking, and there is no apparent advantage of operating as a close corporation rather than an LLC (which also features decentralized management and limited liabiliy and no double taxation). If you are interested in forming a close corporation, you should consult with a lawyer.
The profits of corporations are taxed twice -- once at the entity level (at the applicable state and federal corporate income tax rate), and again at the individual level when profits are distributed to individual owners as dividends (at the applicable individual income tax rate). Avoiding double taxation is one of the commonly noted advantages of operating as a sole proprietorship, partnership, or LLC. Nonprofit organizations that qualify for 501(c)(3) status are exempt from federal (and usually state) income tax at the entity level, so in a sense they avoid double taxation as well.
As noted, avoiding double taxation generally is considered advantageous, but it may not always prove beneficial, depending on your particular circumstances. Owners of businesses whose income "passes through" to them for tax purposes must pay income tax on their share of the net profits of the business, regardless of the amount of money they actually take out of the business each year. Thus, even if all profits are reinvested into the business, the owners of these businesses must pay taxes on their share of the profits. Shareholders of a corporation, on the other hand, pay income tax only when those profits are actually distributed to them as dividends. In addition, paying reasonable salaries to shareholders who participate in the operation of the business can ameliorate the burden of income tax at the entity level to a certain extent. Additionally, there may be situations where you as an individual pay income tax at a rate that is higher than the corporate tax rate.
Note: Tax questions are complex, and the details of such questions are beyond the scope of this guide. Consult a tax accountant and an attorney (if necessary) before choosing a business entity based on tax issues.
In addition to the two major "constitutional" documents (the articles of incorporation and the bylaws), corporations are required to keep copies of a number of other records relating to the the organization, finances, and ownership of the business.
State record-keeping requirements vary. You can find links to your State's specific record-keeping requirements in the State Law: Forming a Corporation section of this Guide. However, as a matter of best practices you should keep copies of at least the following documents in the corporation's principal office (where it is operating on a day-to-day basis) and on file with the corporation's registered agent (this latter step is applicable only if the corporation is incorporated in a state other than the state in which it does business):
These requirements are in addition to those required for all small businesses for tax purposes. For more on the tax obligations of small businesses, see the Tax Obligations of Small Businesses section and the IRS's informational guide, Publication 583 (1/2007), Starting a Business and Keeping Records.