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:
- Liability: Shareholders of a corporation enjoy limited liability for the debts and obligations of the business, including liability for the unlawful acts of other shareholders and employees. For instance, if a fellow shareholder writes a defamatory article or posts copyright infringing material on your jointly-run website or blog, then your liability ordinarily is limited to amounts invested in the corporation. The same goes for a defamatory article or infringing post published by an employee on the company's site. However, limited liability does not relieve you from personal liability for your own unlawful actions.
- Corporations, like LLCs, are subject to the legal doctrine known as "piercing the corporate veil," which can result in shareholders losing limited liability protection in extremely rare circumstances.
- If you apply for a small business loan, the lender probably will require you to give a personal guarantee. In that case, you are personally responsible for the paying back the debt, even if the business is a corporation and even if there is no basis for piercing the corporate veil.
- Formation: Forming a corporation is moderate in terms of burden and cost. Please see the Forming a Corporation section for details on the required steps. The steps are usually carried out by the initial owners of the corporation (called "incorporators" in legal terminology), although owners can hire others to do it for them. Corporations are governed by state law, and formation requires filing articles of incorporation with a state office, usually the Secretary of State. Creating and submitting articles of incorporation is simple and generally does not require the assistance of a lawyer, but there usually are significant filing fees. It also requires creation of corporate bylaws, which are internal rules and procedures regarding the operation of the corporation that are stored at the corporation's place of business but not filed with the state. Drafting bylaws that are highly customized to your business may involve some complexity. It will be up to you and your fellow shareholders whether the assistance of a lawyer is required.
- Forming a corporation is slightly more burdensome than forming an LLC. One difference is that the owners of a newly formed corporation should hold an initial organizational meeting to adopt bylaws, elect initial directors (if not named in the articles of incorporation), and authorize the issuance of stock to themselves, among other things. Minutes of this meeting must be recorded. Another difference is that stock must be issued, and this requires creation of formal stock certificates and a stock ledger for record-keeping purposes. Neither of these steps are required to form an LLC.
- Management Structure: Corporations are centrally managed by a board of directors, which is charged with making major strategic and financial decisions for the company and ensuring compliance with relevant legal and accounting requirements. The board of directors meets and makes decisions collectively. State corporate laws and corporate bylaws generally set out voting requirements for valid board action, such as how many directors are needed to constitute a quorum and whether action in writing without a formal meeting is permitted. The full panoply of issues relating to a properly functioning board of directors is beyond the scope of this Guide.
- The board of directors nominates the officers of the corporation to run the day-to-day affairs of the company and oversee the activities of employees (if any). Common examples of corporate officers include president, vice president, secretary, and chief financial officer. Effective day-to-day control of the business will be in the hands of these officers.
- Note that, if a corporation has single shareholder, state laws allow that shareholder to occupy the role of sole director and sole officer, all at once.
- In some states, shareholders can opt out of the centralized management structure by forming a close corporation, but there are significant disadvantages to forming a close corporation, and owners often choose to form an LLC instead. Please see the Close Corporation section for details.
- Operation: Operating a corporation is moderately burdensome and costly, somewhat more so than operating an LLC. State corporate laws provide for cumbersome formalities governing things like the election and removal of directors, filling vacancies on the board, holding board and shareholder meetings, keeping minutes of those meetings, recording board resolutions, and shareholder approval of major management decisions. Additionally, state laws impose record-keeping requirements, as well as annual or biennial reporting requirements (and fees), all of which tend to drive up the cost of operating as a corporation. For details on annual/biennial reporting requirements and fees, see the the State Law: Forming a Corporation section. This is all in addition to the tax and other regulatory obligations imposed on all small businesses. 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.
- Large, publicly-traded corporations generally have additional disclosure obligations under federal (and sometimes state) securities laws. However, a small owner-operated corporation that issues shares to a small number of people generally will be exempt from these disclosure requirements. If you contemplate issuing shares to more than ten people, or to people not actively involved in the business, you should consult an attorney regarding potential securities laws obligations.
- Ownership of Assets/Distribution of Profits: The corporation owns the assets of the business, and shareholders have no direct financial interest in them. Shareholders own the business itself, but their direct financial interest is in the shares of stock that they own. Shares entitle their holder to a portion of corporate profits, distributed by the company in the form of dividends. The percentage of profits received as a dividend by a particular shareholder depends upon that shareholder's proportion of share ownership. Thus, if you own 50% of the outstanding stock in the company, you would be entitled to receive 50% of the dividends if and when the company makes a distribution. Note that corporations do not have to distribute dividends every year; rather, the board of directors decides whether to distribute them or to invest proceeds back into the business.
- Shareholders also can sell their shares, unless there is a restriction on transfer imposed in the articles of incorporation or a shareholders' agreement (generally an issue with close corporations). In the case of large, publicly-traded corporations, the price that a shareholder can get for his/her shares is determined by the price on a stock market such as the New York Stock Exchange. In the case of smaller companies that are not publicly-traded, the amount for which a shareholder can sell her shares is negotiated between the parties to the transaction, and generally reflects their assessment of the value of that percentage of the business represented by the selling party's shares.
- Among the most important assets of any business that operates a website or blog are its articles, posts, videos, and other content. For details on who owns what from a copyright perspective, see the Copyright Ownership of Articles and Posts section.
- Tax Treatment: One of the major (at least perceived) disadvantages of operating as a corporation is "double taxation." The profits of corporations are normally taxed twice -- once at the corporate level (at the applicable state and federal corporate income tax rate ), and again on the individual level when profits are distributed to shareholders as dividends (at the applicable individual income tax rate - under current law, dividends paid by corporations generally are subject to tax at the same rate as capital gains or 15%). For some corporations, paying reasonable salaries to shareholders who participate in running the business can help ameliorate the potential burdens of double taxation to some extent. Shareholders of a corporation cannot deduct business losses to offset income from other sources. Also, corporations are generally taxed at a relatively high rate (currently about 34% or 35%) on its earned income, which may be higher than applicable indivdidual rates.
- A corporation must file its own income tax return on Form 1120. For details on required filings, see the Corporations page on the IRS website.
- Other Considerations
- The corporate form offers full transferability of shares, which makes it easier for a company to raise capital from outside investors, and it also makes it somewhat easier for individual shareholders to "get out" of the business by selling their shares to other shareholders or outsiders. This may be a major advantage for those looking to expand the business quickly through outside investment. However, if you are interested in operating a small business with others that you know and trust, and not giving up significant control of the business, the free transferability of shares may be a disadvantage to adopting the corporate form.
- If you want your corporation to "do business" in states other than the one in which it is incorporated, you need to register as a "foreign" corporation doing business in that state. You do not need to do this simply because your website reaches the residents of other states. It might be an issue, however, if one of the officers or employees of the corporation worked (i.e., contributed content to the website or blog) from another state, and it would likely be required if your corporation had an office there. State procedures for obtaining this registration vary, but commonly there is a specific form that you need to complete, and you will need to submit copies of the articles of incorporation and a certificate of good standing from your state. There will also be a registration fee. To get the process started, you should visit the Secretary of State's website for the state in which you want to register.