Today’s business entity is the best known: The for-profit corporation. In some ways, a for-profit corporation is like a limited partnership. In both entities, there are investors and management. But unlike a limited partner, an investor in a corporation – a shareholder – is not liable for the acts of the corporation even if the shareholder participates in running the corporation.
A corporation has one or more shareholders. The shareholders elect one or more members of the Board of Directors. How many directors there are is established by the corporation’s bylaws. The Board of Directors is responsible for running the corporation. In larger corporations, the Board of Directors might appoint a Chief Executive Officer and other officers to run the corporation on a day-to-day basis. Shareholders may serve on the Board of Directors. In corporations with only a few shareholders, they often do. In corporations with many shareholders, the shareholders with the largest holdings often serve on the Board.
Corporations Favored as Investment Vehicles
The corporate format is often favored as an investment vehicle. Corporations have existed for many years. There is a substantial body of statutory law governing corporations. There are many court decisions that settle some of the finer points of corporate law. In short, an investor will be familiar with corporations and will understand that when the investor buys stock, the investor’s rights are spelled out in the law. For that reason, the investor’s money is better protected than in some other types of business entities such as the limited liability company. Further, the investor can be and often is elected to the Board of Directors where the investor can help to manage the corporation.
Formation of a Corporation
A Texas corporation is formed by filing a Certificate of Formation with the Texas Secretary of State. The Certificate of Formation lists the registered agent for the corporation and names at least one person to serve on the initial Board of Directors. The Certificate is filed by the Organizer, who can be the same person as the registered agent and the initial board member. The corporation’s name must contain the word “company,” “corporation,” “incorporated,” or “limited”; or an abbreviation of one of those words. The filing fee for a corporation is $300.
A corporation may be either a “C” corporation or an “S” corporation. The “C” corporation is the default: The corporation pays federal income taxes on its profits. When it distributes dividends to its shareholders, the shareholders pay tax on those dividends. The corporation may eliminate taxation at the corporate level by electing “Subchapter S” status. When a corporation makes that election, corporate profits are “passed through” to the shareholders rather than being taxed at the corporate level. The shareholders pay tax on these distributions. In a later post, detailed requirements for S corporate status and taxation will be discussed.