Maintenance
Part of Corporation formation: a clear guide with practical examples
Corporation formation guide: what to know and why
Corporation formation explained through its machinery: shares, board, officers and the written record, and what each one is actually for in a small company.
A corporation is the only common business form that comes with machinery attached. Shares, a board, officers, and a written record of decisions are not optional extras you add if you want to be formal. They are what a corporation is, and running one means running them.
That is the whole of the difference people find surprising. Everything else follows from it: why corporations suit outside investment, why they cost more to keep, and why an abandoned one causes more trouble than an abandoned anything else.
What to take away
- A corporation separates ownership from management by design. Shareholders own, directors decide, officers act. One person can hold all three roles and still has to keep them distinct on paper.
- The recurring work is governance, not filings. Minutes, resolutions and a share register are the maintenance, and they are what a dispute or a buyer will ask to see.
- Tax classification is a separate question from legal form, decided with an accountant against the IRS's own current criteria.
- If nobody in the business will keep the record, the machinery is a liability rather than a protection.
The three roles
| Role | What it holds | What it does |
|---|---|---|
| Shareholders | Ownership, in shares | Elect directors, vote on the things reserved to them |
| Directors | Authority over direction | Decide major matters, appoint officers, record decisions |
| Officers | Day to day authority | Sign, hire, spend, within what the board has authorized |
In a one-person corporation the same person fills all three. The roles still exist, and the reason to keep them apart is evidentiary: when someone later asks who authorized a decision, the answer has to be a role, with a record, not a person's memory.
Shares, and why they are not percentages
Ownership in a corporation is expressed in shares, and shares behave differently from a percentage written in an agreement. There is a number authorized in the filing, a number actually issued, and a register recording who holds them. Those three drift apart quickly if nobody maintains them.
The practical consequences show up later. A share register that does not reconcile is one of the first things to derail a sale or an investment. So is a promise of equity made in an email and never issued. If you are going to hand out ownership, the moment to get the mechanics right is the first time, not the fifth.
The record is the product
Directors decide by resolution, and a resolution is only useful if it was written down at the time. What goes in the record: who was present, what was decided, what authority the decision rested on, and any conflict declared.
This sounds like ceremony until the first time it matters. A bank asks who is authorized to open the account. A buyer asks whether the share issue was properly approved. A claimant argues that the corporation and its owner were never really separate. In each case the record is the answer, and a record written afterwards is worth much less than one written on the day. The general shape of the recurring obligations a registered business picks up is described by the SBA under staying legally compliant.
What the state decides and what you decide
The state's filing office decides whether the name is available, what the formation document must contain, what the recurring report is, and what becomes public. Those are record questions and its answer is the only one that counts.
You decide, with advisers, everything about how the corporation is governed: the classes of share, what is reserved to shareholders, how directors are appointed and removed, what happens when a shareholder wants out. Most of that lives in bylaws and a shareholders' agreement rather than in the public filing. The starting point for choosing between this and the alternatives is set out in the comparison of structures, and the mechanics of dealing with the office itself are in filing with the state.
Tax is a separate decision
The legal form is created by a state. How the corporation is treated for federal tax depends on its classification and any election it makes, and the criteria for those are the IRS's. Its own description of the S corporation election is where the current conditions are stated, and its general corporations section covers the rest.
Do not reason from a comparison table you found. The election has eligibility conditions, timing conditions, and consequences that depend on how you pay yourself. That is an accountant's question with your numbers in front of them, and it is worth asking before the first share is issued rather than after.
Before you file
Six things to settle, in this order, because each one constrains the next.
- Who owns it, and in what proportions, expressed in shares rather than percentages.
- Who sits on the board, and what the board must approve.
- Who the officers are, and what each may sign for.
- What happens when a shareholder dies, leaves, or wants to sell.
- Where the corporation will actually operate, which determines where it registers.
- Who will keep the record, honestly answered, with a name against it.
Item six decides whether the rest survives year two. The role of the person who receives legal papers on the corporation's behalf is a related appointment, covered in the agent of record, and the events that later require the filing to be updated are in changes after formation.
Common questions
Can one person form a corporation?
In most states, yes, holding all three roles. The record keeping does not get lighter for being a formality, and in some ways it matters more, because there is nobody else to corroborate what was decided.
Do I need bylaws if the state does not ask for them?
The state usually does not file them, which is not the same as not needing them. Bylaws are what answer procedural questions when there is a disagreement, and writing them during the disagreement is not writing them.
Is a corporation stronger protection than the alternatives?
The separation is a feature of several forms. What varies is the machinery, and machinery only helps if it is maintained. An unmaintained corporation offers a false sense of protection.
What does it cost to run?
That depends on your state's recurring report, your accountant's fees for whatever classification applies, and whether you run payroll. All of those are questions of record or of quotation, and any figure quoted on a general page would be wrong for somebody.
When is it clearly the right form?
When outside investors are involved and want a familiar instrument, or when there are many owners and the decision rights need formal structure. Whether it is right for your business is still a question for a lawyer and an accountant who know your facts.