Corporate formation involves the considerations in choosing the corporate form over other business entities. This is part 1 in a 6 part series on Corporations.
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A corporation is a legal entity, separate from its owners, that is created by state statute so that the owners may engage in any legal enterprise without fear of personal liability.
Businesses now have several options in lieu of the corporation, such as the Limited Liability Company, Limited Liability Partnership, and a few others that we are not going to examine.
The primary reason these business entities are chosen is because they provide limited liability for the owners.
The second factor that people consider when creating a business entity involves its taxability. Corporations must pay federal income taxes on its earned income, and then shareholders pay federal income taxes on that same income when they receive dividends from the corporation.
The third factor to consider when creating a business entity is management flexibility. By management flexibility I am referring to how the business entity decision makers interact with the business entity.
The fourth factor involves the availability of well-developed law. When there is a full body of law, uncertainty in litigation is minimized.
To understand this phenomena, you also need to understand one legal doctrine: the internal affairs doctrine. This doctrine holds that a corporation’s internal affairs are governed by the laws of the state of incorporation. The practical effect of this doctrine is that corporations located in any state can incorporate in Delaware and have Delaware law apply to their internal governance affairs, regardless of what state or federal court they are sued in.
The Fifth factor involves the ability to raise money. Corporations are familiar to almost every investor, in a way that limited liability companies and limited liability partnerships are not.
Finally, a note on where to find the rules that corporations create for themselves. The articles of incorporation provides things like the corporate name and initial business address.
The second important corporate document is called the by-laws. This document is created and amended by the board of directors.
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