Corporations are probably the most common form of business entity. When a corporation is formed, it is regarded by the law as a separate legal entity from its owners, directors, officers and employees. In fact, courts sometimes refer to corporations as "fictitious persons."

Forming a corporation requires filing Articles of Incorporation with the Missouri Secretary of State. If the Secretary of State finds that the articles are in proper form, a Certificate of Incorporation is issued and a registration number assigned, at which point the corporation comes into existence.

A corporation is a structured organization which allows for one or more owners and centralized management. The owners of a corporation are called stockholders because they own shares of stock in the corporation representing their ownership interests.

One advantage of incorporation is insulating the stockholder owners from personal liability for the activities and obligations of the corporation. Subject to certain rare exceptions, a creditor cannot enforce a corporate obligation against individual stockholders, but can only collect from corporate assets. Thus, while a stockholder could lose part or all of his or her investment in the corporation to a corporate creditor, the stockholder’s other personal assets are protected.

Another advantage of incorporation is that it allows for raising capital by selling stock or corporate bonds. Other types of business organizations typically are limited to raising capital through contributions or loans from their existing owners or through loans from third parties such as banks.

The basic management structure of a corporation is as follows:

If corporation is profitable, its stockholders can receive a return on their investment through the payment of dividends. Dividends must be approved by the board of directors and are taxable to the stockholders as ordinary income.

Unless a corporation elects special tax treatment under Subchapter S of the Internal Revenue Code, the corporation’s net income is subject to taxation at rates sometimes higher than those applying to individuals. This raises the possibility of double taxation of dividends – the money is taxed once at the corporate level and again at the personal level when reported on stockholders’ personal tax returns.

To avoid this double-taxation effect, subject to certain restrictions, a corporation can elect a different tax treatment under Subchapter S of the Internal Revenue Code. If this election is made, the corporation is treated virtually the same as a partnership for tax purposes. Although the corporation must file an informational return with the IRS, its net income is not taxed at the corporate level but rather is "passed through" to the stockholders for reporting on their personal returns. Corporate losses can also pass through and be taken as losses on the stockholders’ personal returns. Consultation with an accountant is highly recommended before deciding whether to elect Subchapter S.

Dividends are not the only way stockholders can receive money from a corporation. Additional possibilities include:

Scott Law Firm provides legal services in forming and maintaining corporations. In most cases we charge a fixed fee for incorporating a new business corporation. Current incorporation expenses are:

Contact us for further information.

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