By Ashley Ellixson
This post should not be relied upon as legal advice.
In continuing our overview of business organization structures, I will be illustrating the corporation structure with you today. A corporation is a legal entity separate and distinct from its owners. A corporation is owned by its shareholders who are individuals, other business organizations, or both. Even though corporations are distinct and separate, they enjoy most of the rights and responsibilities that individuals possess. For example, corporations have the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes.
In order to become a corporation you must establish your business name and register your legal name with your state government. In Maryland, you are required to use one of the following words, or an abbreviation of one of these, in your corporate name: “incorporated,” “corporation,” “company,” or “limited.” Then you are required to prepare and files articles of incorporation with the Maryland Department of Assessment and Taxation.
From there, you need to appoint a registered agent who is either an individual or corporation that agrees to accept legal papers on the corporation’s behalf if it is sued. You also need to set up a corporate records book to document all important information, prepare corporate bylaws, appoint initial corporate directors, hold your first board of directors meeting, comply with Maryland Annual Report Requirements, and continue to comply with all other tax and regulatory requirements. Please consult your attorney or tax representative before and during your setting up of a corporation to ensure your particular needs and requirements are fulfilled.
For steps and required documents needed for filing in Maryland, see:
For a checklist when filing as a business organization in Maryland, see:
Some disadvantages of being a corporation are that they are more complex than other business organizations because they often have costly administrative fees and complex legal and tax requirements. Because of these characteristics, corporations are generally suggested for large, established companies with multiple employees. Another disadvantage of corporations that other business organizations do not is that in some cases, corporations are actually taxed twice. This happens when first, the company makes a profit and second, when they pay out dividends to their shareholders. Additionally, because corporations are heavily regulated by federal, state, and sometimes local agencies, there are increased paperwork and recordkeeping burdens associated with this type of organization. However, make sure to consult your legal or tax representative about your particular needs.
Corporations offer many advantages as a business organization, however. One advantage is the ability to sell ownership shares in the business through stock offerings. The act of “going public” through an initial public offering (IPO) is a major selling point in receiving investment capital and attracting high quality employees and companies. It is also important to note that there is limited liability associated with corporations. Shareholders’ personal assets are protected from any debts on actions taken by the company, and can only be held accountable up to their investment in the company (purchase of stock). On the other side of the tax coin, corporations file taxes separately from their owners. Owners of a corporation only pay taxes on the corporate profits paid to them in either salary or dividends, while any other additional profits are taxed at a corporate tax rate, which is usually lower than the personal income tax rate.
Again, it is very important that you consult your personal attorney or legal representative in making business organization determinations and filings. Each producer’s needs are widely different and unique. This article is not intended to be relied upon as legal advice but rather to inform all producers of the options and opportunities available.