Corporations are historically the most popular form of business organization. The primary advantage of a corporation is limited liability for the shareholders. Corporations can have one shareholder, or multiple shareholders.
One disadvantage of corporations has always been taxation. A corporation’s income can be subject to double taxation. The corporation would be taxed on its income. When the income is distributed to shareholders in the form of dividends or wages, the shareholders would then pay tax on the dividends or wages. As a result, shareholders would pay tax twice on income of a corporation.
This problem was mostly solved by the creation of Subchapter S corporations. Subchapter S corporations are approved by the IRS. The IRS does not tax the income of a Subchapter S corporation. It only taxes the dividends or wages paid to shareholders. One potential problem associated with Subchapter S corporations are limitations on who can be shareholders, the number of shareholders and other matters dealing with shareholders.
When there are multiple unrelated shareholders of a corporation, the parties should enter into written shareholder agreement which sets forth the terms of the relationship. A shareholder agreement would address issues such as percentages of ownership, restrictions on the sale or transfer of shares, and arrangements in the case of death or disability of a shareholder.
A corporation is formed by filing articles of incorporation with the Minnesota Secretary of State’s office. An attorney usually prepares the articles of incorporation. The articles would include the name of the corporation, address, number of shares authorized, and the name and address of each incorporator. A corporation with multiple shareholders should also have bylaws which sets forth the operating rules of the corporation.
In order to maintain the liability protections of a corporation, it is important that shareholders observe certain formalities in the operation of the corporation. This can be accomplished by having the shareholders conduct regular meetings and preparing minutes of the meetings. A corporation should have a separate corporate checking account. A corporation also should use corporate letterhead and other corporate materials.