Though most small businesses are formed as sole proprietorships or partnerships, some small businesses choose to register as corporations. Corporations provide a number of benefits, including tax shielding and limited liability. Corporations also allow an unlimited number of stockholders, making it easier to bring in investors. Any shareholder in a corporation is a partial owner of the company.
Owners are Shareholders
To form a corporation, you must file articles of incorporation with the secretary of state in your home state or another state in which you wish to incorporate such as Nevada or Delaware. When you file, you must also designate the maximum number of shares the company is authorized to issue. Most states require that corporations issue certificates of stock to their stockholders at formation and designate a par value for the stock. BusinessDictionary.com defines a shareholder as “An individual, group, or organization that owns one or more shares in a company, and in whose name the share certificate is issued.” Hence, owners of a corporation are called shareholders or stockholders.
In the U.S., it is legal for any corporation to have only one owner or shareholder. A privately held corporation designated as an S-corporation can have a maximum of 100 shareholders. Shareholders can be individuals, other corporations, LLCs or trusts. Corporations are separate legal entities that can exist into perpetuity, so it is important to create a shareholders agreement that governs stock ownership and what happens in the event of an owner's death or disability.
Corporations may offer all shareholders the same rights and privileges based on the number of shares owned. Corporations may also create different classes of stock. Each shareholder in a particular stock class would have the same rights and privileges. For example, a corporation could create two classes of stock, preferred and common. Shareholders who own preferred stock would have first rights to dividends and distributions and more voting rights than owners holding common stock. The ability to create and offer different stock classes makes corporations an easy choice for small-business owners who wish to pursue significant investment by angel investors, venture capitalists or via private placement.
Corporations are taxed as separate, stand-alone entities, and shareholders are taxed on any distributions or dividends received from the corporation. The exception is if you specifically elect treatment as an S-corporation. The IRS treats S-corporations like partnerships. Hence, with an S-corporation, the IRS allows shareholders' proportionate share of the income or losses generated by the company to be filed on the shareholders’ federal tax returns.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.