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How a Corporation Works | Introduction to Legal Structures



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in this brief video we're going to be

discussing corporations corporations

represent a very viable form of business

ownership and one that are predominantly

used by many large businesses ones that

do a higher number of sales on an annual

basis and that is usually to justify the

cost of utilizing this type of structure

but corporations mainly refer to what we

call C corporations this is by far the

most common form of a corporation there

also are things like LLC's and S

corporations but typically when someone

uses the terminology of a corporation

they're usually referring to AC

corporation specifically although they

may do it you know obviously not

knowingly so C corporations comprise the

bulk of all corporations and what a C

corporation does and what all

corporations do for that matter is they

establish the business as a separate

legal entity

and what that means is that the business

and the owner are considered to be

separate

remember in us with the sole

proprietorship and a partnership the

owner of the business and the business

itself were considered to be kind of one

in the same and so that provided you

certain benefits in terms of taxes but

obviously wasn't very good in terms of

liability with the C corporation we

split the two and so the the business

exists on its own independent from the

owners and this is beneficial for a

number of different reasons so C

corporations can essentially hold

property in their in the business name

they can sue they can be sued they can

do a host of other things because

they're essentially almost like a person

if you will just according to kind of

tax law and liability and different

things and so there are separate legal

entity for that very reason now in order

to establish AC corporation and usually

all corporations for that matter now the

first thing you have to do is complete

what we call in Articles of

Incorporation

and the Articles of Incorporation simply

kind of establishes the basic outline of

the company this is usually filed in the

state in which you want to be

incorporated in so if you are going to

be doing business predominantly in

California you might incorporate in

California typically for the most part

Delaware is usually the most Pro

corporate friendly state they have the

law a lot of laws that are kind of

pro-business

if you will which typically runs to the

detriment of employees now but they do

that to attract corporations to settle

there and so you'll find that a lot of

corporations are incorporated actually

in Delaware and so just an example of a

couple things the Articles of

Incorporation will include typically

will outline you know some common things

like the name of the company at my

outline the number of shares that it can

be issued

also probably outlined the name of the

individuals on the Board of Directors

and also specify things like location

where the company's going to be based

out of you know basic not anything

overly specific once again just

outlining some of the fundamental

information you would need to know about

a company okay and now another thing you

need to complete is what we refer to as

corporate bylaws there seems to be a lot

of confusion with regards to corporate

bylaws and how they relate to the

Articles of Incorporation they are in

fact separate documents and the

corporate bylaws are much more specific

than the Articles of Incorporation with

the Articles of Incorporation you get

really basic information with the bylaws

you're really going to outline the kind

of day-to-day different rules of your

company as well as the guidelines on how

your company is going to keep running

smoothly if you will

so some of the specific things that

would be included in a in a corporate by

law would be outlining the specific

duties of each of the board of directors

now you might outline specifically how

do you go about electing board of

directors right what's the process that

you use you might go over how corporate

officers are appointed specific things

like how our meeting is conducted and a

few other things as well

right and what situations can you

actually amend the corporate bylaws

meaning change the rules that you've

already established so they're much more

specific so you're really looking at the

day-to-day operations the different

guidelines that help you run the company

okay the specific guidelines rules and

regulations are typically outlaw

outlined in the corporate bylaws okay so

now that we know how C corporations

essentially are created we need to

identify a few people that are actively

involved the first one is what we refer

to as the stockholder

the stockholder is actually technically

the owner of a c-corp okay and

stockholders they purchase actual shares

of ownership typically usually for a

certain dollar amount for publicly

traded companies you can actually

purchase shares on an open market which

means that the public is able to

purchase them so you put forth let's say

50 dollars and you receive one share

which is a fraction of ownership of this

entire corporation and that entitles you

to certain rights of course the biggest

of those is that it gives you voting

rights specifically to vote on the board

of directors now because stockholders

may not have the expertise necessary to

run a company right they kind of pass

off that that responsibility to the

Board of Directors and so they appoint

the Board of Directors usually through

elections to actually oversee kind of

the management of the company and to

oversee and represent their best

interests and so the board is designed

to represent the interests of the

shareholders or stockholders meaning the

people that own shares of the actual

company so in private corporations

usually by private meaning that they

don't sell their stock on an open

exchange and you have to obtain it

through other means or a public

corporation meaning you can purchase it

through the New York Stock Exchange and

go through a broker or a discount

brokerage from like an e trade or Ascot

trade or something similar so the board

once again representing our interests

designed to oversee management of the

company now the board is not involved

with the day-to-day decision making

and so what they do is they will

actually appoint our corporate officers

positions like CEO for example or chief

executive officer and so the board will

what they do is they kind of agree on

what the overall mission is of the

company right so what what are what is

our mission as well as what are the

objectives right what are our goals what

are we trying to accomplish and once

they've have some type of outline of

that some kind of clear picture of what

that looks like they will go ahead and

they'll appoint corporate officers and

those are the individuals that are going

to run the day-to-day and so they'll

maintain more detailed involvement with

the company typically the corporate

officers will meet with the board of

directors usually at some type of

regular interval maybe it's a bimonthly

or monthly basis just to update them on

operations so they can make sure that

the company is moving in the direction

that they feel is is going to increase

the likelihood of the business being

successful but also in a manner that

protects the interests of the

shareholders which is what their

responsibility is so now that we know

the key players how a corporation is

formed kind of the structure of it you

know let's talk about some of the

advantages and disadvantages of course

know this type of format is very complex

can be very expensive so obviously there

has to be some type of benefit from it

otherwise who in the right mind would

use it so let's first look at some of

the advantages the biggest and most

notable is going to be limited liability

because there is a separation between

the business and the owners the owners

essentially which once again owners of

the company are going to be stockholders

are only liable for the money that it

commits or invest so for example if you

purchase stock in a publicly traded

corporation like a Walmart or McDonald's

and you invest let's say a thousand

dollars and for some reason that company

you know comes on hard times can no

longer operate and has to liquidate

everything and declares bankruptcy okay

or declares bankruptcy and then goes

through liquidation creditors basically

people that those companies owe money to

that want to get paid back can't pursue

you for anything

you are only responsible for the money

that you invest initially which would be

your thousand dollar investment that's

gone you can't get it back but you can't

be pursued for your personal assets

which is certainly a benefit and so that

protects us in some way so we can invest

in some of these companies but we don't

incur a great deal of risk and so that

is a significant benefit another benefit

is that you do have a sense of what we

call permanence

because the owners are our stockholders

right so we have shares of ownership if

any of single-person you know or to or

to pass away that doesn't affect the the

extent to which the business continues

to operate which is certainly a good

thing and so the business will continue

to run despite maybe one of the owners

unfortunately passing away whereas with

the sole proprietorship in a partnership

because the business and the person the

owner are the same for all intents and

purposes then that creates some issues

where we're running into well is the

business going to continue to operate

and if so how can it so those are

probably some of the more significant

advantages of C corporations there are a

few others but I just want to stick to

some of the more prominent ones so

disadvantages like all forms of

ownership there are certainly

disadvantages the most notable one for a

C Corp is going to be what we call

double taxation and double taxation is a

basic concept that basically follows the

the mindset that the profits of the

business are going to be taxed once and

then if they're paid to owners in the

form of a dividend they would be taxed

again so let me try and run through this

real quick we know that the money that a

business brings in is obviously coined

revenue the money that flows out of the

company are expenses and there obviously

are several subcategories within that

we're going to keep things fairly

simplistic and so the difference between

the two is profit okay on this profit

the money that organization keeps

obviously it has to pay taxes so that

means that the government essentially

wants their fair share and so they're

going to take a percentage out of that

profit the company can choose to pay

what we call a dividend and so a

dividend is usually a quarterly payment

which means it occurs every three months

and it's a way of kind of rewarding

stockholders for investing in a company

and so they might say okay for every

share you

oan we're going to pay you 70 cents and

so obviously if you own more shares you

get more money if you don't own many

shares and it's not as significant but

it's a way of providing at least some

guaranteed return just in case the

shares don't go up in value when they in

fact go down at least you get a little

bit of money so you get a dividend which

is great

the only problem though is you have to

claim those dividends on your tax

returns so at the in the following year

you're going to get a 1099 form and

which is going to state that you receive

X amount of dollars in the form of a

dividend and you have to claim that on

your personal tax return as income so it

does get taxed typically it's a very low

rates usually around 15% so it's a lower

rate for dividends and capital gains at

least for certain tax brackets

but you still get taxed on it and so

that's where we get the term double

taxation because there is kind of one

tax right here the actual business

itself is paying taxes on the money and

then we as stockholders are paying tax a

second time on that money as well which

is how you get the term double taxation

so that's a significant disadvantage of

a corporation now the last one in the

next one I should say and the last is

the expense and complexity of formation

there's a reason that many businesses

don't automatically jump to starting a C

corporation it's because they're very

expensive they can be multiple thousands

of dollars and they have certain costs

that have to be maintained there's

certain regulations that you have to

abide by to maintain your C corporation

status obviously you have to create

Articles of Incorporation you have to

create biologic it a Board of Directors

these are very time-consuming operations

and things that are going to take not

only time but also money to do and so

that is an inherent disadvantage because

for the most part you're kind of small

business and you're entrepreneurs that

are starting startup businesses aren't

going to initially gravitate towards

this form of business formation because

of those very reasons because it takes

some time and there is some paperwork

involved quite a bit actually and

usually you're involving internees and

different things which as we know kinda

just jacks up the cost a little more so

that is obviously a disadvantage is

probably one of the reasons why more

companies or more businesses rather

don't initially go to this form of

ownership right we like the idea of

limited liability right who wants to get

sued for their personal assets so they

can pay for things related to the

business but at the same point in time

you have to kind of weigh the cost and

complexity versus the ease of the ease

of formation as well so those are some

of the advantages and disadvantages of C

corporations those are certainly not all

of them but probably the more

significant advantages and disadvantages

that you will encounter with this form

of business ownership