Articles

CORPORATION

One type of entity to consider when forming a business or making an investment is the corporation. A corporation is a separate legal entity, distinct from its shareholders, that has the power to conduct business in its own name. These powers include, but are not limited to, the power to sue and be sued, acquire and dispose of real and personal property and hold title thereto, enter into contracts, borrow and lend money, and appoint and compensate officers, employees, and agents of the corporation.

Stock Corporation 

In a stock corporation, the owners of a corporation are referred to as shareholders. A stock corporation is authorized to issue shares of stock to the shareholders in order to raise capital for the business or investment and is usually organized for profit-making purposes. Generally, the shareholders do not have the right to directly participate in the management of the corporation. Instead, a stock corporation is primarily managed by a board of directors who are nominated and elected by the shareholders. The main advantages associated with a stock corporation are its ability to raise capital, the limited liability of the shareholders, and the transferability of a shareholder’s interest.

Except as otherwise provided, all references to a corporation in this article refer to a stock corporation.

FORMATION

A corporation exists under the laws of the state in which it is formed. In the Commonwealth of Virginia, a corporation is formed by filing articles of incorporation with the State Corporation Commission and upon the issuance of a charter by the State Corporation Commission. The articles of incorporation are required to include the name of the corporation, the number of shares of stock which the corporation is authorized to issue (and if more than one class or series of stock is authorized, the number of authorized shares of stock of each class or series and a distinguishing feature for each class or series), the address of the initial registered office, and the name of the initial registered agent.

In the Commonwealth of Virginia, each corporation is required to adopt initial bylaws for the corporation which may contain provisions for managing the business and regulating the affairs of the corporation. Corporations are required to file an annual report with the State Corporation Commission which sets forth information such as the principal office address and the names and post-office addresses of the directors and the principal officers. In addition, each corporation is assessed an annual registration fee based upon the number of shares of stock the corporation is authorized to issue.

LIMITED LIABILITY

Shareholders are generally not liable for the obligations of the corporation.  However, a shareholder who actively participates in the management or operation of the corporation may be liable for his or her actions in such capacity.  Likewise, a corporation will not be liable for the personal debts of its shareholders.  The risk of a shareholder who invests in a corporation is normally limited to the possibility that the shareholder’s investment will become worthless.  

TAXATION

A corporation is a separate legal entity for tax purposes.  Therefore, corporations pay taxes on their earnings and profits at corporate income tax rates (however, S corporations do not pay tax; rather the income from an S corporation is passed through to its shareholders).  In addition, a shareholder will be subject to tax on the earnings of the corporation if the corporation distributes earnings to such shareholder in the form of dividends or if the corporation redeems the stock of such shareholder.

TRANSFERABILITY OF INTERESTS IN A CORPORATION

Ownership interests in a corporation are generally considered freely transferable.  Upon the transfer of shares of stock, the recipient usually obtains all of the benefits of stock ownership.  The transferability of shares of stock increases the liquidity of each shareholder’s interest and is one of the characteristics which attracts investors to corporations (and thereby assists corporations in raising capital).  However, the transferability of shares of stock may be limited by the articles of incorporation, the bylaws, or a private agreement among the shareholders of a corporation, which is especially common in closely-held corporations.

TERMINATION

A corporation has perpetual existence unless otherwise provided in the articles of incorporation.  Therefore, the existence of a corporation generally is not affected by the death of a shareholder or a change in ownership or management.

OTHER TYPES OF CORPORATIONS

Nonstock Corporations

A nonstock corporation is not authorized to issue shares of stock and is generally organized for a not-for-profit purpose.  In addition, a nonstock corporation is prohibited from paying dividends or distributing income to its members, directors, and officers (with limited exceptions).

Professional Corporations

A professional corporation may be organized as either a stock or nonstock corporation.  A professional corporation consists of a group of individuals authorized to perform certain professional services in corporate form.  Only certain professionals are permitted to form a professional corporation in the Commonwealth of Virginia, such as attorneys at law, certified public accountants, practitioners of the healing arts, dentists, and professional engineers (however, this is not an exhaustive list).

S Corporations

An S corporation is a corporation whose income (and losses) are passed through to its shareholders, who are subject to tax on such income, similar to partnerships (whether a loss may be taken by a shareholder against his or her other income will depend upon whether the shareholder has sufficient basis to take the loss).  At the same time, an S corporation retains some of the benefits of the corporate formation, such as limited liability of its shareholders.  Eligibility for S corporation status is restricted to corporations with no more than one class of stock and a limited number of shareholders (the types of permissible shareholders is also limited).  The term S corporation is a reflection of a corporation’s ability to elect S corporation tax status under Subchapter S of the Internal Revenue Code of 1986, as amended.

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