A corporation is one type of business structure, created and regulated by state law. More specifically, a corporation is defined as being a legal entity that is separate from its owners, meaning its shareholders. What this means is that only the corporation itself can be held liable for corporate obligations, such as maintaining required business records.
There are a number of different types of corporations. In general, a corporation is classified according to specific factors, such as:
- Their tax structure;
- The purpose of the corporation; and
- The number of shareholders and the amount of stock that is to be issued.
Some of the most common forms of corporations include:
- C Corporation;
- S Corporation;
- Non-Profit Corporation;
- Business Corporation;
- Professional Corporation;
- Foreign Corporation; and
- Public or Private Corporation.
However, when the term “corporation” is used, it is generally referring to the two main categories that corporations are divided into according to tax laws: C Corporations, which are taxed separately from their owners, and S Corporations, which are not.
Some of the notable benefits to forming a corporation include:
- Corporations can survive changes in ownership, which means that they could exist in perpetuity;
- They are considered to be “people,” and as such, they are entitled to some constitutional protections; and
- Due to the fact that only the corporation itself can be held responsible for its obligations, corporations have considerably limited liability when compared to other types of business structures.
Corporations are generally created by complying with state corporate laws, with the majority of states basing their laws on a model act known as the Revised Model Business Corporation Act (“RMBCA”). Additionally, a corporation is formed when a document known as the articles of incorporation is filed with the Secretary of State.
In order to form the articles of incorporation, the individual owners or shareholders must agree on a number of factors. Some common examples of such factors include, but may not be limited to:
- The official name of the corporation;
- The number of shares that the organization is authorized to issue;
- The number of shares of stock that each owner will buy, as well as the amount of money that they will contribute to the purchase;
- The specific type of corporation being created and registered; and
- The people who will form and manage the corporation.
Each state has its own set of corporate law requirements; as such, there may be additional factors to take into consideration when forming a corporation.
What Is A Foreign Corporation?
Simply put, a foreign corporation is a corporation that is incorporated in one state, but is authorized to conduct business in one or more other states. An example of this would be how a corporation may be formally registered in Delaware, but is authorized to do business in California, Florida, and Texas. This corporation would be considered a domestic corporation in Delaware, but would be referred to as a foreign corporation for its operations in the other states.
Occasionally, the term “foreign corporation” may be used to describe an international company abroad that is conducting business in the United States. However, the term is most commonly used to refer to American businesses that are operating in several different states. Foreign corporations may also be referred to as “out-of-state” corporations.
What Is A Delaware Corporation?
Many businesses choose to register as foreign corporations simply because it is considered to be more practical than incorporating in every single state in which they maintain operations. Rather than incorporating in several different states, the business will generally incorporate in the state in which its headquarters are located, and then register as a foreign corporation in other relevant states.
Additionally, some states maintain special governance rules or various tax incentives for companies that incorporate in their state. Delaware and Nevada are the two most noteworthy examples of states in which such businesses incorporate. As such, a company might incorporate in Delaware in order to receive “corporate privilege” tax breaks, and then register as a foreign company in all of the other states in which they have significant business dealings.
Additionally, among the 50 states, the state of Delaware has some of the most favorable laws for corporations. Delaware’s body of corporation law is referred to as Delaware General Corporation Law, and it attracts many out-of-state businesses who are seeking to take advantage of the favorable corporation laws. As such, a “Delaware Corporation” generally refers to an out-of-state business entity that has filed for incorporation in the state of Delaware.
There are numerous advantages of filing as a Delaware corporation. Some of the most common examples of such advantages include:
- There is no income tax on corporations that only conduct business outside of Delaware;
- All corporate offices can be held by one single person;
- The addresses of the members of the initial board of directors do not need to be provided;
- Considerably faster and easier incorporation when compared to most other states;
- There is no requirement for the company to have an office or address in the state of Delaware, but the company must have a registered agent located in the state;
- Stockholders who are not Delaware residents do not have to pay state personal income tax;
- Shareholders are granted various additional rights, such as the right to change bylaws and the right to be free from liability for corporate debts;
- Directors can only serve on the board for a maximum of 3 years;
- Restrictions on the transfer of stock cannot be imposed on stock that was previously issued, unless the shareholder consents to such restrictions; and
- Voting trusts cannot last longer than 10 years.
What Is The Internal Affairs Doctrine?
According to general American corporate law, the internal affairs doctrine states that corporations who are operating in more than one state can only be subject to the laws of the state in which they are incorporated. The Internal Affairs Doctrine applies to regulations that affect the internal affairs for the corporation.
Because of this, businesses that incorporate in Delaware are generally subject only to Delaware corporate law when they are being sued. This remains true even if they conduct business operations in other states. In this way, the internal affairs doctrine also adds to the advantages of incorporating in Delaware.
What Is The Delaware Court Of Chancery?
The Delaware Court of Chancery is a court of equity that is maintained by the state of Delaware. Most lawsuits and legal actions involving the internal affairs of a Delaware corporation are heard in the Court of Chancery. In the Delaware Court of Chancery, there are no jury hearings, as cases are heard exclusively by chancellors who are the equivalent of judges. This provides a considerably more streamlined process for the hearing of corporate affairs. Appeals from the Chancery Court are then sent to the Delaware Supreme Court.
Because of the activities of the Court of Chancery, Delaware has a considerably more extensive and well-developed body of corporate case law when compared to other states. This body of case law grants much greater guidance for Delaware corporations and their lawyers, in the event that they become involved in a lawsuit or a regulatory hearing.
Do I Need An Attorney For Issues With A Delaware Corporation?
If you are considering a Delaware corporation, or are experiencing issues associated with your Delaware corporation, you should consult with an experienced and local Delaware corporate attorney.
A local lawyer can advise you regarding the incorporation process. Finally, an attorney will also be able to represent you in court, as needed, should any legal issues arise.