Several of our clients have asked us exactly what is a corporation and what are its benefits. They also want to know how a corporation is formed. They have also heard of something called an "S" corporation and they wonder what that is. We will attempt to answer these questions in this newsletter.

         A corporation is a separate and distinct legal entity. This means that a corporation can open a bank account, own property and do business, all under its own name. The primary advantage of a corporation is that its owners, known as stockholders or shareholders, are not personally liable for the debts and liabilities of the corporation. For example, if a corporation gets sued and is forced into bankruptcy, the owners will not be required to pay the debt with their own money. If the assets of the corporation are not enough to cover the debts, the creditors cannot go after the stockholders, directors or officers of the corporation to recover any shortfall.

         A corporation is managed by a board of directors, which is responsible for making major business decisions and overseeing the general affairs of the corporation. Directors are elected by the stockholders of the corporation. Officers, who run the day-to-day operations of the corporation, are appointed by the directors.

         One major disadvantage of a traditional corporation is double taxation. A traditional corporation, known as a "C-corporation," pays a corporate tax on its corporate income (the first tax). Then, when the C-corporation distributes profits to its stockholders, the stockholders pay income tax on those dividends (the second tax).

           To avoid double taxation, corporations can make a special election to be taxed as a pass-through entity, like a partnership or a sole proprietorship. In other words, there is only one level of taxation. The corporate profits "pass through" to the owners, who pay taxes on the profits at their individual tax rates. Corporations that make this tax election are known as "S-corporations."

           To form or start a corporation, an individual (Incorporator) must file Articles of Incorporation with the Arkansas Secretary of State and pay a filing fee. After the Articles of Incorporation have been filed, the Incorporator should elect an initial Board of Directors, prepare a set of By-Laws and have an initial meeting of the Board of Directors and Stockholders with a set of minutes evidencing these meetings.