ABA Family Legal Guide

Forming and Operating a Small Business

Types of Business Organizations

Corporations

How are corporations created?

A corporation is a legal entity that you form by filing articles of incorporation (in some states, the term used in the statute is certificate of incorporation) with the secretary of state in the state in which you have chosen to organize the corporation, along with the required filing and license fees.

One or more persons can form a corporation. Thus, a sole proprietor can incorporate if he or she wants to. With some exceptions (doctors and lawyers are prohibited by ethical and regulatory constraints from operating in certain types of corporations), corporations can generally operate any type of business.

The people who file the articles or certificate of incorporation are called incorporators. The equity ownership interest in a corporation is called stock, and the owners of shares of stock are called shareholders or stockholders. There are two types of stock, common stock and preferred stock. Voting rights typically belong to common stock holders, but dividends generally must be paid on the preferred stock before the common stock receives dividends.