A corporation is a legal entity wholly separate and apart from its owners (the shareholders or "stockholders"). You form a corporation by filing a "certificate of incorporation" or "articles of incorporation" with the Secretary of State in California or the state where your business will operate. The certificate or articles of incorporation contains such information as:

• Provisions describing corporate management
• Provisions protecting the corporation’s directors and officers, and limiting their personal liability to the corporation and its shareholders

The rights and obligations of the corporate shareholders are set forth in great detail in your state corporation statutes. These statutes set out basic rules such as:

• How a corporation must be formed
• Necessary officers
• Annual reports you must filed
• The types of corporate shares you can issue

Some of these rules must be followed exactly while others, at the option of the shareholders, can be varied in the certificate or articles of incorporation, or in the bylaws of the corporation.

Bylaws are a separate set of rules governing how a corporation is run. Shareholders who form the corporation adopt bylaws. They can later be changed by a vote of the shareholders or the directors, depending upon your particular state’s corporation law and the provisions of the certificate of incorporation.

Professional Corporations

Professional corporations are formed by doctors, lawyers, accountants, engineers, architects, and other professionals to do business in their respective professions. Under state law, only licensed professionals can be shareholders and directors of professional corporations. The same rule usually applies to partnerships, limited liability companies, and other entities formed by professionals to practice their professions. In most states, a professional will not be liable for the negligence or misconduct of other professionals working for the corporation, except those directly supervised by such professional. Of course, professionals will be liable for their own negligence or misconduct.

A professional corporation can be either a "C" corporation or an "S" corporation under the federal Internal Revenue Code.

"S" Corporations

Certain small companies with no more than 75 shareholders and meeting certain requirements (only one class of common stock, only certain types of shareholders) can be taxed as an "S" corporation.

An “S” corporation will be taxed at the federal level very similarly to partnerships and limited liability companies, with income, losses, and gains passed through directly to the shareholders and no tax at the corporate level.

Some states do not recognize "S" corporations for tax purposes and tax them as they would a "C" corporation. And some states recognizing "S" corporations tax them, but at a reduced rate