Business Entities Explained: Corporations
A corporation is an artificial, intangible being which is created under state law. A corporation may be owned by one or more persons. It is a separate entity that can acquire, hold, and convey property, be sued in court and generally act in its own name. It derives its rights from statute and its articles of incorporation. A detailed statutory framework is provided for the creation, operation and termination of corporations..
If properly capitalized and corporate procedures are followed, the company is responsible for its debts and obligations, while the owners (shareholders) are not personally liable for these obligations.
Let's look at the benefits and drawbacks of this type of business.
Advantages
Shareholder Benefits
Shareholders are not liable for the corporation's debts and liabilities if corporate procedures are followed and the initial capital is adequate. As a result, a corporation protects its owners' personal property and liabilities.
2. Easy Transferability of Ownership
This type of business allows for the free and easy transfer of ownership through the sale and transfer of shares, with no impact on the company's continued existence or ownership of its assets.
Corporations are also very adaptable business structures; if the owner decides to leave the company, he can simply sell his shares. Similarly, if the owner passes away, his shares are transferred to someone else.
3. Tax Advantages
This type, in particular, has additional benefits available, such as deductions for pension plans and insurance that other entities do not have, and the owners can also deduct the cost of employee and official benefits.
4. Flexibility of Financing
Financing flexibility is provided by the ability to create and sell various types or classes of stock to a large number of investors. For example, a corporation may have multiple classes of stock, each with its own rights to dividends and returns.
Disadvantages
Rigid Formalities
To maintain corporation status, certain formalities are required including: keeping a board of directors, following by-laws established by this board, and performing more difficult reporting tasks to the board and to the state in which the corporation was established. All of this leads to less flexibility in your organization.
2. Less Authority as a Shareholder
If you choose to be a minority shareholder, you will have very little power over the corporation's operations or policies.
3. Assets as the Only Source for Credit
Because the corporation's assets are the only source of credit, individual shareholders may be called upon to guarantee corporate indebtedness, which somewhat undermines the value of the limited liability.
4. Double Taxation
This type of business is subject to double taxation, which means that business income is taxed both at the entity and shareholder levels. Individual shareholders are not permitted to deduct the corporation's losses unless the corporation qualifies and elects to be taxed as an "S" corporation.
Who Should Use the Corporation Business Structure?
This type of company is ideal if you have a vision to grow a large business which may Be prepared for detailed records, operational processes, and reports.
“The corporate entity is one of the oldest and most commonly recognized business entities and most people are familiar with its basic structure of shareholders and boards of directors. That said, for start-ups and companies in which the owners will also actively manage the business, corporations may not be the best choice”. - John
