A corporation is a legal entity considered a person under the law, meaning it can sue or be sued by another party. Corporations also have rights and obligations. Corporations are separate from their owners or shareholders and, as such, have many different advantages and disadvantages. A corporation is not the best business structure for all businesses. Still, for many companies, this structure offers a balance that other business entities do not provide.
At Dohrwardt Law Firm, I can help you identify the best business structure for your company or help you transition from a sole proprietorship or another structure into a corporation. I will discuss all the factors in forming and operating a business. Contact the Dohrwardt Law Firm to learn more about corporations and your business idea.
What is a Corporation?
A corporation is a business entity with a separate legal identity from its owners (shareholders). As a separate legal entity, a corporation can sue and be sued, enter into contracts, own assets, take out loans, and pay taxes. Corporations often use the designation “Inc.” after the business name.
Shareholders own an interest in a corporation and receive its profits, usually in dividends. However, they typically aren't involved with the day-to-day management of the business. Instead, the shareholders elect a board of directors who oversee the company and hire senior leadership.
An essential feature of a corporation is its limited liability. Shareholders are not personally liable for the business's debts. Their liability is limited to their interest in the corporation.
Corporations can be for-profit (both privately owned or publicly traded) and non-profit.
How Is a Business Incorporated?
The specific steps for incorporating a business vary between states. Generally, the process involves the following four steps.
- Filing articles of incorporation with the relevant state government office. One or more of the shareholders file the articles of incorporation. The articles usually include information such as the corporation's primary purpose and shareholder structure.
- Creating corporate bylaws. Typically created at the first shareholders' meeting, the bylaws set the basic rules around how the corporation will operate and address things like regular and special meetings, voting rights, and corporate officers.
- Issuing stock. Stock is issued to shareholders via stock certificates.
- Electing a board of directors. The shareholders elect a board of directors at a general meeting. This election is vital because board members can play strategic corporate roles.
Before incorporating, you should weigh the pros and cons of the business structure to decide whether it's right for your business.
Advantages of a Corporation
Corporations offer many advantages, some of which are listed below.
- Limited personal liability. As a corporation is a separate legal entity, shareholders are generally protected from the corporation's creditors. Any liability is limited to their investment in the business. This means that shareholders' personal assets are protected if a corporation is sued or goes bankrupt.
- Easy transfer of ownership. Shares in a corporation can easily be transferred. While the corporate bylaws will set out the specific rules for buying and selling shares, a shareholder can leave a corporation simply by selling them. This flexibility of ownership also ensures a business continues to operate through ownership changes.
- Quick capital raising. A publicly traded corporation can quickly raise additional capital by issuing more stock.
These advantages should be balanced against the potential disadvantages of incorporation.
Disadvantages of a Corporation
The disadvantages of a corporation are less numerous, but they can be significant.
- More costly and complex to set up and run. Incorporation incurs more costs and takes longer than setting up a sole proprietorship or partnership. Once it's up and running, a corporation is subject to a stricter regulatory framework. This includes ongoing documentation and filing requirements, such as filing annual reports, keeping minutes at shareholder meetings, maintaining detailed financial records, and opening a separate corporate bank account.
- Potential double taxation. In some circumstances, the profits of a corporation are taxed twice, both at an entity level and a shareholder level.
As you can see, these advantages and disadvantages may benefit or work against you – it all depends on the business and your goals. A corporate lawyer can discuss these things with you, helping you narrow down exactly what business structure will work best.
Fortunately, when it comes to corporations, there is more than one type, all of which have unique angles and purposes. Exploring these options can help you determine if one corporation type will help you reap the benefits but do so more strategically.
Types of Corporations
Aside from being incorporated as a corporation, you may want to consider a specific type of corporation. I've included below brief descriptions of particular corporation types for you.
C Corporations
In a C corporation, or C corp, shareholders are taxed on their income from the corporation, and the corporation is also taxed at the entity level. There's no limit to the number of shareholders a C corp can have, making it an ideal structure for businesses requiring significant capital.
S Corporations
An S corporation, or S corp, has special tax status. An S corporation is taxed like a partnership and does not pay federal corporate tax. Instead, the corporation's profits and losses are passed to taxed shareholders under the personal tax rate.
A corporation must meet strict eligibility rules to elect S corp status. The number of shareholders is limited to 100, and specific rules exist to determine shareholder eligibility.
Certified Benefit Corporations
Also referred to as B corporations or B corps, certified benefit corporations have a dual purpose to generate a profit while promoting a public benefit. While the status offers no tax breaks, its value is reputational. B corporations are only available in some states.
Non-Profit Corporations
Corporations can also be used to establish non-profit ventures such as charities, educational institutions, and religious organizations. Rather than going to shareholders, profits are reinvested in the business, so non-profit corporations are typically exempt from paying taxes.
Factors to Consider Before Incorporating
Before you incorporate, please take a look at the six factors below.
- Complexity. What type of business do you have, and how complex is its structure or management?
- Liability. How much does personal liability matter to you?
- Number of Owners. Is it just you, and do you want to maintain sole ownership, or will ownership be divided among others?
- Capital. Do you need to raise capital, and if so, how much?
- Taxation. Double taxation is a hallmark of corporations, and as such, how does this affect the business?
- Survivorship. If something happens to you (e.g., you become incapacitated in some way or die), do you want the company to survive?
Considering these factors with a corporate lawyer will help identify whether a corporation suits your business.
Contact a Corporate Lawyer
If you need to incorporate a business, do it strategically and smartly. The Dohrwardt Law Firm helps clients form corporations and plan for their futures. Contact the Dohrwardt Law Firm to discuss your business venture.