Corporation at a Glance
Complex, Secure & Sustainable ...
- A corporation is its own "legal entity", separate from its owners. Essentially its own person, a corporation can enter into contracts, own property, sue and be sued, and must pay its own taxes.
- Owners (aka shareholders) elect a Board of Directors who manage the company, while officers (appointed by the Board)) oversee the daily operations.
- Generally considered more complex in terms of management, regulation and tax structure, though this is not always the case. In some states, one individual can fulfill the role of shareholder, director and officer.
ADVANTAGES
- Limited Liability – Since a corporation is technically its own “person”, it can be sued, and only the corporation’s business assets are at risk. Unless you knowingly commit a crime (such as fraud), your personal assets are safe from lawsuits.
- Raising Capital – Corporations are the best business structure for raising capital. An individual who buys stock then becomes a shareholder and owns part of the business. This is regardless of whether the corporation has "gone public" or not.
- Perpetual Existence and Flexible Ownership - Since ownership of a corporation is based on the number of shares purchased by an individual, a corporation's lifespan is not dependent on the life- span of a shareholder. Ownership (and thus power) can be easily transferred simply by buying and selling shares.
- Image and Prestige - While not 100% guaranteed to lend to a business' credibility, the dedication to forming and maintaining a corporation could potentially strengthen a company's image of legitimacy for future clients and investors.
DISADVANTAGES
- More Complexity = More Expensive - Corporations have more legal formalities upon set up, as well as more regulations during operation (ex: record keeping requirements). These various administrative fees generally make corporations more expensive to set up and maintain.
Food for thought:
- Double Taxation - Corporations are taxed on their profits and then taxed again when distributing dividends (the profits paid to shareholders).
- Think of it this way: you bought a pie, and were taxed when you bought it. Then when you served the pie, each person with a slice also had to pay a tax.
- Think of it this way: you bought a pie, and were taxed when you bought it. Then when you served the pie, each person with a slice also had to pay a tax.
- S Corporation - After meeting a few extra requirements with the IRS, a corporation can actually be classified as an S Corporations. S Corps avoid the "double taxation" as they are taxed the same as partnerships. Profits are divided among the owners and reported on each of their personal taxes.
- While an S Corporation can avoid double taxation, that does not necessarily make it a "better" business structure. Tax benefits are very situational, and depend greatly on how a business operates.