Starting your own business can be very rewarding. But you might be confused while choosing your business type. One of the business entities you can choose to form is a Corporation, but you need to consider various factors before finalizing to incorporate as a Corporation Company. Read the below article to know in detail about the Corporation.
What is a Corporation?
A Corporation is a legitimate entity with its own rights and obligations. It implies that a Corporation is a separate entity from its stockholders. It can be built up as a profit-making or non-profit association and can be held publicly or privately. Also, the way in which the corporation will be taxed entirely depends on your choice of incorporation. You can choose between a “C” corporation or an “S” corporation. To be identified as a corporation, a company needs to file an application that covers the corporation’s articles of incorporation with the State, incorporation fees, and approval by the State. Once the company receives the approval, the corporation must develop by its laws. You can hire professionals to take care of the complete process.
General Characteristics of a Corporation
Since stockholders own the corporation and employees manage it, the death of a stockholder, sale of stocks or the inability of an employee to perform accurately does not affect the life of the corporation. The life of a corporation is in the hands of a charter; he can extend or limit it.
Separate legal entity
The corporation can conduct its business in its own name. Hence, corporations can enter binding contracts, have their own property, pay taxes, borrow money, sue and can be sued. Stockholders can only act as agents if they are the employees or are designated as agents.
Ease of capital procurement
A corporation can acquire capital by selling bonds or capitals. Hence, the corporation is not limited to small resources. The limited liability along with the ease of transferring ownership rights makes it accessible for a corporation to obtain capital by selling stock.
The liability of the stockholders depends on the amount each of them has invested in the corporation. Creditors cannot claim personal assets; they are limited to corporate assets for the compensation of their claims.
The sale of stock leads to government regulations that are essential for stockholders. The sale of stocks is also governed by the federal securities. The public companies who have traded their stock on exchanges are expected to file their financial statements and other added informative declarations with the Exchange Commission and the Securities.
Ease to transfer ownership rights
The stockholder of the corporation has a stock certificate which states the number of his shares in the company. In a public company, the stocks can be quickly transferred without the approval of other stockholders. Similarly, if any stockholder wishes to buy stock in a corporation, he/she does not need the approval of the existing stockholders. Private companies may have few restrictions on the transfer of stock.
Advantages of Corporation
One of the main perks of a corporation is that it lives on, even after owner’s death, dissolution of the corporation or if the stockholder decides to move on. It is convenient to merge or sell a corporation as it is the matter of changing shareholders instead of establishing a completely new business.
Regardless of the type of corporation, the centralized management system is followed by the corporation. Shareholders do not handle the day-to-day operations of the corporation, instead, they appoint managers to do so. Unlike other business structures where stockholders control the affairs, the corporation does not require a keen attention of its stockholders every time.
Since the corporation is a separate entity, it distributes tax liabilities. It implies that personal tax liabilities are not linked with corporation taxes. As a business owner, you are only required to pay taxes on the salary, commission or dividends that corporation pays you. The corporation is liable for paying the corporate taxes on the company’s profits.
Source of capital
A corporation can easily obtain a substantial amount of capital by selling shares or issuing bonds. Stockholder need not to take permission from his partners.
It is not particularly difficult for a shareholder to sell or transfer shares in a corporation, he can easily do it, without asking from his partners.
Disadvantages of Corporation
Corporations are required to keep more records than any other business entities. Corporations need to file annual returns, tax returns and manage all the business bank accounts. Other corporate records such as meeting records and licenses are also required.
One of the main disadvantages of a corporation is the costs that are required to run the business. You need to pay the applied costs to incorporate with the state where you are planning to start the business. To make it simpler, you can hire an attorney to help you complete the incorporation process.
Depending on the type of corporation you choose, you may require to pay taxes on its income, after which owners pay taxes on the bonuses or the dividends received, so income is taxed twice.
Lots of Rules to Follow
You need to keep in mind many standards on how a corporation governs itself. Corporations are required to have a board of directors, hold meetings at defined intervals, and maintain certain records. If a corporation decides to sell a stock or has a membership, there are many additional rules that apply.
You should always choose a business structure wisely keeping in mind all its perks, drawbacks and how it can benefit you in the long run. If you are still confused regarding the type of business structure you should choose, it is advisable to consult an attorney. He will make you understand every detail carefully and you can decide accordingly.