A corporation is a legal entity that is distinct from its shareholders or owners and has all the rights to do the business and own property like a person.
As the corporation has privileges like an individual, the owners or the stakeholders are not liable for the debts or any other financial issues beyond the amount they had invested in that company.
The Rights that a Corporation Owns
As we have said that the corporations just operate as a person, let’s look into some of the rights that a corporation owns
- Start and conduct businesses
- Buy and sell property
- Right to borrow money
- Make and sell products
- Sue or get sued
- Right to enter into binding contracts
- The Rights that a Corporation Owns
- Advantages of a Corporation
- Complexity and Cost of Formation
- Government Regulations and Reporting
- Double Taxation
- Possibility of Loss of Control
- Possibility of Conflict
- Difficulty of Termination
- Types of Corporations
- Corporate Structure
Advantages of a Corporation
Another biggest advantage of corporations is the limited liability to the investors, where they are only liable for the amount they had invested in that business but not for their personal assets.
In case of failure, legally, the courts can seize or sell the assets of that corporation and the amount invested by the investors but not their personal assets.
However, be known that the protection of limited liability is only when everything is right, it may not protect the owners or the key persons from being held personally liable in case of any illegal or fraudulent activities or even any actions that can keep stockholders at risk.
Ability to Raise More Money
The demands of the company are nearly uncontrollable, especially in the starting and in growth phases and the solution for most of those demands is surely the money.
Corporations have a greater advantage of raising money levels by selling the shares of the company to the public or investors, which gives the ability to the corporation to invest in several fields and to implement new strategies for business growth.
The advantage is not just about pooling money but pooling easily due to vast outreach by selling the stocks publicly, which is an easy and quick way of raising the money for established businesses.
Continuity is another major advantage of corporations because corporations have a long lifespan if not simply, they can continue forever independent of investors and founders, simply because they are considered as separate legal entities.
You can even pass on your shares legally to your heirs or even sell them easily if you wish to, which is another great advantage that attracts investments.
Liquidity means converting the stocks into money. Investors can quickly sell and convert their stocks into money in the open market whenever they need it. It is one of the main reasons corporations are able to attract investors to buy stocks.
Due to high capital and the ability to raise funds, corporations can easily employ highly skilled individuals within their respective fields. They can also attract more talented individuals by the benefits and higher salaries when compared to other ownership types.
With the talented and skilled individuals and the ability to invest in modern technology, corporations can easily manage and organize for greater productivity.
Not only that, Corporations also have a ability to attract incredibly talented individuals by offering them to purchase their stocks at a fixed price and so on.
Complexity and Cost of Formation
Forming a corporation is a complex process and is expensive than setting up a sole proprietorship or partnership firm. You may also require the need for an attorney(lawyer) and even accountants to complete the process of formation.
You can also do this on your own, but you need to spend a lot of time to read through all the rules and complete all forms to get respective licenses.
In case if you want to take your company public by selling some of your shares, its again a time consuming, laborious, and highly expensive process that can take so much time.
Government Regulations and Reporting
In case if you want to sell your stocks to the public, your business needs to meet several government standards and rules before you start selling them. Also, you might need to report in related departments for approval.
Once you get all the approvals and start selling your stocks, you also need to inform your investors, stockholders and sometimes even government agencies in a regular basis about several aspects of your business where you need to prepare complete documentation and reports about the strategies, financial positions, activities, and others.
Preparing all these necessary reports can eat up a lot of your staff’s time and is also an expensive thing to do.
In case of a corporation, you need to pay the taxes twice, which is again another disadvantage.
First, you need to pay the tax on the total income that is generated by the entire corporation before distributing the profits to the stockholders.
Secondly, you can divide the remaining income and distribute it as per the share of the stockholders as dividends. Again, the stockholders need to pay the tax on the profit that has been received as a dividend, which leads to the double taxation process in the corporation type of ownership.
But the S corporation and the limited liability company have an advantage over double taxation as they are taxed like a partnership firm.
There can also be some special taxes for corporations. However, be known that the taxation process may differ from country to country and even between states.
Possibility of Loss of Control
In a corporation, due to the selling of the stocks, outside investors can acquire a considerable share in the business and can get a place in the board of directors where they can influence the strategies and the nature of the company.
Sometimes even the new investors can even take over complete control of the business by time by acquiring more shares.
Possibility of Conflict
Conflicts are inevitable in a corporation, it’s not only between the employees, but it can also happen with the higher authorities. The impact of conflict can be higher in case the stockholders select a board of directors, which may further lead to consequences like disagreeing with the management.
Difficulty of Termination
Once a Corporation is started, it is really difficult to terminate it, as it involves a very lengthy process and also respective approvals.
Types of Corporations
Corporations can be privately held or public traded and it is a very broad classification as its mostly based upon how the stocks are held. But when it comes to the operation and the strategy, incorporating your business can be done as a C corporation or an S corporation
Closely Held or Privately Held Corporation
A closely held or privately held corporation is the one where all the stocks are owned by a few people, often the family members or the management. In this type, the stocks are not offered for sale to the general public. Most small corporations are usually closely held.
Publicly Held Corporation
In the publicly held corporation, the shares of the stock are available for sale to the general public and are traded in stock exchanges. Several large corporations go public.
C corporation is a traditional form of cooperation and is considered as a separate legal entity.
The C Corporation has an appropriate structure for investments, public stock offerings, as well as an acquisition. So, if you plan to seek any investments in large amounts for your business, it should be established as a C corporation.
Although C corporations enjoy limited liability, the profits are taxed twice. You need to pay both the corporate tax as well as the net income received by the stockholders as dividends.
Usually, all for-profit corporations are treated as C corporation until unless they specify and opt to be treated as any other special corporation like S corporation.
Subchapter S Corporation or commonly called S Corporation is a special type of Corporation Where the stockholders have the advantages of a partnership as well as the corporation as you don’t need to pay taxes on the corporate income. At the same time, the stockholders can enjoy limited liability.
The paperwork, operation and the details of this type of Corporation is just similar to that of C Corporation
If your business meets the necessary requirements, you can apply for the status of an S Corporation.
Another point to note about S Corporation is, if you lose the status, you may not operate the business under the same S status for at least five years.
The organizational structure of the corporations is very different and complex when compared to sole proprietorship or partnership. In a Corporation, usually, the board of directors and officers are the ones who control and manage the entire business.
Stockholders Elect the Board of Directors
Stockholders of the company appoint or elects a person to represent themselves in the process of business as a member of the board of directors.
The board of directors is the topmost body that governs business activities. The members can be selected within the corporation or even from outside.
The stockholders can also be able to control and manage the activities with the help of the board of directors.
The main responsibility of the board of directors is to set the goals as well as to develop the strategies to achieve them.
Board of Directors Appoints the Officers
These selected board of directors appoints the officers, who are usually the president, vice president, secretaries, and others in the organizational structure.
These officers help to make plans as well as work to carry out strategies, day to day business activities as well as to hire the employees.