Describe the Type of Business of the Corporation
If you need to describe the type of business of the corporation, first determine what type of goods or services are being sold.3 min read
2. Advantages and Disadvantages of Corporations
3. The Process of Incorporation
Updated September 30, 2020:
If you need to describe the type of business of the corporation (an organization that provides goods or services to customers in exchange for money or other goods or services), first determine what type of goods or services are being sold. The three major business types and what they sell are:
- Service businesses offer intangible products (no physical form) and often include professional skills, expertise, or advise. Examples include hair salons, repair shops, banks, and accounting firms.
- Merchandising businesses purchase products at wholesale pricing, then sell the same product at retail pricing. The product itself isn't changed in any way, and profits are gained by selling at higher prices. Examples include grocery stores, distributors, and resellers.
- Manufacturing businesses purchase products as raw materials with the plan to make new products. Manufacturing requires the combination of raw materials, labor, and any factory overhead to complete the production of the new product.
A fourth type, called a Hybrid Business, is possible when more than one of the three major business types is in use. Normally, when this happens, the business is classified as the main business interest. An example of this is a restaurant, which can include all three: manufacturing (combining ingredients to make a meal), merchandising (selling wine), and service (taking orders from customers).
Types of Corporations in the United States
There are several types of corporations in the United States. They include:
- C corporations
- S corporations
- Limited liability companies (LLC's)
- Nonprofit organizations
- Sole proprietorships
Each corporation has a different structure and taxation. C corporations are taxed separately from their owners under United States federal income tax law. Corporate profits and shareholder distributions are both taxed, resulting in a "double taxation." Corporations provide legal benefits, including safeguarding personal assets against claims that come from lawsuits or creditors. This also limits stockholders, directors, and officers' liability for the amount they've invested in the company and restricts them from any of the company's debt or other obligations.
S corporations are corporations that direct all corporate income, profits, losses, or deductions to their shareholders. S corporations are similar to partnerships. Income is taxed at the shareholder level, not the corporate level.
An LLC combines aspects of the partnership and corporate structures. An LLC also establishes limited liability to the owners under most United States jurisdictions. An LLC has pass-through income taxation similar to a partnership. LLCs are often good options for single owners due to their increased flexibility in comparison to corporations.
The least expensive and best option for single owners is a sole proprietorship. For two or more people who pool their resources, a partnership is common. In a partnership, profits are divided among the owners. In both sole proprietorships and partnerships, any liabilities are held by the person(s). This includes business liabilities such as loans, legal judgments, and accounts payables.
Nonprofits take any positive revenue gains and put them back into the business or distribute them for the intended goals, expansion, or plans of the nonprofit's overall mission.
Advantages and Disadvantages of Corporations
Corporations include many benefits for businesses. The advantages include:
- Transferable ownership
- Establishing retirement funds
- A lower rate of taxation
- Raising capital through stock
- Credit rating
Alternatively, corporations have disadvantages, including:
- The potential for double taxation
- High formation fees
- High legal fees
The Process of Incorporation
When establishing a corporation, the main objective is to create a legal personality separate from the owners. The corporation can be a business, nonprofit organization, sports club, or government of a new town or city. Corporations have rights and responsibilities that are protected under the law.
The process of incorporation requires filing articles of incorporation with a state office. The articles of incorporation state the purpose and intent of the company, place of business, and the number and type of stocks. The corporation normally has a distinct name, a full description, and a legal ending. The legal ending shows that it is a legal corporation. Examples include "Inc." at the end of the name, as in "Lion Cleaning Inc."
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