General Corporation: Everything You Need to Know
2. Advantages of a General Corporation
3. Disadvantages of Corporations
4. Shareholders of a General Corporation
A general corporation is a type of corporation that is commonly used for companies that plan to eventually go public.
What Is a General Corporation?
Corporations, at their essences, are legal business entities, meaning they have an individual status that is separate from their owners. General corporations are among the most common types of corporations. Typically, a business chooses this form of corporation if it is interested in making a private stock offering or plans to one day go public. General corporations have several different names:
- C corporation
- Open corporation
- Stock corporation
Forming a general corporation is also a good choice for companies that are interested in pursuing venture capital funding. General corporations are separated into three different groups, all of which play an important role in the corporation:
Thanks to the limited liability protections offered by corporations, the personal assets of directors, officers, and shareholders cannot be seized to pay for company debts. General corporations can elect Subchapter S status by meeting IRS qualifications and filing Form 2553.
There are several reasons that a company might want to form a general corporation:
- The company plans to go public in the future.
- The company wants to be able to raise capital more easily.
- The company wants the ability to buy other companies.
- The company wishes to do business on a global scale.
With a C corporation, the profits of the business are taxed separately from the profits of the owners.
Advantages of a General Corporation
The biggest benefit of structuring your company as a general corporation is protecting the assets of owners from corporate liabilities. Another advantage of a general corporation is that its lifespan can be unlimited. If an owner leaves the business, the corporation can continue operations uninterrupted.
Corporations can also easily make tax deductions for retirement plans, travel, and insurance. By selling stock, ownership of the corporation can be transferred with little difficulty. Unlike other business structures, corporations tend to have a much easier time raising capital, as they can sell bonds and stocks. A benefit of a C corporation is that the stockholders are not passed corporate taxes.
Disadvantages of Corporations
While there are several advantages of the general corporation structure, there are also drawbacks of which you need to be aware. The primary disadvantage of this type of corporation is that they can be expensive to form. Partnerships and sole proprietorships, on the other hand, can be formed without the need to cover large costs.
Another disadvantage of this corporate form is the need to follow complex regulations and rules at both the federal and state levels. Also, owners must observe corporate formalities in order to maintain their liability protections.
Shareholders of a General Corporation
In a general corporation, shareholders are not responsible for any management duties and only serve as owners of the corporation. Generally, shareholders will have one vote for each corporate share they own, giving them the ability to influence the membership of the corporation's Board of Directors.
Shareholders who own common stock will also have a say in major company decisions. A general corporation can have as many shareholders as it wishes, and each shareholder will be protected from the corporation's debts. While shareholders may hold some liability, it usually restricted to what they have invested in the corporation.
The majority shareholder is a person who owns the majority of corporate shares, giving them the ability to control the company. Majority shareholders have a number of responsibilities that do not apply to minority shareholders. A minority shareholder is a shareholder who does not own a controlling interest in the company.
Typically, minority shareholders are not responsible to the company in any way, and they have the ability to assign their votes to another person if they so choose. Minority shareholders also have the ability to sell their stock.
Shareholders of a corporation benefit from owning corporate stock in one of two ways. If a dividend is declared by the Board of Directors, shareholders can receive dividend distributions based on the amount of stock that they own. Also, the value of the shareholders' stock will grow as the company expands.
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