Non-Corporate Meaning: Everything You Need to Know
It allows for an individual or a group to operate with the best tax benefits available and choose a structure that fits their business requirements.4 min read
Knowing non-corporate meaning is important for businesses and individuals. A non-corporate status allows for an individual or a group to operate with the best tax benefits available and choose a structure that fits their business requirements. This status is preferred by non-profit corporations that are typically managed by volunteers or paid positions and operate for non-commercial purposes.
Why Non-Corporate Matters
A non-profit status allows businesses to qualify and receive funds from government agencies or private foundations. This allows capable and dedicated people to build organizations in the non-profit sector to offer a variety of services, entertainment, banking, and more. These options open the gateway for innovative alternatives to multinational corporations that dominate the marketplace.
Types of Organizations
There are many types of organizations that make up a non-corporate sector. They include:
- Mutual societies
- Employee-owned businesses
- "Community-supported" schemes
- Social enterprises/not-for-profits
- Free/open source tech
- Other complementary currencies
- Social clubs
Differences between a Corporation and a Non-Corporation
A corporation acts as a separate legal entity from shareholders who own the company. Corporations are built to utilize the same rights and responsibilities offered to individuals, including creating and entering into contracts, borrowing and loaning money, suing and being sued, hiring employees, owning assets, and paying taxes. Corporations are used worldwide to operate businesses. Legally speaking, the most important benefit of a corporation is limited liability. This may vary from jurisdiction to jurisdiction. Limited liability allows for shareholders to receive profits through dividends and/or the appreciation of stock without the issue of being held personally responsible for any company debts.
Sole proprietorship or partnerships are non-corporation businesses that have no legal separation from the business owners. Non-corporations are simpler to set up due to the lack of fees to pay or papers to file to begin operation.
Differences between corporations and non-corporations include but are not limited to:
- Shareholders, directors, and officers must be set in a specific structure.
- At least one director is required to govern the business and allocate company resources.
- Directors are responsible for choosing officers to manage the day-to-day office operations.
- Corporations have the ability to raise capital through the issuing of stocks.
- A specific structure isn't required.
- Raising capital is dependent on the owner's investment to finance operations.
- Minutes or filing reports with the state are not required.
- Financial statement preparation is not required.
Non-Corporate Shareholder and a Corporate Shareholder
The differences between corporate and non-corporate shareholder breakdown to the following simple definitions:
- Corporate Shareholder: a corporation owns shares in another corporation.
- Non-Corporate Shareholder: a person or partnership owns shares in a corporation.
In reality, the differences create tax, corporate governance, and legal issues that should be understood by investors.
Corporate shareholders have access to a greater pool of resources and have the ability to buy and own large portions of a corporation. Ownership, especially large volume ownership in a corporation, will increase voting power on important company issues. This also increases the probability of corporate shareholder participation in the governance of the company. In contrast, individual investors who lack a solid structure may not have the ability to challenge and affect the direction of the company.
Another important factor is tax-rate. When an individual is the owner of an unincorporated business, the income is taxed based on the individual's income. Assets must belong and the use must be dedicated to the non-profit corporation. Failure to comply to these specific requirements can result in the loss of tax-exempt status.
Corporate income, on the other hand, is subject to double taxation. First, it is taxed when the money is received by the company. That money is taxed again when the same company issues dividends. If a corporation receives dividend income, it is taxed at a lower rate. Some finance theorists have speculated that this has caused corporate shareholders to purchase shares of firms with large dividend payouts to receive this tax preference.
Corporate Shareholders in Practice
Finance professors Michael J. Barclay, Clifford G. Holderness, and Dennis P. Sheehan found in their 2006 study that interest by corporate shareholders interest was necessarily in high-dividend firms. They determined that joint ventures or mergers with client firms were of most interest. This approach may lead to capital gains that are taxed at a higher rate. Researchers found that when individual investors were also the largest shareholders, the dividend policy was most biased.
Need Additional Clarification?
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