Other Advantages of Organizing as a Corporate Entity
Some of advantages include the option to sell shares of stock to raise capital, tax benefits, and reduced risk for the owner(s) of the business.3 min read
What are other advantages of organizing as a corporate entity? Some of the advantages include the option to sell shares of stock to raise capital, tax benefits, and reduced risk for the owner(s) of the business.
The Corporate Form of Organization
A corporation is a legal business entity that has been formed under the laws of the state in which it will operate. Corporations have investors who buy shares of stock to show their ownership in the business. This legal entity exists separately and distinctly from its owners, who are referred to as the stockholders or shareholders.
A corporation is an artificial being that only exists under the contemplation of the law. When one or more individuals go through the process of incorporation, the first step is filing the articles of incorporation with the secretary of state's office in the state where the business will operate. Upon filing the articles of incorporation, the corporation is created. This document will outline the specific aspects of the business entity, including how it will be governed and structured, as well as its purpose.
The Secretary of State will review the articles of incorporation. Upon approval, the business will receive a certificate of incorporation, also called a charter, that authorizes the legal existence of the corporation. Those who file the articles of incorporation will then be responsible for collecting the initial investments from the shareholders. After collecting the investment, the business owners can issue shares of stock to the shareholders, which is evidence of the ownership interest in the corporation.
After issuing the initial stock, the next step is meeting with the shareholders. During this meeting, the shareholders should choose the members of the board of directors and adopt corporation bylaws. The board of directors is responsible for appointing the officers who will take care of the daily business operations. In small companies or start-up ventures, the incorporators may be the only shareholders. These incorporators may also serve as the members of the board of directors and become the officers of the business.
Which Structure Is Best for Your Business?
When starting a business, you will need to decide which formation is best for the needs of the company. Business entity options include:
- Sole proprietorship
Choosing the right formation depends on your expectations, preferences, and situation, as well as how you want the business to grow.
There are two forms of corporations: S corporation and C corporation. Each has its own advantages and disadvantages. The most common form of incorporation is the C corporation, which is a separate entity that exits legally and is owned by its shareholders. Many of the publicly traded, larger corporations are formed as C corporations. Although C corporations are more common, S corporations offer several additional advantages, including an improved tax structure for the shareholders.
Advantages of a Corporate Structure
One of the advantages of structuring your business as a corporation is limited liability. The owners aren't personally liable for the business debts or legal action taken against the corporation. Instead, they are only liable for the amount they invested. Forming a corporation provides a shield against personal liability.
Corporations exist separately from their shareholders and owners. If a corporation is sued or has outstanding debts, A corporation is an entirely separate legal entity from its owners and shareholders. That means that in situations such as the company being sued or the corporation owing debts, neither the shareholders nor the owners will be personally held liable or responsible. However, some exceptions do exist. For example, a shareholder might have to sign a guaranty to take on corporate debt.
Shareholders in smaller companies may also be held responsible for corporate debt if their personal and business finances are mixed. If the owners of the business don't follow the legal requirements to keep the corporation in good standing, they could become liable for business debt or legal action as well.
A limited liability corporation, or LLC, is another option for business formation. This unique structure is legally authorized under state statutes. When you form an LLC, you must elect for treatment as a partnership, corporation, or individual for taxation. The option you choose may offer protection to the LLC owners, called members, from legal action or company debt.
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