Is business incorporation right for you? As a new business, it’s worth considering whether you’ll need to register the corporation. Here you will get an overview of types of incorporations, and the advantages and disadvantages of incorporating businesses
Keep on reading to find your business structure and if a corporation is the next big thing for you.
What is a Corporation?
A corporation is a separate legal entity, and its owners are not personally liable for the corporation’s debts or business legal trouble. It can be owned by a single or multiple persons. And the owner can easily be transferred by buying or selling shares. In the eyes of law corporation is a separate legal person from its owner and liable for its debts and payments.
The shares are your evidence of ownership and define your rights incorporation. The ownership depends on the total number of shares a shareholder processes. To incorporate a corporation, you will have to follow your state laws and requirements. You can register the corporation by yourself or get a professional to seek guidance to get incorporation registered.
Now Let’s learn about corporation benefits and drawbacks with a catch about corporation types.
Do corporation benefits outweigh the drawbacks? It depends on your business setup and vision. You can decide it as you continue viewing down the expert advice and opinions.
According to US law, a corporation is a separate person from its owners. It means shareholders cannot be sued for corporation debts and liabilities. Likewise, there is a defined business structure and how the corporation will operate in its regulations and articles of association.
If a corporation gets sued or faces bankruptcy, then the shareholders lose only the capital invested in the corporation. It means you cannot be held the person liable to pay any debts and liabilities from his personal belongings. Limited liability protection is the major and most appealing reason for businesses to get incorporated.
Get more Capital for Business
If you incorporate a public corporation, you can list your business on the stock exchange. It will assist to sell shares and raise more capital for business growth. It’s a lucrative luxury that other companies don’t owe. It’s also helpful for corporations going bankrupt.
As a registered corporation, you have a separate tax schedule and regulations. It’s helpful for tax optimization. Subject to the corporation type, you can get tax advantages like for S corporations. At the same time, you can also get double taxed like C corporations.
In a private corporation, you can transfer ownership to anyone subject to the approval of other shareholders to avoid conflicts. Meanwhile, as a public corporation, you can easily transfer ownership by selling your shares to anyone.
Unlike partnerships that end with a partner’s death, the corporation continues. As a separate legal entity, if an owner passes away, the ownership of the shares is transferred to their successors. It will continue to pass until owners decide to finish the corporation legally.
Corporations have separate ownership and management. It means as an owner; you don’t need to run the business. There are defined regulations and rules on how they will be operated.
What are the Disadvantages of forming a Corporation?
With such convincing benefits, there are a few corporation drawbacks that you shall keep in mind before deciding. Now it’s to analyze the corporation disadvantages:
The process of incorporation is lengthy and requires certain approvals at each stage. You will have to follow all laws while going through the lengthy paperwork and documentation details. To ensure everything is in the right place.
If you are familiar with all processes, you can get it done easily. Or the other option is to hire a professional to form a corporation.
Many types of corporations have to pay double taxes. Firstly, a corporation pays the income tax and then the shareholders. With the S corporation type, you don’t have to pay double taxes.
It is because the taxation is done only at the shareholder level. Or you can get a professional for tax optimization.
Corporations come with strict compliance and regulations. As a private corporation, there are a few regulations, but as public, they increase tremendously. If you don’t comply with regulations, you can get penalized. With good administration, you can easily follow our regulations, but it will increase your cost.
Forming and operating corporations is expensive. It’s easier to buy and sell shares but forming a corporation is a completely different thing. You have to follow regulations, pay registration prices, get all documentation following all laws to get your corporation registered.
With other aspects, while operating as a corporation, you have to adhere to all regulations and formalities. You have to maintain records, finances, annual meetings, directors on board, and much more. For public corporations, these protocols and regulations are a lot more. There are also restrictions for each, as a maximum of only 100 US citizens can be shareholders in S corporations.
Corporations have separate management from shareholders. If the majority shareholders don’t engage in the corporation’s performance, the management team can fraud. An incompetent management team can also ruin the corporation.
With an overview of all the advantages and disadvantages of a corporation, it’s time to move on to the next step. Which type of corporation is right for your business? Every single corporation has a different structure and different types of shareholders. Here’s a look at the different types of corporations and what each one means.
A close corporation, also known as a private company, is owned by a few partners. It is also famous for family incorporation and incorporated partnership. Shares of these corporations are privately owned and controlled, which can make it difficult to raise capital.
However, the owners still have the benefit of limited personal liability. With it, they are flexible and free of most reporting requirements, regulations, and shareholder pressure.
Here’s a quick overview of Closed corporation benefits and drawbacks.
Pros of Close Corporation
- Low operational cost
- Less SEC regulations and requirements
- Limited Liability and Separate legal entity
Cons of Close Corporation
- Limited options to raise capital
- Limitations to transfer shares
- Double taxations unless getting S-corp status
S corporations are corporations that meet certain Internal Revenue Code (IRC) requirements. In an S corporation, you can pass income to the shareholders without paying federal corporate taxes. With normal corporation benefits, the best advantage of an S corporation is a tax-exempt privilege.
S Corp shareholders report income and losses on individual tax returns. Similarly, the taxes are getting paid at ordinary tax rates. However, all members of these corporations must have US citizenship.
The C Corporation (C-Corp) is a legal entity with unlimited shareholders and is taxed as a separate entity on income. Their shareholders also have to pay an individual tax on dividends. The C corp ownership is divided into stocks that are easily purchased or sold. C corporations have the option to raise capital by selling stocks of their own.
The annual meeting is essential in C corporations where the board of directors is selected by shareholders voting. The shareholder’s liability is also limited to the amount they have invested.
Certified Benefit corporation is a profit-making business structured to provide benefits to society. B Corps are a new business kind operating to create a balance in profit and purpose.
Legally it’s their responsibility to consider their decision’s impact on the environment, customers, suppliers, and workers. It isn’t easy to get registered as a B corporation. Even when registered, you still have to maintain your S corporation or C corporation tax status.
A Non Profit corporation is a legal entity that primarily exists for the benefit of society. It is made for “religious” and “charitable” purposes. It has many strict incorporation regulations in certain states. Non-profits have special tax benefits, including the status of tax exemption.
The Non Profit status is given only to corporations that meet all necessary requirements and qualifications. With it, they don’t pay any dividend or profit to the shareholders or owners. Non-profits are typically subject to the same employment taxes and workplace rules as for-profits. They also have to abide by the state and federal tax rules. Normally business owners make Non-Profit organizations for charity and society benefits.
A good corporation will have advantages and disadvantages to help you make your business run. Also, not to mention tax deductions! It’s important to choose the best type of corporation for your business. Different types of corporations can be a good option for a variety of business needs.
You can always consult a business advisor for assistance. Now, if you want to incorporate, there’s lots of good information out there waiting for you.
Matthew is a Co-Founder at BusinessFinanceArticles.org. Matthew was a floor manager at a local restaurant in Wales. He lost his job after the pandemic and took initiative to make a team and start the project.