A corporation is a separate legal entity from its owners, known as shareholders. This means that the corporation has the right to enter into contracts, incur debt, and own assets in its own name.
Shareholders of a corporation have limited liability, which means that they are not personally responsible for the debts or obligations of the corporation beyond their investment in the corporation. This can provide a layer of protection for the personal assets of the shareholders.
Potential Benefits of Forming a Corporation
There are several potential benefits to forming a corporation:
- Limited liability: One of the main advantages of forming a corporation is that it offers limited liability protection to its owners, known as shareholders. This means that the personal assets of the shareholders are generally not at risk if the corporation is sued or incurs debt.
- Transferability of ownership: Shares of a corporation can be bought and sold, which makes it easier to transfer ownership of the corporation to new shareholders. This can be useful for businesses that want to raise capital or sell the business.
- Perpetual existence: A corporation has perpetual existence, which means that it continues to exist even if the shareholders change or the business is sold. This can make it easier for businesses to plan for the long term and to transition ownership without disrupting the operations of the business.
- Separation of management and ownership: In a corporation, the management of the business is typically separate from the ownership of the business. This can make it easier to attract and retain talented managers and can also provide a clear separation of duties and responsibilities.
- Ability to raise capital: Corporations have the ability to raise capital by issuing shares of stock and selling them to investors. This can provide a significant source of funding for the business.
- Professional image: Corporations may be perceived as more professional and credible than other business structures, which can be beneficial for businesses that want to attract customers and partners.
Potential Drawbacks of a Corporation
There are several potential drawbacks to consider when forming a corporation:
- Complexity: Forming and operating a corporation can be complex and may require a significant amount of time and resources. You will need to follow specific rules and requirements, such as holding annual shareholder meetings and preparing and filing annual reports.
- Cost: Forming a corporation can be more expensive than other business structures, due to the need to draft and file articles of incorporation, hold organizational meetings, and issue shares of stock.
- Double taxation: Corporations are subject to corporate income tax on their profits, and shareholders may also be taxed on any dividends they receive. This can result in double taxation, which can reduce the overall profitability of the corporation.
- Loss of control: As a shareholder in a corporation, you will have limited control over the management and decision-making of the business. This can be frustrating for business owners who are used to having complete control over their business.
- Lack of flexibility: The corporate structure can be inflexible and may not be suitable for businesses that want to have a more informal or collaborative management style.
- Complex management structure: The management structure of a corporation can be complex, with multiple layers of management and decision-making. This can make it more challenging to make quick decisions and may require more time and resources to manage.
Since following corporate formalities is usually a deal breaker for most businesses, it’s helpful to consider how to comply wtih corporate formalities. Here are some tips that give you a sense of how to follow corporate formalities as a corporation:
- Hold annual shareholder meetings: Corporations are typically required to hold annual shareholder meetings to discuss the business and financial performance of the corporation and to vote on major decisions. It’s important to follow the rules and procedures for holding shareholder meetings as outlined in the corporate bylaws and applicable state laws.
- Appoint directors and officers: Corporations are required to appoint a board of directors and officers to manage the business. It’s important to follow the rules and procedures for appointing directors and officers as outlined in the corporate bylaws and applicable state laws.
- Keep detailed records: Corporations are required to keep detailed records of their activities, including financial records, minutes of shareholder and board meetings, and any other relevant documents. It’s important to maintain accurate and complete records to ensure compliance with legal requirements and to provide transparency to shareholders and other stakeholders.
- File annual reports: Corporations are typically required to file annual reports with the appropriate state agency, such as the secretary of state. The annual report should include information on the business and financial performance of the corporation, as well as any other required information.
- Comply with corporate governance requirements: Corporations are required to follow certain corporate governance rules and practices, such as adopting and following a code of ethics, implementing internal controls, and complying with any other relevant laws and regulations.
Those who cannot commit to this type of compliance may want to consider a limited liability company instead.
It’s important to carefully consider the potential benefits and drawbacks of forming a corporation before making a decision. Give us a call to get more information and advice on the suitability of a corporate structure for your situation.