Corporation

Most businesses are formed as corporations, authorized to act as separate legal entities and protected by the law of their country’s jurisdiction.

What is a corporation?

A corporation is a separate legal entity created by individuals, stockholders, or shareholders, with the purpose of operating for profit. The creation involves a legal process called incorporation where legal documents, containing the primary purpose of the business, name and location, and the number of shares and types of stock issued, are drafted. This process gives the corporation a distinct feature that dismisses its owners from being personally liable in the event of a lawsuit or legal claim.

What are the Common Types of Corporation?

A corporation can be created by issuing stocks and operating business for profit or by not issuing stocks and operating business for no profit. Some overlaps between or among them exist, but a stock corporation is likely for profit and a non-stock corporation is likely not-for profit.

  • C Corporation – this is the most common among businesses and contains almost all of the attributes of a corporation. Owners receive profits and are only taxed at the individual level, while the corporation itself is taxed like a sole proprietorship.
  • S Corporation – this is created in the same way as a C Corporation but is different in owner limitation and tax purposes. An S Corporation consists of up to 100 shareholders and is not taxed as separate, but instead the profits/losses are shouldered by the shareholders on their personal income tax returns.
  • Non-Profit Corporation – commonly used by charitable, educational, and religious organizations to operate without generating profits. This type of corporation is exempt from taxation and any contributions, donations, or revenue received are retained in the entity to spend for expansion or future plans.

What are the Advantages and Disadvantages of a Corporation?

Advantages

  • Separate legal entity – independent from its owners and considered a legal person who may conduct business, own properties, enter into binding contracts, borrow money, sue and be sued, and pay taxes.
  • Unlimited life – stockholders, shareholders or members are the owners of a corporation and it is managed by a board of directors. Their death or inability to perform their duties does not affect the continuity of this legal entity; only changes in a corporation’s charter will enable it to either be extended or liquidated.
  • Limited liability – company owners are only liable for the amount they invested. Creditors and lenders have no claim to the owners’ personal assets for payments owed by the corporation.
  • Easy transfer of ownership shares – publicly held corporations do not require approval from other stockholders to sell the stocks or shares of individual owners. Stocks or shares can be easily traded in the market, regardless of their volume.
  • Competent management – investors or owners may not directly handle day-to-day business operations. They vote for the Board of Directors who eventually hire a professional management team.
  • Source of capital – corporations can source funds from selling stocks and issuing bonds.

Disadvantages

  • Incorporation costs – it is costlier to form a corporation than a sole proprietorship and partnership.
  • Double taxation – two taxes are remitted from the corporate earnings and payments of dividends to shareholders.
  • Documentation – aside from incorporation documents, corporations must file annual reports and tax returns as well as maintain accounting records, licenses, and other important documents.

How Does a Corporation Dissolve?

The life of a corporate entity lasts until there is a change in its charter or the purpose of its existence has reached its peak. A process called liquidation will serve the transition, facilitated by a liquidator. The corporate assets will be sold and the proceeds will first go to creditors to pay off debt, then whatever remains will be given to shareholders. Involuntary liquidation is usually triggered by creditors of an insolvent or bankrupt corporation.

More information

To learn about more important corporate finance topics you may find these articles useful:

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