What is a Corporation?
A corporation is a 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.
The process of incorporation gives the business entity a distinct feature that protects its owners from being personally liable in the event of a lawsuit or legal claim.
To learn more about the process of incorporation in the United States, visit: https://www.usa-corporate.com/
What are the Common Types of Corporation?
A corporation can be created by issuing ownership shares and operating a business for profit, or by not issuing shares but with a membership structure instead and operating as a non-profit business. Some overlaps between or among them exist, but a stock corporation is likely for profit and a non-stock corporation is likely a not-for-profit.
The three main types of business incorporations are:
#1 C Corporation
C Corporation is the most common form of incorporation among businesses and contains almost all of the attributes of a corporation. Owners receive profits and are taxed at the individual level, while the corporation itself is taxed as a business entity.
#2 S Corporation
S Corporation 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 – instead, the profits/losses are shouldered by the shareholders on their personal income tax returns.
#3 Non Profit Corporation
Commonly used by charitable, educational, and religious organizations to operate without generating profits. A non-profit is exempt from taxation. Any contributions, donations, or revenue received are retained in the entity to spend on operations, expansion, or future plans.
What are the Advantages and Disadvantages of Incorporation?
- Separate legal entity – Independent from its owners and considered a legal entity that 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 the company’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 shareholders.
- 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.
- Incorporation costs – It is costlier to go through the process of incorporation than to form a sole proprietorship or partnership.
- Double taxation – Two taxes are remitted, from the corporate earnings and from payments of dividends to shareholders.
- Documentation – Aside from incorporation documents, companies 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. Whatever remains will be given to shareholders. Involuntary liquidation is usually triggered by creditors of an insolvent or bankrupt company.
CFI’s mission is to help you advance your career and become a great financial analyst. In helping you with that mission, these additional resources will be helpful: