The corporation is one of the most complex of the four business structures. Here we will discuss only the general characteristics of the corporation, not its intricacies. Keep in mind, a corporation is a distinct legal entity, distinct from the individuals who own it.
Formation of the Corporation
A corporation usually is formed by the authority of a state government. Corporations which do business in more than one state must comply with the Federal laws regarding interstate commerce and with the state laws, which may vary considerably.
To form a corporation one must first subscribe for capital stock and create a tentative organization. Then, approval must be obtained from the Secretary of State in the state in which the corporation is to be formed. This approval is in the form of a charter for the corporation, stating the powers and limitations of the particular enterprise.
Advantages of the Corporation:
- Limitations of the stockholder's liability to a fixed amount of investment.
- Ownership is readily transferable.
- Separate legal existence.
- Stability and relative permanence of existence. For example, in the case of illness, death, or other cause for loss of a principal (officer or owner), the corporation continues to exist and do business.
- Relative ease of securing capital in large amounts and from many investors. Capital may be acquired through the issuance of stock and long term bonds. Long term financing can be secured with relative ease by taking advantage of corporate assets and often personal assets of stockholders and principals of guarantors. (Lenders very often require personal guarantees.)
- Delegated authority. Centralized control is secured when owners delegate authority to hired managers, although they are often one and the same.
- The ability of the corporation to draw on the expertise and skills of more than one individual.
Disadvantages of the Corporation:
- Activities limited by the charter and by various laws. However, some states do allow very broad charters.
- Manipulation. Minority stockholders are sometimes exploited.
- Extensive government regulations and required local, state, and federal reports.
- Less incentive if manager does not share in profits.
- Double tax - income tax on corporate net income (profit) and on individual salary and dividends.
You should be aware of the possibility of selecting subchapter S status. The purpose of an "S" corporation is to permit a "small business corporation" to have its income taxed to the shareholders as if the corporation were a partnership. One objective is to overcome the double tax feature of our system of taxing corporate income and stock. An S corporation is still a separate entity apart from its owners, giving them limits on their responsibilities to the business, but it is taxed like a partnership. This means money that is taken out is reported on your income tax return and the business itself pays no income tax.