(Quick Note: Before forming a corporation, we highly recommend brushing up on the basics of what it means to have one. Scroll down for our savvy breakdown of its advantages and disadvantages.)
Okay, so things can get rather complex quick when trying to be specific in identifying what a corporation is, can be, and how it’s viewed/treated under U.S. law. In the content that follows our goal’s to address more common concerns of average folks interested in founding their own, or in switching from another business entity into a conventional corporation.
For simplicity’s sake, here are the core characteristics of a corporation:
There are two formal types of corporations, but keep in mind it can be far more complex (especially if/when you talk to a lawyer). Where they differ primarily is in taxation and corporate ownership, but some similarities include:
C-Corporation: The most common form of a corporation, unlimited growth, unlimited shareholders, sells stock, better access to funding, double taxation (but can deduct business expenses), no restriction on ownership, etc.
S-Corporation: Typically for smaller platforms, 100 shareholder limit, pass-through taxation (no double-taxation, instead taxation passes through corp to owners who file individually), ownership restrictions – can’t be owned by a c-corp, another s-corp, an LLC/Partnership, or many trusts.
This is arguably another big bonus (these days) to owning a corporation, but again, it’s complex (and somewhat controversial) so let’s begin with a great snippet from the Wikipedia page:
“In this view, treating corporations as “persons” is a convenient legal fiction which allows corporations to sue and to be sued, provides a single entity for easier taxation and regulation, simplifies complex transactions that would otherwise involve, in the case of large corporations, thousands of people, and protects the individual rights of the shareholders as well as the right of association.”
In other words, corporation and tax laws view the corporation as a legal “person” that can enter into contracts, incur debts, and pay taxes apart from its owners. Pretty neat, right? So make no mistake, on paper, when you form a corporation it is actually in the eyes of the law quite similar to giving birth to a human being!
Oh, there are so many, but we’re going to streamline all of them down into the core-five that are easy to understand.
Limited Liability Protection: This means owners and shareholders enjoy “limited” liability protection so they aren’t personally responsible for debts or being sued. The corporation is. However, this protection can be taken away very easily if there’s been unethical, illegal, or irresponsible behavior.
Unlimited Capital Generation: Corporations can generate and issue stock, so their ability to raise capital is unlimited far beyond that of much smaller organizations and business entities.
Corporate Taxation Benefits: Because corporations are separate from their owners, they pay taxes separately. Owners only have to pay taxes on profits paid (salaries, bonuses, and dividends), then everything else is filed under the corporate tax rate which is often going to be better than individual income tax rates.
Attractive to Potential Employees/Investors: Because of their growth and income potential (stock options), as well as certain taxation benefits, it’s typically going to be much easier for a corporation to attract talent and acquire investor funds.
Management: Corporations are known for more dependable management and structure thanks to the formalities of maintaining a board of directors, elected officers and committees, bylaws, articles, minutes of meeting, etc.
Now, if we had to narrow down the field of disadvantages into three, this is how we would wrap them up but keep in mind these aren’t disadvantageous 100% of the time in all circumstances.
Resource Demands: Unlike an LLC or partnership, corporations can cost a fair amount in terms of both man-hours and money. It takes time to go through all the motions, assemble a board, set up the bylaws, and everything else involved initially and over time.
Double-Taxation: First when the company makes a profit, and again when dividends are paid to shareholders. Although every American is aware just how many loopholes there are in the tax code for corporations!
Formalities & Paperwork: Corporations are highly regulated entities on all levels – federal, state, and sometimes locally – so that’s also a lot more paperwork, documents to be filed, forms, recordkeeping burdens, etc.
An odd question, though common nonetheless. But this needs to be said:
There’s a smorgasbord of expenses and formalities to consider and founders can get in trouble quick if they don’t have some help or know what they’re doing. If all you’re trying to do is set up a business entity for limited liability protection, consider other less complex options like an LLC. That being said, here are some realistic situations in which forming a corporation might be a better idea.
Absolutely, Startup Savant has a TON to offer just about anyone interested in starting their own business venture and learning how to form a corporation.