A corporation is a mode of a business organization through which your business comes to be recognized as a legal entity in the eyes of the government. In the following, we’ll consider a few of the advantages of incorporating your business. Then we’ll turn to contrast these advantages with some of the most important disadvantages associated with the corporate approach. These advantages and disadvantages have to do with aspects of law, taxation, and convenience that pertain to incorporated businesses. After you read it, you’ll be in a better position to decide whether or not to transform your business into a corporate entity.
What is a Corporation?
Broadly speaking, a corporation is any group officially recognized by the government as being a distinct entity. The word derives from the Latin corpus “body”. Its meaning operates on the basis of the figurative resemblance between the synergistic functions that individuals perform within organizations and the synergistic functions that organs perform within the bodies of animals. This recognition allows for corporations to act and suffer as legal persons, such as suing or being sued in the courts, to give one example. The word “corporation” most commonly, perhaps, is used to refer to for-profit businesses that have obtained governmental recognition as independent beings.
What are the Advantages of Creating a Corporation?
Listed below are the advantages of Creating a Corporation.
- Corporations offer personal liability protection: The corporation as a whole is held responsible for its losses. This means that the individual owners of a corporation are only responsible in proportion to their share of ownership.
- Business security and long-term viability: The identity of the corporation transcends those of its owners, allowing it to exist in perpetuity.
- Capital accessibility: Corporate status allows for the sale of shares in the business on the public markets. When members of the public purchase shares, the money they pay can be used to operate the business.
- Tax benefits: Some kinds of corporate organizations provide for different modes of taxation. These can ease the tax burden of these corporations’ owners.
1. Corporations Offer Personal Liability Protection.
Another term for this is “limited liability”. The members of a corporation share financial responsibility for the corporation in proportion to their share of ownership in the business. This means that shareholders must recoup any losses that the corporation suffers only to the extent of their investment in it, including those incurred as the result of lawsuits and legal judgments. In practice, this allows for businesses that adopt the corporate model to take greater risks than those that do not adopt it.
2. Business Security and Long-term Viability
Ownership in a corporation takes the form of stock in the company, which may be bought or sold. This makes it easy to transfer ownership to and from part-owners and allows for a corporation to exist for as long as the government that bestows its recognition exists.
3. Capital Accessibility
Some corporations are registered as “publicly-owned”, which, among other things, allows for shares in these corporations to be sold on public stock exchanges. Public sales of part-ownership allow for corporations to take on public investment quickly and easily; thus they make capital accessible.
4. Tax Benefits
Some kinds of corporate organizations have associated tax benefits. For example, United States corporations that choose to be taxed under the rules laid out in Subchapter S of Chapter One of the Internal Revenue Code (1958) can distinguish between income used as “owner’s salary” and the rest of their income, with the latter category being exempt from the higher rates of tax to which the former is subject.
What are the Disadvantages of Creating a Corporation?
Listed below are the disadvantages of creating a corporation.
- Prolonged application procedure: Gaining recognition as a corporation can require a lot of effort. This is mostly because of the extensive paperwork required.
- Formalities, procedures, and structures that are rigid: Governments impose a wide variety of regulations upon corporate entities. These can make the operation of your organization more difficult.
- Corporations are subject to double taxation: Corporations are often taxed as entities. These taxes come in addition to those that governments impose upon their subjects.
- Corporations are expensive to form and operate: Alongside the paperwork, you’ll have to fill out, governments generally impose fees for the formation of corporations. Similar fees have to be paid on a regular basis in order to maintain corporate status.
1. Prolonged Application Procedure
In order to obtain recognition of your business as a corporate entity, you’ll have to fill out a lot of forms. Not only are these forms lengthy and extensive, but some will also have to be submitted to your government every year, taking up even more of your valuable time.
2. Formalities, Procedures, and Structure that are Rigid
The regulations that governments impose upon the entities it recognizes as corporate entities are onerous and restrictive. You’ll need to be aware of these stipulations and ensure that they are being adhered to within your company. These regulations may pertain to the documents your company maintains, its organizational and decision-making structure, and/or the number and character of your company’s ownership.
3. Corporations are Subject to Double Taxation
Unlike corporations that choose to be governed by the regulations outlined in Subchapter S of Chapter One of the Internal Revenue Code (1958), corporations that choose to be governed by the regulations outlined in Subchapter C of that document (“C corporations”) have their income taxed twice. C corporations’ income is first taxed at the level of the whole corporation, and then again at the level of each individual shareholder (as a percentage of profits earned). It’s not easy to avoid this double-taxation so long as your company is domiciled in the United States of America, because the Code imposes more onerous requirements upon S corporations than on C corporations, and tends to check the records of S corporations thoroughly to ensure that these requirements are being satisfied.
4. Corporations are Expensive to Form and Operate
In addition to the burden of time and effort that is required for obtaining and maintaining corporate status, the process also imposes significant financial expenses. In addition to the natural costs arising from buying tools and raw materials and hiring employees, governments impose onerous registration fees, which must be paid periodically, and extract higher rates of taxation from organizations it deigns to recognize as corporations.
How do Corporation Works?
A famous section of Aristotle’s Metaphysics is commonly summed up as meaning that “the whole is greater than the sum of its parts”:
What is the reason for unity? However, so many things have a plurality of parts and are not merely complete aggregates, but instead are some kind of a whole beyond its parts, there is some cause of it (8.6).
Corporations are legally recognized as “wholes greater than the sums of their parts”, which are taken to work in a way analogous to the way that the organic bodies of animals work. This allows them to act as legal persons, and to be judged as having legal responsibility. Thus, corporations buy, own, and sell assets, enter into contracts, and engage in legal controversies just as any natural human person would. The way in which these decisions are taken is generally governed by the laws and regulations that governments use to recognize corporate entities. Typically, a board of directors selects a head office, who fills the role of the corporation’s “mind” or “will” by making authoritative decisions that determine the direction and focus of the organization.
What are the Different Types of Corporations?
Below is the table for every type of corporation, including their definitions and distinguishing characteristics.
| C corporation | The C corporation is the most common mode of corporate organization in the United States of America. Among its distinguishing features are its unlimited number of potential owners based on purchases of stock, as well as the fact that C corporation’s income is double-taxed, at the levels of both the organization and the individual owners. |
| S Corporation | Unlike C corporations, the income of S corporations is not taxed at the organizational level (“pass-through entity”). This advantage is offset by the more restrictive requirements imposed by the USA government on this type of corporation, including limits on the number of owners, who must all be USA citizens, among other things. |
| Closed corporation | Corporations employing this mode of the organization are commonly known as “private companies” or “incorporated partnerships”. This mode of the organization still provides liability coverage to its owners, but it cannot be used to raise capital through the public sale of shares. |
| Not-for-profit corporation | Although not-for-profit corporations may still pay their employees for services rendered, they may not legally distribute profits among their owners. In exchange, not-for-profit corporations are exempted from federal and state taxes. |
Is a Corporation Profitable?
Every business exists in its own unique situation, including yours. This means that weighing the advantages and disadvantages of a corporate organization will depend upon your specific circumstances. In order to decide whether or not to file with the government in order to have your business recognized as a corporation, you’ll need to consider all the details. Once you’ve decided that registering your business as a corporation is the right decision, furthermore, you’ll need to decide which corporation is right for you. There are a lot of variables, but NumberSquad accountants are here to help you with this important decision.
