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Your Guide to Corporate Structures

People considering startups have multiple ways to go about them. Understanding the differences between business types is essential to making the decision that suits you the best. You can read more about corporations vs LLCs and franchise vs corporate structures to find out more.

If you are interested in implementing a corporate structure, read on to comprehend the details of what corporations exactly are and what are the pros and cons associated with them.

What Are Corporations?

A corporation is a business recognized as a legal entity distinct from its owners, it can enter litigation without its owners facing personal liabilities. This structure can be owned by one or more shareholders, and ownership is transferred through buying and selling stock.

The shareholders have to elect a board of directors to govern the business structure before a corporation can begin operating. The board of directors then manages the daily activities of the company and makes decisions and policies that have an organization-wide impact.

Types of Corporations

A few main types of corporations are listed down below:

1.  C Corporations

C Corps can be owned by an unlimited number of shareholders. Owners and the corporation are both taxed individually in this type of structure.

2.  S Corporations

S Corps can have a maximum of a hundred shareholders. They are not taxed separately unless they have passive income incoming from an outside source, such as an investment in a C Corp. Instead, the profits and losses are reported and taxed separately in owners’ income tax return statements.

3.  Non-Profit Corporations

The structure of non-profit corporations is similar to for-profit corporations, except that they are exempt from taxes. They are permitted to receive external funding from various sources and any revenue generated or donations received are used by the entity in operations, expansion, etc.

4.  Closed Corporations

A closed corporation, or a private company, is held by a few shareholders. Shares for such corporations are not bought or sold externally. Closed corporations are taxed as C corps unless the shareholders seek an S corporation status from the IRS.

Advantages of Incorporated Business Structures

Corporations are popular business structures because they offer numerous benefits:

1.  Limited Liability

Limited liability is undoubtedly one of the greatest benefits of incorporated business structures. Under this legal status, the personal assets of shareholders are protected in case of liabilities. For example, in the case of corporate debt, the shareholders of the company shall not be held personally accountable and their assets will be secure even if the corporation does not have the means to pay the debt off by itself. Limited liability is among the key reasons behind corporations finding investors easily.

2.  Availability of Capital

Corporations can quickly sell shares, issue bonds, and build credit to raise capital. Most corporations can transfer ownership through publicly trading stock, allowing them to raise funds swiftly when required. No other type of business has access to this benefit. It allows corporations to grow easily and saves them from bankruptcy.

3.  Tax Benefits

Income tax rates are lower for corporations than individuals. In the case of S Corps, income can be split between shareholders and the business. This lets it be taxed at different rates. Only the income designated as the owner’s salary will be subject to self-employment tax.

4.  Easy Transferability of Ownership

Unlike a sole proprietorship, ownership of all corporate structures can be transferred easily by exchanging assets for stock.

5.  Perpetual Life

As the corporation is not tied to specific owners, it can live on indefinitely through generations of investors until it is dissolved.

Disadvantages of Incorporated Business Structures

Like all other structures, corporations come with their own set of cons:

1.  Double Taxation

The C Corp structure requires the corporation to pay taxes on its income and then the shareholders to pay taxes on the dividends received.

2.  Costly Operations

A hefty amount of capital is required to form and maintain corporations, and the filing charges, fees, and larger taxes do not amount to a negligible sum either. Though shares can be sold to raise funds as the corporation establishes itself, a considerable amount of capital is needed in the startup process.

3.  Conflict of Interests

If there are a lot of investors in a corporation and the interest of the majority is not apparent, the management team can operate the business without any insight from the owners.

Endnote

Incorporation offers many advantages to its owners, especially those who want to build a formal business structure. However, any benefits and drawbacks of incorporation can hold different weights for individuals. If you are planning to start a business, getting legal advice should be your next step to determine if corporations are right for you.

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