Legal Structure of a Business: Corporation

A corporation, unlike a sole ownership or partnership, is a legal entity that is separate and distinct from the individual owners/shareholders. This type of entity is complex, and can only be formed with the authority of the Secretary of State or the Government of your state.

Once a corporation is formed, the shareholders must apply for a Tax Identification number, as well as licenses and permits, in the name of the corporation.

There are several advantages to forming a corporation. The first one is that because the corporation and the owners are distinct, the owners are not personally liable for the debts of the corporation. It is also a more stable business structure because the corporation doesn’t end when the owners die. It is also easier to transfer ownership by selling shares of the business.

Additionally, it is not as difficult to obtain financing because lenders feel more confident in the stability of the corporation. There is depth of skills and talents, since the business can draw upon the experiences of the shareholders and directors of the corporation.

But the disadvantages can sometimes scare off business owners who might consider this type of entity. First, there is quite a bit of government control in the formation and management of the company. There are many requirements, such as holding regular meetings, and drafting minutes of those meetings. The tax filing requirements are considerably more complex than those for sole proprietorships and partnerships. There is double taxation, as the corporation pays taxes, and the shareholders pay taxes as well. Also, in many states there is a minimum tax that a corporation must pay. Additionally it is more expensive to form and manage this type of entity because of the many requirements.

In order to avoid double taxation many corporations elect to be a subchapter “S” corporation. In this case the corporation is taxed as a partnership, so the corporation itself does not pay taxes. But a subchapter “S” corporation cannot have more than 35 shareholders, nor can any of the shareholders be foreign nationals. Additionally, if the corporation offers benefits to its employees, such as health insurance and 401K programs, the shareholders often cannot participate, depending on their percentage of ownership in the company.

These are some of the advantages and disadvantages of forming a Corporation. If you are interested in this type of entity, make sure that you consult your lawyer so that she can fully explain the requirements in your state as well as at the federal level.