When considering the best way to structure your corporation, you must understand the key advantages, disadvantages and different types of corporations available. A corporation by definition is a legal structure in which the business is considered as an individual entity. In addition, the ownership of the corporation is through units of stock, and the owners are commonly called shareholders or stockholders. A corporation can offer units of stock to individual investors in exchange for money. The money raised from selling stock is then used to provide capital to the business. Units of stock can be offered privately to a select group of individual investors (for example, family members and close friends) or it can be offered to the general public.
Advantages of a Corporation
Owners of corporations are granted with limited liability, so they only risk the money that has been invested in the corporation. Their personal assets are not at risk, nor are they considered as the assets of the business. This corporate concept of liability is in direct contrast to the liability structure of the sole proprietorship.
The lifespan of a corporation can greatly extend the lifespan of the original owners or founders. A corporation can last for many generations and often having a long-lasting legacy is the mark of a great corporation. Many of the best businesses have been in existence for many decades, and meeting the mark of a century for a corporation is a great achievement.
Management of the corporation is not tied to the owner, but instead relegated to the board of directors. Usually the board of directors will employ corporate officers who then make up the C-Suite of positions. The C-Suite is usually led by the Chief Executive Officer, who is helped by Marketing, Finance, Technology and other experts who may make up the rest of the C-Suite.
Disadvantages of a Corporation
Corporations are more difficult to maintain and cost-intensive to set up than other business structures. Corporations are set up and regulated under each state, so there may be different regulations that must be followed depending on the state where the business is located. There are very specific procedures for keeping records and conducting share sales. Also, corporations are taxed twice in the sense that the corporation pays taxes on the profit that is earned, and the shareholders pay personal taxes on the dividends received from the corporation.
C-Corporation Business Ownership Structure
Most corporations are C-Corporations, which are taxed as an individual entity by the federal government. Some areas in the United States also require the corporation to have a standing board of directors. The board must have one or more people responsible for making the final decisions about the business, which is usually the founder of the business along with other key shareholders.
S-Corporation Business Ownership Structure
An S-Corporation is different than a C-Corporation in that it is not taxed as an entity. Instead an S-Corporation has the income or loss of the company applied to each shareholder, and the financial details of the company appear on their tax returns. In this manner, the S-Corporation is not taxed twice, so there is a benefit. The drawbacks of an S-Corporation are the increased complexity in setting one up, and the expense and restrictions of maintaining one.
Limited Liability Corporation Business Ownership Structure
A limited liability company is similar to a C-Corporation, but with more simple operational and tax requirements. There is also a greater protection for the owners in terms of their personal liability. Limited liability companies bring together the liability benefits of a corporation with the business tax benefits of a partnership sole proprietorship.
Nonprofit Corporation Business Ownership Structure
Another classification of corporation is a nonprofit corporation. The nonprofit corporation exists to serve the good of society rather than to provide profit for the shareholders. Any profit obtained is used to further the mission of the nonprofit corporation, and owners of nonprofit corporations also have the benefit of limited liability. Most nonprofit corporations obtain funding through donations and earn the bulk of their income from fundraisers.
Cooperative Business Ownership Structure
Cooperatives are not a very common business structure in the United States. Legally defined cooperatives are companies that are controlled, operated and owned by the members. Members are individuals that use the services or buy the goods of the company. Members can also be individuals who are employed by the cooperative. Cooperatives will sometimes be organized operationally as a business, and will share the earnings of the cooperative with the individual members as a payment of dividends.
There are numerous options to structuring a corporation, each with their own set of advantages and disadvantages. While some are more popular than others, it is important to understand the differences to ensure you are selecting the structure that is right for your business entity. If you currently own a corporation or are looking to start a corporation, be sure that you understand the applicable considerations of the structure.