CORPORATION FORM OF OWNERSHIP

The simple definition of a corporation is a legal business entity that exchanges ownership of a
company, also known as stock, through shares.
Whether private or public, a corporation has investors and it must operate in the best interest of those
investors at all times. Thus, a corporation is a group of people collectively serving as one legal entity
and pursuing one goal: to generate the highest net return for its shareholders.

ADVANTAGES
The corporate structure allows companies to merge financial and human resources into enterprises
with great potential for growth and profits:

 Limited liability. A key advantage of corporations is that they are separate legal entities that exist
apart from their owners. Owners’ (stockholders’) liability for the obligations of the firm is limited to
the amount of the stock they own. If the corporation goes bankrupt, creditors can look only to the
assets of the corporation for payment.
 Ease of transferring ownership. Stockholders of public corporations can sell their shares at any
time without affecting the status of the corporation.
 Unlimited life. The life of a corporation is unlimited. Although corporate charters specify a life
term, they also include rules for renewal. Because the corporation is an entity separate from its
owners, the death or withdrawal of an owner does not affect its existence, unlike a sole
proprietorship or partnership.
 Tax deductions. Corporations are allowed certain tax deductions, such as operating expenses,
which reduces their taxable income.
 Ability to attract financing. Corporations can raise money by selling new shares of stock.
Dividing ownership into smaller units makes it affordable to more investors, who can purchase
one or several thousand shares. The large size and stability of corporations also helps them get
bank financing. All these financial resources allow corporations to invest in facilities and human
resources and expand beyond the scope of sole proprietorships or partnerships. It would be
impossible for a sole proprietorship or partnership to make automobiles, provide nationwide
telecommunications, or build oil or chemical refineries.
DISADVANTAGES

Lengthy application process

Filing your articles of incorporation with your secretary of state can be quick, but the overall
process of incorporating is often a long one. You will likely have to go through extensive
paperwork to properly determine and document the details of the organization and its ownership.
For example, Sweeney said you need to draft and maintain corporate bylaws, appoint a board of
directors, create a shareholders ownership change agreement, issue stock certificates, and take
minutes during meetings.

Rigid formalities, protocols and structure

Alongside the lengthy application process is the amount of time and energy necessary to properly
maintain a corporation and adhere to legal requirements. You have to follow many formalities and
heavy regulations to maintain your corporation status. For example, you need to follow your
bylaws, maintain a board of directors, hold annual meetings, keep board minutes and create
annual reports. There are also restrictions on certain corporation types (for example, S-corps can
only have up to 100 shareholders, who must all be U.S. citizens).

Double taxation

Most corporations (like C-corps) face double taxation, which means that the business income is
taxed at the entity level as well as the shareholder level (based on their percentage of profits
earned). The only way around this is to operate as an S corporation. S-corps eliminate this
problem by only taxing each shareholder on their individual income, not at the entity level.
However, the IRS has been known to pay closer attention to S-corps and even tax them as C-
corps if their records fail to meet the legal requirements.

Expensive

Corporations are expensive to form and operate. It might be easy for established corporations to
raise capital by selling shares, but forming and maintaining a corporation can be costly. You will
likely need a lot of startup capital to get a corporation running, in addition to paying the filing
charges, ongoing fees and larger taxes. When weighing the pros and cons to determine whether a
corporation is the right legal structure for your business, consult an attorney and an accountant
who are well versed in the implications of creating a corporation.

What types of corporations are there?

There are several types of corporations, including C corporations, S corporations, B corporations,
closed corporations and nonprofit corporations. Each has it benefits and disadvantages. Some
alternatives to corporations are sole proprietorships, partnerships, LLCs and cooperatives.

C corporation

As one of the most common types of corporations, a C corporation (C-corp) can have an unlimited
number of shareholders and is taxed on its income as a separate entity. C-corp shareholders are
also taxed on the dividends they receive from the company, and they receive personal liability
protection from business debts and litigation. Ownership for this type of corporation is divided
based on stocks, which can be easily bought or sold. A C-corp can raise capital by selling shares
of stock, making this a common business entity type for large companies.
S corporation

S corporations (S-corps) are similar to C-corps in that the owners have limited personal liability;
however, they avoid the issue of double taxation. An S-corp is considered a pass-through entity,
meaning its income, losses, credits, and deductions can be passed on to the shareholders to be
reported and taxed on their individual tax returns instead of the company being taxed as a
separate entity. All S-corp shareholders must be U.S. citizens.

“In order to qualify as an S corporation, the corporation must meet several requirements, including
not having partnerships, nonresident aliens, or other corporations as shareholders; having no
more than 100 shareholders; and only having one class of stock,” said Almes.

B corporation

A certified benefit corporation, also known as a B corporation or B-corp, is a for-profit business

structured to benefit society. This relatively new type of corporation is essentially a seal of
approval for S corporations and C corporations, certifying that they are dedicated (and legally
committed) to improving the environment and society. To become a B corporation, you need to
meet rigorous criteria, like scoring an 80 or above on the B Impact Assessment, publicly reporting
your scores on BCorporation.net, and making a legal commitment to consider your organization’s
stakeholders. As a B-corp, you will still maintain your C-corp or S-corp tax status.

Closed corporation

A closed corporation – also known as a private company, family corporation or incorporated

partnership – is a privately held company owned by a few shareholders. Shares for these
corporations are not publicly traded, which can make it difficult to raise capital for them; however,
the owners still have the benefit of limited personal liability.

Nonprofit corporation

Business owners can form a nonprofit corporation for religious, charitable, political, educational,
literary, scientific, social or benevolent purposes. Certain states may have stricter requirements for
nonprofit corporations. Almes said the main characteristic of a nonprofit corporation is that it is
prohibited from distributing profits to members, directors or officers; however, this does not
preclude nonprofit corporations from paying wages or reasonable compensation for services
rendered.

Nonprofits have specific tax advantages, including the ability to file for nonprofit tax-exempt status
with the state and federal governments.

“Typically, most nonprofit corporations choose 501(c)(3) tax-exempt status, which exempts
qualifying nonprofit corporations from having to pay federal and state taxes because the nonprofit
corporation is pursuing a nonprofit mission,” said Sweeney.