While forming a business there are several things that you need to consider, such as target market, capital, and location. Moreover, apart from these, an inspiring entrepreneur needs to make some important decisions. What business form do you have any idea in your mind?
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Do You Know What Is Meant by a Corporation?
You can simply have three choices, such as single Proprietorship, partnership, and the last one is a corporation. Another important question that arises in your mind is what is meant by a corporation?
In general, a corporation is a business entity that is entirely independent of the owners. It is a legal entity that sells parts of itself to its owner through stocks or shares for the contribution of the current share price.
To form a corporation, you need to consider both pros and cons of a corporation as a business entity. If we talk about the advantages of corporations, it is a legal entity in itself with its taxation, liability, and ability to exist in perpetuity.
On the other hand, there are strict rules on how a corporation should be formed, and income from corporations would be subjected to double taxation.
Pros of the Corporation:
Let’s have a look at some advantages of corporations first one by one.
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Comes up with the Security of Personal Assets:
Advocates for corporations posit that is the safest and effective business form in terms of protecting your assets and properties. One of the main reasons behind this is if and when a corporation goes bankrupt, the personal savings and other finances of the owners will remain unaffected.
Therefore, it is true that if your business owes money, then creditors will surely go after the business.
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Investors and Stock Options:
Corporations have got instil the potential to grow and expand because of the presence of the investors that will join the company with their money and skills. While on the other hand, corporations are more likely to attract more serious investors. More investors, a corporation has meant more credibility it contains.
More giant corporations give more options to their stocks to their employees. This helps them to motivate more potential high performing employees to apply and join these corporations.
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Continuity of Business:
Business people who prefer corporations say that if the owner or owners and even shareholders have left the corporation, but business is still doing great. It can continue to be in operation. Except that only some documents need to be filed. So, the truth is that corporations will continue to exist.
Transferability of Ownership and Ease of Raising Capital:
For a corporation to operate, the owner is tied to its management, and it is an independent legal entity. In this way, the shares of stock are readily transferable from one investor to another.
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But note this is not true for all the corporations. However, a corporation is its legal entity, banks, investors, and other sources to finance. It trusts to put the borrowed capital to good use, and thus it is easier to raise money. You will be able to get new investors to invest in a business venture that is mainly corporations.
Cons of the Corporation:
Corporation also carries some disadvantages with it.
Unlike sole partnerships and Proprietorship where we have limited owners, corporations need more people, and this whole process is complicated. In terms of requirements, documentation, and operations, the entire method is daunting.
So, a strong need is to introduce incorporation articles. It is also a need of time; investors should be convinced, and lawyers should be hired. Therefore, to run companies, corporations also need to be expensive to set up, and more significant capital is required.
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Government Regulations and Tax Liabilities:
Another con of corporations is tax liabilities. Larger corporations have shareholders that need to pay taxes for all the earnings or profits they get from the sales.
In this way, taxes will be higher, and investors will usually end up paying more taxes as opposed to sole proprietors and partners who are receiving salaries instead of dividends. So, this is on top to seek help from professionals like experts such as lawyers and accountants.
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When corporations are compared to sole proprietorship and partnerships, it has to comply with more regulations of different government agencies. These include tax regulations, environmental compliance, and insurance policies. Larger corporations hire more employees. Now there will be more risks for potential legal problems related to work as well as insurance companies.
Double Taxation and a Lot of Paperwork:
No doubt that corporations have a lot of ways to deduct costs, losses, and borrowing expenditures that are not only easily deductible for a sole partnership. In other terms, the problem is debatable that the income of a corporation is subjected to double taxation.
Since a corporation is a legal person and entity on its own, it is taxed independently first, and then shareholders receive income from owning the shares of the corporation.
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This specific feature is applied differently when it comes to applying it to different kinds of corporations such as S-corp or a C-corp. The main idea is that the price of having an independent legal entity is that entity is entirely taxed separately from shareholders or its owners.
Too Many Decision-makers and Adherence to Corporate Formalities:
Incorporations, many people are involved, such as directors, investors, presidents, and shareholders. But when it comes to making decisions, the process should not belong since many people can decide. Moreover, corporations are required to follow established formalities from state to state where corporations are chartered.
This can influence the very existence of a corporation. In this way, you just need to write bylaws for the corporation as well as corporate minutes. Corporations must hold annual meetings of shareholders and directors and seek approval of directors.
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In short, corporations offer us benefits, but there is a flip side too. Corporations may work on some businesses but may not be advisable to some. Now the strong need is that potential business owners should research properly and look at both pros and cons of setting up a corporation.