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A corporation is a legal entity established by individuals or shareholders in order to generate profits. In other words, it’s an impersonal entity that possesses an existence that is separate from its owners. A corporation can own assets, borrow money, enter into contracts, hire employees, and much more. It is managed by a board of directors who are elected by shareholders. The shareholders of a corporation own a percentage of the company based on the number of shares they hold. When it comes to decision making, shareholders vote based on the number of shares they own. The basic structure of a corporation consists of shareholders, board of directors, officers, and employees.
A corporation has limited liability, meaning the owners are protected against debts and lawsuits filed against the company. For example, if a corporation is sued for defaulting on a loan, the shareholders are not personally responsible for the debt.
Advantages of Corporation
- Personal Liability Protection
A corporation is a separate legal entity, meaning the owners are protected from the debts and liabilities of the corporation. If the company goes bankrupt, the creditors cannot pursue the owners’ personal assets. In effect, the owners of a corporation can conduct business without risking their personal assets.
- Access to Capital
A corporation can raise substantial amounts through the sale of stock. This access to capital is a luxury that most entities such as sole proprietorship or partnership do not have.
- Business Security and Perpetuity
The existence of a corporation is not dependent upon its owners. That means it will continue to exist beyond the deaths of the owners, directors, managers, and officers. A corporation can only come to an end when the board of directors and owners decide to end the corporation.
- Easy Transfer of Ownership
The ownership of a corporation is easily transferable through the sale of shares. In the case of a private entity, it is comparatively difficult to transfer ownership.
- Tax Advantages
Although some corporations are subject to double taxation, the owners can receive tax-free benefits such as deductions for retirement plans, health insurance premiums, savings on self-employment taxes, and more.
Disadvantages of A Corporation
- Lengthy application process
The process of incorporating a business is often a long one due to the extensive paperwork involved. The owners have to acquire many permits from different regulatory authorities.
- Double tax
Corporations pay taxes at the corporate level and the individual level. In other words, the corporation’s business income gets taxed and the dividends paid out to shareholders get taxed as well.
- Lack of Business Confidentiality
Corporations are legally required to provide shareholders with an annual report showing sales volume, profits, debts, and other information. These reports are available to the general public, meaning the shareholders lose the confidentiality of their business.
- Conflict of Interest
It’s possible for the board of directors and the executives running the corporation to have a conflict of interest in the business. They may make certain decisions in which they have an interest and end up impacting the profitability of the business.
The choice of business structure to use depends on your type of business and how you want it to operate. Consider these advantages and disadvantages carefully before deciding to incorporate your business.
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