Corporations are the most well known and well used business entities of all the forms of business organization. Corporations have limited liability, although shareholders of smaller corporations are often asked to personally guarantee loans. The advantage of this liability protection is that the corporation is legally considered a separate entity from the shareholder owners. As such, it has perpetual life, and also as such, the corporation is liable for its own debts and can only be held liable to the extent of the corporation’s assets. Shareholder assets are personal and cannot be touched by creditors. However, if any of the corporate formalities are not followed, the shareholders will be held liable for the debts of the business.
Corporate formation is both complicated and expensive, compared to the formation of a partnership or a sole proprietorship, but in reality the formation of corporations is not that difficult. Articles of incorporation must be filed with the office of the secretary of state; the secretary of state’s office will in turn send out a certificate of incorporation, which is then required to be recorded in the local recorder’s office of the corporation. Interestingly, corporations do not have to be organized in the same state that they do business in. Many corporations are organized in Delaware or Nevada because of the favorable corporate laws. If you choose to do this, you must register as a “foreign” corporation in the state where you do business. There are fees involved for organization as well as registration as a foreign corporation.
Advantages
Shareholders are not held responsible for business liabilities, and the personal assets of shareholders are protected as long as the corporation follows all necessary formalities.
The stock structure of a corporation makes the investing process easier for investors, and thus more attractive. The stock structure can also be used to attract employees by offering stock options.
A corporation can exist perpetually, which means that shares of corporations are freely transferable unless shareholders have buy/sell agreements that limit the way that shares can be transferred.
Disadvantages
It is expensive to incorporate an entity, and there are also annual filing fees that must be considered. There are administrative costs involved, as well, when tax time comes around and when dealing with the accounting of the business because corporate laws are so formal and complex, but those formalities must be followed.
The formalities required are another drawback to this form of business organization. In order to preserve its corporate status, the business must follow the formalities dictated by law.
These state and federal tax procedures and formalities make the administration of a corporation complicated as well, and certain accounting methods may not be allowed.
There is a lot of paperwork involved with having a corporation.
Dissolution cannot happen automatically. Most states provide a mechanism for dissolving a corporation and liquidating its assets, so in that scenario you have to play by someone else’s rules. Corporations can be dissolve voluntarily or involuntarily.
The corporation pays its own taxes on corporate profits. The business owner pays taxes on business income on his or her personal income tax. Corporate income is taxed at the corporate level. This is called double taxation. S corporations can avoid double taxation
Posted in 
Tags: 