A business can be operated in an unincorporated form, such as a sole proprietorship or a partnership, or the business can be operated in an incorporated form, such as a corporation. This business structure is the most complex of the three, and is defined as “an artificial being, invisible, intangible, and existing only in contemplation of the law.” A corporation is considered a distinct legal entity, that is, separate and apart from the individuals who own it.
A unique feature of this type of business structure is its ability to exist for an indefinite time. This is a distinct advantage over the sole proprietorship and partnership business forms. A corporation also cannot be terminated by any change, removal, or death of an owner and/or stockholder. It is usually formed by the authority of the state government. Doing business in more than one state means that you must comply with each of the individual state laws, and these can vary considerably.
Additionally, corporations can be divided into two broad categories:
- public—A public corporation is a governmental body, for example, a state or political subdivision of a state.
- private—A private corporation is one that is created for commerce; it can have various characteristics of distinction with regard to stock or non-stock entities, religious, charitable, etc.
Corporations can elect how they want to be treated tax-wise. For example, a business that is incorporated can elect to be a non-profit; a “C” corporation; or a “Subsection S” corporation, all of which dictate their own tax status.
Advantages of the Corporation
- limited liability—Unless otherwise noted, the liability of the owner-stockholder is limited to his or her amount of investment.
- transfer of ownership—Ownership can be transferred without affecting the ongoing operation of the business.
- separate entity—A corporation has status and is recognized as a separate entity, separate from the stockholder owners.
- stability—It is relatively permanent in the sense that it continues to exist and to conduct business in the event of disability, illness, death, or any other condition that could impact an owner/stockholder. This is not true of a sole proprietorship or a partnership form of business.
- ease of securing capital—A corporation can secure large amounts of capital by issuing stock and long-term bonds. Long-term financing can also be secured by taking advantage of corporate assets.
- centralization of management—Owner/stockholders have supervised control of centralized management when they hire officers and managers.
- the availability of expertise and skills—The business can rely upon the expertise and the skills of many people.
Disadvantages of the Corporation
- limitations—Some activities are limited by the corporation’s charter and by various state laws.
- management—A corporation has a more complex management structure than that of a sole proprietorship or partnership. Management decisions must go through a structured process.
- manipulation—Minority stockholders can sometimes be exploited.
- regulation—Corporations are extensively regulated at the state and federal levels.
- expense—Forming and maintaining this business structure can have greater expenses when compared with a sole proprietorship or a partnership.
- taxation—The business has more taxation oversight, in which corporate income or profit are income taxed, as well as individual salaries and dividends.
The Limited Liability Company (LLC)
The limited liability company was first established in 1977 in the State of Wyoming and is now adopted by statute in all 50 states and the District of Columbia. This form of business offers owners the limited liability advantage that the C corporation also offers. LLCs also offer tax and management advantages as offered with a partnership. Because the state statutes are not uniform, this business form is best suited for business activity that can be confined to one or two states.