The Corporation

by admin

corporate boardroomThe Corporation (not the film) is probably the most famous business entity.  If you are thinking of starting a corporation, be prepared for paperwork.

Each state has its own corporation laws.  Generally, you would file articles of incorporation with your secretary of state.

Organization

The shareholders elect the Board of Directors, who is responsible for managing the corporation.  To make managing easier, the Board will usually delegate or assign management responsibility to various officers.

Depending on the corporation’s organizational documents, the cost of running the corporation can vary.  There are many administrative tasks such as board meetings, board committees, shareholder voting, annual and special meetings, compliance, and other governance issues.

Limited Liability

One of the biggest benefits to forming a corporation is limited liability.  As a shareholder, you are generally not liable for the corporation’s action (be careful that you do not abuse the corporate form or you will be held liable for the corporation’s actions).

Tax

Undoubtedly, one of the major downsides to the corporation is double taxation.  Taxes are taken out at the corporate and shareholder level.  One of the implications is that losses are not “passed through” to shareholders.  The S Corporation allows “pass-through” treatment but only if you meet certain strict requirements, including (1) not having any partnerships or corporations as shareholders, (2) no more than 100 shareholders, and (3) having only one class of stock.

Another tax consideration comes about with stock sales.  A stock sale of a corporation may have some adverse tax effects on the buyer.  This might cause the purchase price the buyer is willing to pay to be decreased.

Other considerations

Corporations are actually quite flexible when it comes to financing.  They can structure their shares with different rights and preferences—this can make it easier to get outside investing.  In addition, generally, transferring your shares of stock to another person is simple.  This means the corporation is the vehicle of choice for an easy exit, including an IPO, since generally no major structuring changes are usually needed for an IPO.

 

 

 

 

(photo courtesy of: http://flic.kr/p/5R2DXH)

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