Professor Dr. D.

Jayakumar

UNIT 3 (cont.)

Corporation

A legal entity created by individuals or shareholders with the

purpose of operating for profit

What is a Corporation?

A corporation is a legal entity created by individuals, stockholders, or

shareholders, with the purpose of operating for profit. Corporations are
allowed to enter into contracts, sue and be sued, own assets, remit federal
and state taxes, and borrow money from financial institutions.

The creation of a corporation involves a legal process called incorporation

where legal documents containing the primary purpose of the business,
name and location, and the number of shares and types of stock issued,
are drafted.

The process of incorporation gives the business entity a distinct feature

that protects its owners from being personally liable in the event of a
lawsuit or legal claim.

What are the Common Types of Corporations?

A corporation can be created by a single shareholder or by multiple

shareholders who come together to pursue a common goal. A corporate
can be formed as a for-profit or a not-for-profit entity.
For-profit entities form the majority of corporations, and they are formed
to generate revenues and provide a return to their shareholders, according
to their percentage of ownership in the corporation.

Not-for-profit entities operate under the category of charitable

organizations, which are dedicated to a particular social cause such as
educational, religious, scientific, or research purposes. Rather than
distribute revenues to shareholders, not-for-profit organizations use their
revenues to further their objectives.

The three main types of business incorporations are:

1. C Corporation

C Corporation is the most common form of incorporation among businesses

and contains almost all of the attributes of a corporation. Owners receive
profits and are taxed at the individual level, while the corporation itself is
taxed as a business entity.

2. S Corporation

S Corporation is created in the same way as a C Corporation but is

different in owner limitation and tax purposes. An S Corporation consists of
up to 100 shareholders and is not taxed as separate – instead, the
profits/losses are shouldered by the shareholders on their personal income
tax returns.

3. Non-Profit Corporation

Commonly used by charitable, educational, and religious organizations to

operate without generating profits. A non-profit is exempt from taxation.
Any contributions, donations, or revenue received are retained in the entity
to spend on operations, expansion, or future plans.

How Do Corporations Work?

A corporation is required to name a board of directors before it can

commence operations, and the members of the board of directors are
elected by shareholders during the annual general meeting. Each
shareholder is entitled to one vote per share, and they are not required to
take part in the day-to-day running of the corporation. However,
shareholders are eligible to be elected as members of the board of
directors or executive officers of the corporation.

The board of directors comprises a group of individuals who are elected to

represent shareholders. They are tasked with making decisions on major
issues affecting the shareholders, and they also create policies to guide the
management and daily operations of the corporation.

The elected members to the board of directors owe a duty of care to the
shareholders, and they must act in the best interests of the shareholders
and the corporation.

What are the Advantages and Disadvantages of Incorporation?

Advantages

 Separate legal entity – Independent from its owners and

considered a legal entity that may conduct business, own properties,
enter into binding contracts, borrow money, sue and be sued, and
pay taxes.
 Unlimited life – Stockholders, shareholders, or members are the
owners of a corporation, and it is managed by a board of directors.
Their death or inability to perform their duties does not affect the
continuity of this legal entity; only changes in the company’s charter
will enable it to either be extended or liquidated.
 Limited liability – Company owners are only liable for the amount
they invested. Creditors and lenders have no claim to the owners’
personal assets for payments owed by the shareholders.
 Easy transfer of ownership shares – Publicly held corporations
do not require approval from other stockholders to sell the stocks or
shares of individual owners. Stocks or shares can be easily traded in
the market, regardless of their volume.
 Competent management – Investors or owners may not directly
handle day-to-day business operations. They vote for the board of
directors who eventually hire a professional management team.
  Source of capital – Corporations can source funds from selling
stocks and issuing bonds.

Disadvantages

 Incorporation costs – It is costlier to go through the process of

incorporation than to form a sole proprietorship or partnership.
 Double taxation – Two taxes are remitted, from the corporate
earnings and from payments of dividends to shareholders.
 Documentation – Aside from incorporation documents, companies
must file annual reports and tax returns, as well as maintain
accounting records, licenses, and other important documents.

How Does a Corporation Dissolve?

The life of a corporate entity lasts until there is a change in its charter or
the purpose of its existence has reached its peak. A process called
liquidation will serve the transition, facilitated by a liquidator.

The corporate assets will be sold and the proceeds will first go to creditors
to pay off debt. Whatever remains will be given to shareholders.
Involuntary liquidation is usually triggered by creditors of an insolvent or
bankrupt company.

Major Forms of Business Organizations (With Examples)

Starting a business involves making many important decisions, especially in

terms of choosing the right form of business structure. Taking enough time
to research your options and understand how each of the major
organization structures work may help you make the best choice for your
company.

In this article, we discuss the major forms of business structures, including

the advantages and disadvantages of each, and how to choose the right
structure for your needs.
What are the five forms of business organizations?

The five forms of business organizations include the following:

1. Partnership
2. Corporation
3. Sole proprietorship
4. Cooperative
5. Limited liability company

Partnership

We can classify a business partnership as either general or limited.

General partnerships allow both partners to invest in a business with 100%
responsibility for any business debts. They don't require a formal
agreement. In comparison, limited partnerships require owners to file
paperwork with the state and compose formal agreements that describe all
of the important details of the partnership, such as who is responsible for
certain debts.

Some advantages of partnerships include:

Easy to establish: Compared to other business structures, partnerships

require minimal paperwork and legal documents to establish.

Partners can combine expertise: With more than one like-minded

individual, there are more opportunities to increase their collaborative
skillset.

Distributed workload: People in partnerships commonly share

responsibilities so that one person doesn't have to do all the work.

Disadvantages to consider:
Possibility for disagreements: By having more than one person involved in
business decisions, partners may disagree on some aspects of the
operation.

Difficulty in transferring ownership: Without a formal agreement that

explicitly states processes, a business may come to a halt if partners
disagree and choose to end their partnership.

Full liability: In a partnership, all members are personally liable for

business-related debts and may be pursued in a lawsuit.

An example of a partnership is a business set up between two or more

family members, friends or colleagues in an industry that supports their
skill sets. The partners of a business typically divide the profits among
themselves.

Corporation

A corporation is a business organization that acts as a unique and separate

entity from its shareholders. A corporation pays its own taxes before
distributing profits or dividends to shareholders. There are three main
forms of corporations: a C corporation, an S corporation and an LLC, or
limited liability corporation.

Advantages of corporations include:

Owners aren't responsible for business debts: In general, the shareholders

of a corporation are not liable for its debts. Instead, shareholders risk their
equity.

Tax exemptions: Corporations can deduct expenses related to company

benefits, including health insurance premiums, wages, taxes, travel,
equipment and more.

Quick capital through stocks: To raise additional funds for the business,
shareholders may sell shares in the corporation.

Disadvantages include:
Double taxation for C-corporations: The corporation must pay income tax
at the corporate rate before profits transfer to the shareholders, who must
then pay taxes on an individual level.

Annual record-keeping requirements: With the exception of an S-

corporation, the corporate business structure involves a substantial amount
of paperwork.

Owners are less involved than managers: When there are several investors
with no clear majority interest, the management team may direct business
operations rather than the owners.

Common examples of corporations include a business organization that

possesses a board of directors and a large company that employs hundreds
of people. About half of all corporations have at least 500 employees.

Related: Corporate Life Cycle: Everything You Need to Know

Sole proprietorship

This popular form of business structure is the easiest to set up. Sole
proprietorships have one owner who makes all of the business decisions,
and there is no distinction between the business and the owner.

Advantages of a sole proprietorship include:

Total control of the business: As the sole owner of your business, you have
full control of business decisions and spending habits.

No public disclosure required: Sole proprietorships are not required to file

annual reports or other financial statements with the state or federal
government.

Easy tax reporting: Owners don't need to file any special tax forms with the
IRS other than the Schedule C (Profit or Loss from Business) form.

Low start-up costs: While you may need to register your business and
obtain a business occupancy permit in some places, the costs of
maintaining a sole proprietorship are much less than other business
structures.

Disadvantages include:

Unlimited liability: You are personally responsible for all business debts and
company actions under this business structure.

Lack of structure: Since you are not required to keep financial statements,
there is a risk of becoming too relaxed when managing your money.

Difficulty in raising funds: Investors typically favor corporations when

lending money because they know that those businesses have strong
financial records and other forms of security.

Some typical examples of sole proprietorships include the personal

businesses of freelancers, artists, consultants and other self-employed
business owners who operate on a solo basis.

Cooperative

A cooperative, or a co-op, is a private business, organization or farm that a

group of individuals owns and runs to meet a common goal. These owners
work together to operate the business, and they share the profits and
other benefits. Most of the time, the members or part-owners of the
cooperative also work for the business and use its services.

Advantages of a cooperative include:

Greater funding options: Cooperatives have access to government-

sponsored grant programs, like the USDA Rural Development program,
depending on the type of cooperative.

Democratic structure: Members of a cooperative follow the "one member,

one vote" philosophy, meaning that everyone has a say, regardless of their
investment in the co-op.
Less disruption: Cooperatives allow members to join and leave the business
without disrupting its structure or dissolving it.

Disadvantages include:

Raising capital: Larger investors may choose to invest in other business

structures that allow them to earn a larger share, as the cooperative
structure treats all investors the same, both large and small.

Lack of accountability: Cooperatives are more relaxed in terms of structure,

so members who don't fully participate or contribute to the business leave
others at a disadvantage and risk turning other members away.

Many cooperatives exist in the retail, service, production and housing

industries. Examples of businesses operating as cooperatives include credit
unions, utility cooperatives, housing cooperatives and retail stores that sell
food and agricultural products.

Limited liability company

The most common form of business structure for small businesses is a

limited liability company, or LLC, which is defined as a separate legal entity
and may have an unlimited amount of owners. They are typically taxed as
a sole proprietorship and require insurance in case of a lawsuit. This form
of business is a hybrid of other forms because it has some characteristics
of a corporation as well as a partnership, so its structure is more flexible.

Some advantages of an LLC include:

Limited liability: As the name states, owners and managers have limited
personal liability for business debts, whereas individuals assume full
responsibility in a sole proprietorship or partnership.

Pass-through taxation: Owners of LLCs may take advantage of "pass-

through" taxation, which allows them to avoid LLC and corporation taxes,
and owners pay personal taxes on business profits.
Flexible management: LLCs lack a formal business structure, meaning that
their owners are free to make choices regarding the operation of their
businesses.

Some disadvantages include:

Associated costs: The start-up costs associated with an LLC are more
expensive than setting up a sole proprietorship or partnership, and there
are annual fees involved as well.

Separate records: Owners of LLCs must take care to keep their personal
and business expenses separate, including any company records, whereas
sole proprietorships are less formal.

Taxes: In regards to unemployment compensation, owners may have to

pay it themselves.

Common examples of limited liability companies include start-ups and other

small businesses. Family-owned businesses and companies with a small
number of members may operate as an LLC because it is a flexible
business model that allows members to be active or passive in their roles.

How do you choose a form of business?

Before you make your business official, consider the following steps to help
you decide which form is best for your needs:

1. Find your passion

Successful business owners build a business around what they love doing
the most. People who have a passion for making specialty items or a desire
to change the world by offering a unique service may choose to form a
start-up that allows for flexibility and creativity. Once you have a solid
understanding of your goals, it is easier to move on to the next stage of
planning.
How to Find Your Passion

2. Discuss the details

Discuss your final business plan with other members of your business, if
applicable, to ensure that everyone clearly understands future business
operations. After this, you can choose the structure that best serves your
needs. If your business has more than one owner or decision-maker, it is
important to create a written agreement that details the specifics of your
business plan, including costs, responsibilities, goals and timelines. You
also have to decide on a business name, determine funding and find the
perfect location.

3. Review the common business structures

Once you have decided on the most important details related to your
business, you can decide which business structure works best for your
plan. The legal form your business takes determines your risk in the
business, including your eligibility for financial returns. Knowing which
business structure best serves your needs depends on many factors,
including the number of people involved and their desired roles, as well as
your future goals. Review the five most common types of structures
thoroughly to decide which plan works best for you and your business
before moving ahead with the registration process.