Before we get into the advantages of a corporation business, it is important to understand what a corporation in business is. The simple description of a corporation is a legal business entity that trades a company’s ownership, which is also known as stock, through the shares.
To understand the cooperative advantages and disadvantages better, let us first understand see a corporation example. Let us meet Tom. He owns a retail chain that is growing rapidly. However, to take benefits of growth, he requires more money to support his business. Also, he is concerned about the liabilities in case if something goes wrong without his mistake in such a large business. In this case, Sam, a good friend, and advisor of Tom suggested him to convert his business into a corporate business.
A corporation is a business organization that is different from its owners. The owners of a corporation are shareholders. However, shareholders are not the ones who run the corporation. They appoint the Board of Directors who are responsible to manage the activities of the corporations. These Board of Directors appoint the officers of the Corporation to run the daily operations. Board of Directors appoints the CEO, CFO, and the COO among various other Chief Executives of the corporation.
Corporations have the same rights and responsibilities as same as an individual: they can enter contracts, sue, take a new loan, own assets, pay taxes, appoint employees, etc. Some consider a corporation as a “legal person.”
Types of Corporation Business
C Corporation- A corporation, sometimes also known as C Corp is a separate legal entity that is different from its owners. Corporations can make a huge profit, whether it is tax and can be held liable legally. C Corporation provides the strongest protection to the owners from personal liabilities, but the cost to form a corporation is much higher compared to other structures. This type of corporation also needs extensive record-keeping, reporting, and operational procedures.
Unlike sole proprietors, LLCs, partnerships, and corporations pay income tax on their profits. In a few cases, corporate profits are taxed two times. First, when the organization makes a huge profit, and when the shares are paid to shareholders on their tax returns.
Corporations have an independent life that is different from their shareholders. If a shareholder leaves the organization or sells its shares, the C corporation can continue its business without any disturbance. As far as raising capital is concerned, corporations have a huge benefit as they can raise money through the sale of stock, which can also be a huge advantage in grabbing the attention of employees.
C corporation can be a great option for medium or high-risk businesses or for those businesses that need money, and businesses that are planning to “go public” or ultimately sold.
S Corporation- S corporation, also known as S Corp is a special kind of corporation that is made to avoid the double taxation disadvantage associated with regular C corps. S corps allow profits, and few losses, to be passed directly to the personal income of owners without being dependent on corporate tax rates. There are a few states that tax S corporations on profits above a specific limit whereas other states do not recognize the S Corp election, just treating the business as a C corp.
S corporations must file the IRS to achieve the S Corp status, a different procedure from registering with their state. There are certain limits on S corps. S corps cannot have over 100 shareholders. You still need to follow the strict filing and operation procedure of a C corp. Also, S corps have an independent life, like C Corps. If a shareholder leaves the company or sells the shares, the S Corp can continue its business without any issues.
B corporation- Benefit corporation, popularly known as B corporation is a for-profit corporation. B corporations are different from C corporations when it comes to purpose, transparency, accountability, but are different in the way they are taxed. They are driven by both profit and mission. Shareholders hold the company accountable to generate some type of public benefit in addition to financial gain. Some states need B corporations to submit yearly benefit reports that show their contribution to the public benefit.
There are many third-party B corp certifications services, but none of them are needed for a company to be legally regarded as a B corp in a state where the legal status is accessible.
Close corporation- Close corporations are like B corporations. However, Close corporations have a less customary corporate structure. These discarded several formalities that typically rule corporations and apply to small organizations. State rules differ, but shares are generally excluded from public trading. A small group of shareholders without a board of directors can run Close corporations.
Nonprofit corporation- Nonprofit corporations are formed to do education, charity, literary, scientific, and religious work. As their work benefits the nonprofits, the public can attain tax-exempt status, indicating they do not pay federal or state income taxes on profits it makes. Nonprofits must file with the IRS to attain tax exemption, a different procedure form registering with their state.
Nonprofit corporations must follow organizational rules as a regular C corporation. They also must follow special rules and regulations regarding what they do with any earnings that they earn. For instance, they can distribute their revenues to political campaigns or members.
Now, as you know about the different types of corporation business, let us have a look at the cooperative advantages and disadvantages.
Advantages of a Corporation Business
Restricted liabilities
In a corporation business, the owners of the company are liable for the money that they have invested through buying shares. This means that if an organization gets bankrupt and does not have money left to pay back the lenders and creditors, the money invested by its shareholders into the organization will be utilized to pay back the lenders and creditors. Therefore, the shareholders will lose the invested amount. However, lenders and creditors, have no claim on assets and personal properties of the owners. This is what limited liabilities mean- limited to the extent of the amount which is invested.
Availability of money
One of the major advantages of a corporation business is in this type of business organization, it is simple to raise a huge amount of money through the public. As the total money an organization wants to raise is divided into thousands and lakhs of shares, the cost of each share comes to be little. A small amount of money allows people to buy the company’s shares. Therefore, it becomes easy to raise a huge amount for a corporation by dividing it into small units.
Transferring of Ownership is easy
Ownership in a corporation is quite easy to transfer. As far as a public company is concerned, the shares are transferable freely. However, in the case or a private company, it is quite difficult to transfer the shares as there are a few restrictions.
Develops credibility
Building credibility is one of the significant advantages of corporation business. A corporate form of business is regarded to be more stable compared to other forms of business organization. Also, when you set-up a corporation, you can attract the top talents in the market to expand your business fast. Therefore, a corporation conveys the integrity of your business to dealers.
Disadvantages of corporation
A complicated procedure
Setting up a corporation business is a complex procedure. Setting up a corporation business demands a lot of paperwork. Owners must take permission from various regulatory authorities. Also, several norms of various regulatory bodies that a corporation must satisfy before it can start its business.
Conflict of interests
If Tom decides to convert his business into a corporation, he will ultimately give the decision-making power to the Board of Directors and the officers appointed by them. There are times when the Board of Directors and executives may fulfill their interests by taking few decisions. These decisions might not be good for the business.