One of the lesser-used business structures, a corporation can be a lot of work for an entrepreneur. However, there are some serious perks to choosing this kind of business structure over a sole proprietorship, partnership or limited liability company, especially if you think your business idea will reap a lot of profits, customers, or media attention. Let's discuss what a corporation is, first, before getting into the benefits and drawbacks of this business structure option.
What Is a Corporation?
A corporation acts as a legal person, able to carry on business transactions via officers and directors for the benefit of its shareholders. In many (but not all) states and provinces, a corporation can consist of only one person holding the title of director, officer and shareholder. Anyone who holds any of these position within a corporation is not liable for the corporation's financial liabilities, although there are some specific (yet rare) circumstances where this may apply. As well, a corporation does not fold when a shareholder, officer or director moves on, goes bankrupt or passes away; there is a mountain of paperwork to file to end a corporation, so most live on in perpetuity.
The Benefits of a Corporation
There are several significant benefits to choosing a corporate business structure. They are:
- No Liability: Shareholders are not liable for the debts or lawsuits of the corporation, and both the officers and directors have no personal liability for any actions taken by the corporation;
- Management Structure: Shareholders vote amongst themselves to appoint a Board of Directors, who make the managerial decisions about the company on a larger scale;
- Lesser Start Up Costs: As opposed to an LLC or partnership, only because both comparable business structures require specialized agreements to be drawn up;
- Bylaw Ease: Unlike a partnership or a limited liability company, who need to create relatively complicated agreements that explain each parties' liability and rights, a corporation merely adopts (through their Board of Directors) a set of bylaws mostly determined by their state's laws;
- Perpetual: A corporation rarely dies. Ownership is easily transferred between parties; and
- Personification: A corporation can enter into business contracts and own property like any other person, unlike sole proprietorships. Additionally, corporations can raise capital by selling off stocks or taking on debt, just like a person.
The Drawbacks of a Corporation
As with any business structure, there are drawbacks to each and every one. Those for a corporation, are:
- Higher Maintenance Costs: Unlike all of the other business structures, corporations are required to file numerous, regular reports with regards to their formation, contact information, registered agent, officers, directors and others; and
- Required Formalities: There are many more activities that are required by the state when running a corporation, such as adopting bylaws, holding annual general meetings, electing board members, appointing officers, drafting resolutions, taking and archiving minutes of each and every corporate meeting, maintaining a registered agent, and paying taxes.
For More Information about Business Structures...
Think a corporation isn't the right business structure for your entrepreneurial venture? Then take a peek at the pros and cons of sole proprietorships, partnerships, and limited liability companies.
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