Introduction to Business Corporations
A corporation is a special type of business entity that has its own legal existence separate from the individuals who work for or own it. In the eyes of the law, a corporation is considered a “person” and has certain rights and responsibilities. It can own property, enter into contracts, and even sue or be sued.
There are two main types of corporations:
- Publicly held corporations
- Closed corporations.
Publicly held corporations are owned by shareholders who invest in the company by purchasing shares of stock. These shareholders elect a board of directors to oversee the company’s operations. Unlike in other types of businesses, these shareholders are primarily interested in making a return on their investment and have little involvement in managing the day-to-day affairs of the business. Shares of publicly held corporations are traded on the open market.
Closed corporations are usually owned by family members or individuals who know each other well. They are not traded on the open market, and ownership is limited to a small group of people.
Purpose
There are two main types of corporations based on their purpose: standard, for-profit corporations and charitable, not-for-profit corporations. For-profit corporations aim to generate profits for their shareholders, while not-for-profit corporations are dedicated to serving a charitable or social purpose without the goal of making money.
Advantages
One advantage of a corporation is limited liability for the owners. This means that the owners’ personal assets are generally protected from the company’s debts and losses. The liability of individual shareholders is usually limited to the value of their own stock in the corporation.
Another advantage is that the corporation is considered a separate legal entity, meaning it can continue to exist even if ownership changes. This makes it easier to transfer ownership or attract investors by selling shares of stock.
Disadvantage
However, there are some disadvantages to running a corporation. Complying with government and legal regulations can be costly and time-consuming. Establishing a corporation requires complex paperwork and can be expensive. Additionally, the profits generated by a corporation are subject to double taxation. This means that the corporation pays taxes on its profits, and then the shareholders are taxed again on any dividends or profits they receive from the corporation.
It’s important to remember that a corporation is a distinct legal entity separate from the individuals within it. Understanding the advantages and disadvantages of a corporation can help entrepreneurs make informed decisions when considering different business structures.
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