Defining a corporation
By Joseph Kang
A corporation is treated similarly to a person with the rights and responsibilities of a person. A corporation can buy and sell property or own a business (a subsidiary company). It has a responsibility to act lawfully such as by filing corporate taxes. The corporation also has “rights.” Directors and officers of a corporation have both waivable and non-waivable fiduciary duties to the corporation such as the duties of care, loyalty, and good faith. They must act in the interests of the shareholders and the corporation, and not in their own personal interests.
Like the LLC, a corporation is a separate legal entity from its owners. Also similar to an LLC, a corporation has the benefit of a shield of limited liability that will protect the shareholder’s personal assets from creditors or the IRS. The shareholder won’t be liable for the corporation’s debts and liabilities and vice versa.
To form a corporation, an incorporator, such as your law firm, must file an application with the State. The application will generally include the articles of incorporation and involve a fee. Similar to other business entities, the corporation can choose to exist perpetually. This means that it can live on and operate even if the founder or ownership of the company changes.
While LLC owners are called members, a corporation’s owners are called stockholders or shareholders. A corporation can sell its shares/stock in the company in return for capital to grow its business. It can sell stock to private investors or it can sell stock to the public. This means that a corporation has a larger pool of resources compared to a sole proprietorship, which can only rely on the resources of its individual owner or bank.
The public can own shares in a corporation only when the corporation chooses to go “public.” When a corporation goes public, it lists its Initial Public Offering (“IPO”) on the stock market. Think Facebook, Netflix, Amazon, and Apple. These are all public companies, and they are all partially owned by its public stockholders. There are also many large corporations that are privately held. For example, the supermarket chain Albertson’s, which owns Safeway; PricewaterhouseCoopers; Deloitte; Uber (soon to go public); and Mars (the candy company).
The downside to accepting investors is that the original owner(s) or founder(s) will lose some of his or her control of the company. The original owners will no longer be the sole owners, and they may not always have the authority to move in the direction they desire for the company. This makes sense because the investor-owners will want to safeguard their investments, while the original founder(s) may be more emotionally invested in their business, leading to poor business decision making.
While the investors do retain some control, they often stay out of the business’ day-to-day operations. The Board of Directors of a corporation are usually given the responsibility to hire officers to run the day-to-day operations of the business. The investor-owners, in turn, will vote on who will constitute the Members of the Board. As you can see, incorporating a business means greater obligations. This includes holding shareholder meetings, board meetings, keeping better records, and even filing more tax returns. Compared to an LLC, which may be the same size as a corporation in terms of its profits and its number of employees, a corporation requires better governance.
Keep in mind that a corporation that is taxed as a C-Corporation is subject to double taxation. Double taxation means that a corporation is taxed at the corporate level and then again at the shareholder level. This is usually seen in larger businesses. Smaller businesses can register to be taxed as an S-Corporation and will not be subject to double taxation.
Overall, incorporating a business is a big step with its respective pros and cons. If you are looking to expand your business and go public, incorporating your business will probably be the right first step. It is not easy to convert an LLC to a corporation or vice versa after you have been in business for a while, so it is best to set your business up properly at the beginning. Starting a corporation may come with upfront costs, but if you are seeking a business entity that can draw from larger resources and investors, a corporation may be the best entity for your business.
Joseph Kang is a student at Purdue University. He will graduate in May 2019 with a B.S. in Pharmaceutical Sciences. His college career consisted of being involved with his fraternity and campus organizations such as Purdue Dance Marathon for Riley’s Children’s Hospital and College Mentors for Kids. Joseph has experience working in a medical clinic—helping patients and clinicians as a medical assistant. Joseph plans to pursue law school after graduation. While interning with Kimberly Shin Law Firm PLLC, Joseph researched and wrote articles to help small business owners and entrepreneurs with legal challenges their businesses may face.
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