When you decide to start a corp, this venture requires courage. It is a risk that some people may not be brave enough to take. So having passion and motivation is important in achieving business success. However, those are not the only aspects to consider. The decisions that a company makes will determine whether it will succeed or not.
Business Entity Structure
One of the most important decisions for companies involves choosing the right business entity structure. It will affect the company’s management requirements and compliance obligations.
There are various options a company can choose from. It can decide to operate as a sole proprietorship if it has only one owner or a partnership if there is more than one owner. For those that want to retain the pass-through taxation treatment that sole proprietorships and partnerships have but want asset protection for the business owners, the limited liability company (LLC) may be a better choice. Another structure to consider is the corporation (corp).
Understanding What It Is
Generally, a corporation is a legal business entity structure that is considered separate from the business owners, who are known as shareholders. That means a corp can enter contracts, get a loan or borrow money, sue, get sued, pay taxes, own assets, and hire employees.
The shareholders can be individuals or other entities. The transfer of ownership is also easy. It only requires the selling or purchasing of stock. This transfer would not affect the operations of the business.
Reasons To Start A Corp
There are many reasons why a company should incorporate. Here are the top 3:
1. Protect the assets of the shareholders.
As stated earlier, doing business can be risky, so it is important to get as much protection as possible to minimize those risks. One way of doing that is through incorporation.
Since a corp is a separate legal entity, the shareholders will not have personal liability over the company’s actions and financial obligations. The owners will also not be held liable in case the business has to deal with a lawsuit. So if a corporation ends up facing a lawsuit and losing for any reason, the personal assets of the business owners will not be affected.
The same thing applies to corporate debts. If the company even declares bankruptcy, the personal assets of the shareholders will not be at risk.
However, it is important to note that a corp can only benefit from this feature if it follows relevant corporate laws and adheres to corporate structure. Otherwise, it may pierce the corporate veil and attach the assets of the owners. The corporate veil refers to the imaginary curtain dividing the company’s assets from those of the owners.
2. Raise capital for the business.
Companies that start a corp may find it easier to raise funds to cover the needs of the business. Banks and other financial institutions are more likely to approve loans for companies with a more formal legal structure.
Corporations can also issue stock. That is a good way to raise money. This is something other business entity structures cannot do.
Additionally, traditional corporations can choose to issue more than one type of stock. One corp can issue common and preferred stocks.
Common stocks are those that represent ownership shares in a corp. This stock is the type that most people typically invest in. It confers voting rights as well. An investor typically gets one vote per share. That means they can participate in electing board members and exercise some level of control over management and policy issues.
On the other hand, preferred stocks do not come with voting rights. A shareholder who has this type of stock cannot elect members of the board of directors or participate in voting for corporate policies.
3. Get possible tax advantages.
Taxes are among the factors that many entrepreneurs consider. Choosing to form a corp can help.
While this business entity type is known to have double taxation, it may still provide advantages in other matters. For instance, a corp can write off the cost of providing health benefits to employees. It can also carry forward or back operating losses. Additionally, individuals with higher income may find the corporation tax amounts cheaper than their personal income tax bracket. Among possible tax deductions are salaries, bonuses, advertising costs, and operating expenses.
Other possible tax advantages include deductions for health insurance premiums the company paid on behalf of some owner-employees, self-employment tax savings, and deductions for life insurance. Check out federal and state laws and regulations to find out more.
Once a company owner realizes that the advantages of a corporation suit the needs of its business, they have to take the next step. That is to properly accomplish the business formation process of the state where the company chose to register its operations.
The process will vary per state and may come with different requirements, but there are steps that are common among all states. These include the submission of formal paperwork, which is usually called the Articles of Incorporation. It is filed with the governing agency like the Secretary of State. The filing also comes with a fee.
Corporations have to follow a multistep process. First, choose a business name that abides by the naming regulations of the state. It usually involves the inclusion of the term “corporation,” “incorporated,” or “limited.” States also allow the use of any of the abbreviations of those words. Additionally, it would help to seek help from a reliable third-party organization like DoMyLLC.
Next, it is necessary to appoint and maintain a registered agent in the state where the company does business. The agent serves as the point of contact between the company and the state. They will receive all legal correspondence on behalf of the corp. To find out more about the qualifications, check out our state-specific articles.
Corporations will have other state obligations, too. Compliance with them is a must as it ensures that the company remains in good standing status with the state. To learn more about how to start a corp and business compliance, contact DoMyLLC.
Business Filing Section