What is a Corporation?
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What is a Corporation?
2009.04.09
A corporation is also referred to as a "limited company" or a "company". It is a separate legal entity from the owners of the corporation. Once created, a corporation has perpetual existence separate from owners, directors and officers of the corporation. A corporation can also carry the same powers as a natural person: for instance, a corporation can enter into contracts in the name of the corporation, buy and sell property, conduct business, sue or be sued in the name of the corporation, form associations with other entities or individuals, and even own other corporations.
Here are some benefits of a corporation:
- Limited Liability
The owners or shareholders of a corporation are not liable for the debts and obligations of a corporation. Basically, creditors of a corporation can not hold the shareholders accountable for the debts of the corporation. If the corporation is unable to satisfy the debts, the creditors do not have the right to go after the owners and shareholders for repayment. In most cases, creditors will secure a UCC-1, or lien, against all personal property of the corporation. Thus allowing for recoupment of any unpaid balances through a liquidation process of the personal property. This is usually done when borrowing working capital from financial institutions, and other capital lenders.
- Transferable Ownership
Transferring ownership of a corporation is quite easy. It is done so by simply transferring or selling the shares. Being able to transfer shares freely to anyone gives an investor the right to liquidate investment at any time. Shares are usually sold for cash payment. The change of ownership is recorded in the Minutes of Meetings attended by the Board of Directors and Shareholders of the corporation.
- Perpetual Existence
Due to a corporation being a separate legal entity from the shareholders, the corporation has a perpetual existence. So In other words, when the ownership of the corporation changes, the corporation and business remains the same.
- Tax Advantages
Unlike an S corporation, a general corporation that is formed in the United States or conducts a trade or business in the United States is subject to federal income tax. Shareholders of a general corporation who receive dividends or other income distributions from the corporation are taxed on the dividend. Thus resulting in a double taxation of income, once when earned by the corporation and again when it is distributed to the shareholders. This double taxation may be avoided when earnings are not distributed to the shareholders as a dividend. We recommend that you consult with your tax accountant for further details.
- Raising Capital
Small corporations do not become large without being able to find innovative ways to raise capital to finance expansion. There are five primary methods for obtaining money. Issuing bonds, Issuing preferred stock, selling common stock, borrowing, and using profits.
Issuing bonds: a bond is a written promise to pay back a specific amount of money at a certain date or dates in the future. Corporations benefit by issuing bonds because the interest rates they pay to investors are lower than rates fro most other types of borrowing. Also, the interest paid on bonds is considered to be a tax-deductible business expense.
Issuing preferred stock: a company may choose to issue new "preferred" stock to raise capital. Buyers of these shares obtain special status in the event the corporation encounters financial trouble.
Selling common stock: if a company has a good financial status, it can raise capital by issuing common stock. Investment banks help companies issue stock buy agreeing to buy new shares issued at a set price if the public refuses to buy the stock a certain minimum price.
Borrowing: companies can also raise short term capital by usually borrowing from banks, and capital advance companies.
Using profits: companies can also finance their operations by retaining capital earnings. The strategies concerning retained earnings vary.
