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Posts tagged ‘how to choose a business entity’

Business Entities: Corporations

This is the last of our four-part series on Business Entities.

Today, we will cover Corporations.

  

Corporations

A corporation is a body –it is a legal person in the eyes of the law.  Which means it can bring lawsuits, buy and sell property, contract, be taxed, and even commit crimes.  The most notable feature of a corporation: a corporation protects its owners from personal liability for corporate debts and obligations –within limits.

Of all the entities, corporations are the most formal.  The shareholders, director’s, officer’s, and managers must observe particular formalities in operating and administering the corporation.  For example, decisions regarding a corporation’s management must often be made by formal vote and must be recorded in the corporate minutes.  Meetings of shareholders and director’s must be properly noticed and must meet quorum requirements.  Corporations must meet annual reporting requirements in their state of incorporation and in states where they do significant business.

Advantages of the Corporation

  • Owners are protected from personal liability for company debts and obligations
  • Corporations have a reliable body of legal precedent to guide owners and managers
  • A corporation is the best vehicle for eventually public companies
  • Corporations can more easily raise capital through the sale of securities
  • Corporations can easily transfer ownership through the transfer of securities
  • A corporation can have an unlimited life
  • Corporations can create tax benefits under certain circumstances, but note that C corporations may be subject to “double taxation” of profits

 

Disadvantages of the Corporation

  • Corporations require annual meetings and require owners and director’s to observe certain formalities
  • Corporations are more expensive to set up than partnerships and sole proprietorships
  • Corporations require periodic filings with the state and annual fees

 

 This concludes our Business Entities series of  posts.  I hope this has been helpful to you.  If you feel your business is the incorrect entity, see your CPA and or attorney immediately.

Limited Liability Corporations (LLC)

This is the third of a four-part series on Business Entities.

 

Limited Liability Corporations

The LLC is often described as a hybrid business form.  It combines the liability protection of a corporation with the tax treatment and ease of administration of a partnership.  As the name suggests, it offers liability protection to its owners from company debts and liabilities.  Most of the laws governing this type of business were passed in the 1980’s and 1990’s in the United States.

The cost of setting up an LLC is roughly the same as setting up a corporation. 

If the company grows too large for an LLC, it is easily converted to a corporation. 

Advantages of the LLC

 

  • LLCs do not require annual meetings and require few ongoing formalities
  • Owners are protected from personal liability for company debts and obligations
  • LLCs enjoy partnership-style, pass-through taxation, which is favorable to many small businesses

 

Disadvantages of the LLC

  • LLCs do not have a reliable body of legal precedent to guide owners and managers, although LLC law is becoming more reliable
  • An LLC is not an appropriate vehicle for businesses seeking to become public eventually or to raise money in the capital markets
  • LLCs are more expensive to set up than are partnerships
  • LLCs usually require annual fees and periodic filings with the state
  • Some states do not allow the organization of LLCs for certain professional vocations

 

Next up:  Corporations

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