Business Structures: The Corporation
Research papers from Paper Masters are custom written on any type of business structure you need overviewed. When looking at the structure of corporations, our writers will explain the advantages and disadvantages of forming a company into a corporation.
The corporation provides the greatest degree of protection for the personal assets of the owners. A corporation is a separate legal entity recognized under the law (which gives it a healthy corporate culture), which has the same right and privileges of an individual. They are relatively easy and inexpensive to form, with all states providing regulatory mechanisms to register and oversee corporate operations.
Liability of Corporations
Corporations offer a high degree of asset protection for the owners. In the event of bankruptcy of the corporation, creditors can collect debts only from the assets of the corporation, and are unable to attach the personal assets of the shareholders. In effect, the liability of the owners of a corporation is limited to the amount of their investment. There are certain exceptions to this as the result of court decisions, however, which permit creditors who have been injured through the negligence or willful misconduct of the corporation to pursue their claims against the personal assets of the individual working for the corporation who actually caused the injury. This type of situation is often covered by umbrella liability or good methodology insurance that is secured by the corporation to protect its employees.
Public and Private Corporations
Corporations are either public, in which the shares of ownership are sold to the general public, or private, in which the shares are privately held and not sold to the general public. Because the costs of SEC registration to permit the public sale of corporate shares are high, most start-up companies begin as privately held corporations. The advantage of a privately held corporation are as follows:
- Provides the liability protection of the corporation while permitting centralized control of operations among a relatively small number of shareholders.
- If the corporation is profitable, the privately held corporation sometimes engages in an SEC registration after several years of operation in order to increase capitalization through sale of additional shares.
- The new shareholders that result from this process, however, dilute the ownership percentage of existing shareholders, which reduces their ability to control the operations of the business.
- The corporation can be dissolved only by an act of dissolution by the board of directors, which allows individuals to enter or exit ownership positions at will without disrupting the operations of the corporation.
While all corporate forms provide the same degree of liability protection against creditors, they have different tax consequences. One of the more common types of corporations is the S corporation, so named because it is organized under the Internal Revenue Code (IRS) sub-chapter S. In this corporate form, the corporation is recognized as a separate legal entity, but it is not a taxable entity. All profits and losses flow through the corporation to the owners. Various laws limit the number of shareholders in an S corporation, however, and shares cannot be publicly sold. Under IRS regulations, an S corporation can at any time make an irrevocable decision to become a regular corporation, or subchapter C corporation.