Corporations Explained: Pros and Cons
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Corporations Explained: Pros and Cons

Many businesses operate as corporations. When you get a seller’s permit in California, for example, you can incorporate so your business becomes a legal entity; a corporation is identifiable separately from its owners. Each owner has a share in the company, through which they control it.

By forming a corporation, individuals work together to conduct business and earn a profit. This is usually done at the state level, so state laws must be followed. In general, to get started, you must choose the type of corporation to start (limited liability, S Corp, C Corp, etc.), select a name for your business, appoint directors, and file articles of incorporation. Then you pay filing and license fees, create bylaws, and issue stock certificates.

Public vs. Private Corporation

A corporation can operate publicly or privately. If you go public, your company’s shares will be open for investors to buy. A privately owned corporation will not make its shares publicly available. Public corporations are subject to the rules and regulations of the U.S. Securities and Exchange Commission.

How Does a Corporation Work?

The day-to-day function of the corporation looks like people doing business. At the highest level, a board of directors oversees the business, sets policies, and ensures it acts in accordance with the company mission and bylaws. The board also ensures the corporation complies with local, state, and federal laws. Day-to-day operations are managed by corporate executives who are paid employees of the corporation.

While employees and corporate owners get salaries—some get benefits such as dividends— shareholders are paid solely based on profit and how many shares they own.

Liquidation

A corporation will continue to operate until its owners end it. Liquidation is a process of terminating its legal life. This may happen when the business has reached its objectives or has become insolvent. Liquidation can be voluntary or involuntary. A liquidator sells the corporation’s assets and the company must pay the creditors it owes. Shareholders receive any remaining assets.

Things to Consider

Establishing a corporation has pros and cons, which can help determine if this business model is right for you.

Pros

  • Protection from legal liability. The law sees the corporation as a separate entity from its owners.
  • Attracting investors. Those looking to invest capital in a business venture are often drawn to a company’s stock.
  • Power structure. Officers, directors, and shareholders each have defined roles within the corporation.
  • Shareholders protected. Although they have less privacy, shareholders have limited liability and are protected against creditors.
  • Constitutional protection. Corporations have a right to due process; they have equal protection under the constitution if involved in legal proceedings.

Cons

  • Time and cost. Incorporating is expensive and preparing required documents can be time-consuming.
  • Complexity. Corporate formalities include directors’ meetings, maintaining official records, sustaining financial independence, and managing data.
  • Tax liability. The corporation’s profits are taxed as are individual stockholders’ profits (double taxation), while income and business taxes are filed separately.
  • Heavy regulation. Profit and growth may be impacted by the actions of federal, state, and local regulators.
  • No legal counsel. A corporation does not have the constitutional right to a court-appointed attorney if it can’t pay for one, as an individual has.

Apply for Your Seller’s Permit in California

If you’re selling tangible goods in California, you need a seller’s permit. First look at these advantages and disadvantages of corporations and whether a corporate model will help. We’ll need your business and personal information to get started. Contact FastFilings today to learn more.

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