If you’re the owner of a partner of a small or medium-sized business, you may not have considered the advantages of incorporation. Maybe you were under the impression that corporations tended to be large multinational enterprises, or your business took off so quickly that you didn’t have time to discuss your options with your investors and a business lawyer. While it is true that corporations are large enough to require legal help from groups like Smith, Schnatmeier, Dettmering, Collins, Reeves, Hobson & Hobson, LLP, the benefits are not hard to understand. If you’re considering incorporating your business, there are a few things that you should know.
What is a Corporation?
A corporation is a legal entity that exists separately from its owners. In many ways, a corporation can act as an individual does. Among other things, corporations are able to do the following:
- Enter contracts
- Own property
- Sue and be sued
- Borrow money
- File for patents
- Issue stocks
- File for bankruptcy
Whether there is one, several, or thousands of shareholders, their individual assets are insulated from the liabilities incurred by the corporation. This is one of the many advantages of incorporating.
Corporations and Business Lawyers
Corporations can expand, becoming huge players in the business world and bringing in over half the total business revenue in the US. Your corporation can grow, but you may find the legalities of the process to be an issue that slows or even halts the process. A Massachusetts firm like Olson & Olson focuses on incorporating businesses like yours so that you can enjoy the benefits.
Advantages of Corporations
There are several significant advantages to incorporation over individual proprietorships or traditional partnerships. Here are several of the most significant ones:
Limited Liability – In most cases, a shareholder’s liability is limited to the value of their investment. If the corporation fails, the investors’ personal assets are safe.
Flexible Investment Options – With “C” corporations, because ownership is represented as shares, transfer of all or portion of ownership becomes easier for investors.
Fungibility of Shares – Again, because shares represent part of the corporation, they can be bought, sold, held in trust, transferred to another party, et cetera.
The Ability to Raise Funds Without Incurring Debt – If the shareholders elect to do so, they can issue additional shares to raise capital. This is different from borrowing money as the new shareholders own a portion of the company.
Not all of the advantages to incorporating will appeal to all business owners and investors, but for many, this is a safer, more flexible option.
Types of Corporations
There are several categories of corporations, but a competent business lawyer will not only guide you to the appropriate structure for your company, but will also tailor it to your specific needs.
“S” Corporation – If your business has fewer than 100 investors and you meet the other IRS requirements, you may consider an “S” corp, which allows the business to pay its income to its shareholders. The advantage is that the profits are taxed when they reach the investors, avoiding double taxation.
“C” Corporation – With a “C” corp, you’re not limited by the number of shareholders. As was previously mentioned, ownership is represented by individual shares, which makes it easier to transfer possession and to raise capital. Profits are taxed at the business level, and are paid to investors in the form of dividends or reinvested in the business.
Limited Liability Corporation (LLC) – An LLC combines aspects of “S” and “C” corporations. The partners in an LLC have the ability to allow profits flow through to the hands of investors, similarly to an “S” corporation.