As unicorn startups roar back and the U.S. looks back at a record year for new businesses, it may be time to re-evaluate how these businesses are set up.
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The formal organization or incorporation of a business requires a legal process. Entrepreneurs often opt for a limited liability company (LLC), but if they are considering taking their business globally or want to establish an initial public offering, they need to incorporate. The resulting legal entity is called a corporation - a separate tax-paying entity that separates the income and assets of the business from its investors and owners.
Corporations are a widely used vehicle by businesses globally, and across the world, these share many common elements. One of the easiest ways to identify a corporation is from the terms “Inc”, “Limited”, or “Ltd” found in their names.
Besides being able to conduct any lawful business, corporations can own assets, borrow money, hire employees, enter contracts, sue, and be sued. These business entities are governed by a board of directors elected by the shareholders, who are the owners. Each person’s ownership percentage is determined by the number of shares owned. Business continuity is ensured by the ease with which corporation shares can be transferred.
There are various types of corporations, each having some benefits or challenges. These include C corporations, S corporations, B corporations, closed corporations, and nonprofit corporations. The most common type is the C-corp, a common business entity preferred by larger companies.
Benefits Of Incorporation
Besides the limited personal liability, other benefits of a corporation include the easy transfer of ownership and its business continuity. Corporations also have better access to capital funding and depending on the corporation structure, they also have some tax benefits.
One of the main reasons businesses choose to incorporate is the personal liability protection for its shareholders, who are not responsible for any corporate debt or legal obligations.
The flexibility of the stock ownership structure also allows the business to continue long-term, depending on the bylaws and articles of incorporation. In most corporations, those wanting to leave the company just sell their stocks and these can also be transferred on death.
Ease of capital access is another reason why corporations are a popular business structure. When a corporation needs to raise funds, it just sells some stock.
C corporations are subject to double taxation, but other corporations have tax benefits depending on how they distribute their income. S corporations, for example, split their income between the business and shareholders. This allows each one to be taxed at different rates. Additionally, only the income nominated as owner salary is subject to self-employment tax.
Challenges Of Running A Corporation
Corporations are costly to run and require time-consuming processes. Several challenges include the application process, rigid formalities, and procedures.
Even though filing the articles of incorporation with the secretary of state is quick, the overall process of incorporating can take time. The required paperwork is extensive, ensuring the details of the organization and its ownership are correct. These include drafting of the corporate bylaws, appointing a board of directors, creating the shareholder's ownership change agreement, issuing stock certificates, and taking minutes during meetings.
Corporations are also governed by firm formalities, protocols, and structure which must be followed closely. These include following the bylaws, maintaining a board of directors, holding annual meetings, keeping minutes at board meetings, and creating annual reports. Some types of corporations also have other restrictions they need to adhere to. For example, S-corps have a limit to the number of shareholders allowed (up to 100), and these must be U.S. citizens.
C-corps face taxation as an entity and its shareholders are taxed on the profits. In S-corps shareholders are taxed only on their individual income, but S-corps can be taxed as C-corps if they don’t meet the legal requirements.
Therefore, corporations are expensive to incorporate and run.
Designating A Statutory Agent
In most states, a business cannot incorporate if it doesn’t have a statutory agent because its filing is considered incomplete. If a business doesn’t have an agent, it can also be dissolved administratively by some states.
Also known as registered agents, statutory agents are essential to ensuring the smooth running of a business. Incorporation Rocket highlights the important processes offered by professional registered agent services. These companies offer a significant role in ensuring a corporation avoids all the pitfalls of remaining compliant.
Since an array of tax and legal issues are at stake, beginning with the end in mind is crucial. It may be worth getting an expert opinion on which structure or combination thereof you’ll be using. Finding statutory agents and a range of other related services should be the easy part, even for foreigners starting a business in the U.S.