Benefits Of Being A Corporation
Creating a corporation is like creating a new business life. A corporation is a separate and distinct business entity that is responsible for itself. Upon formation, the corporation issues shares of stock to shareholders, the owners. The shareholders exchange money, goods, or expertise to receive their shares of stock.
A board of directors, elected by the shareholders, manages the corporation. This board then appoints officers of the corporation to handle the day-to-day affairs of the company. In essence, the board members represent the interests of the shareholders in the company operations. Depending on the state in which the business is incorporated, the business owner in many small corporations may be the primary, or only, shareholder and only board member. This same person is listed as the president, secretary, and treasurer of the corporation.
The corporation pays taxes on its annual profits and passes the profits to the shareholders in the form of dividends. The board of directors determines the amount of the dividends. The major benefits associated with a corporate business form is that the corporation is liable for its own financial and civil liabilities. The shareholders risk only the amount of money they have invested in their respective shares of stock.
Let’s assume that the business is a corporation with $500,000 in its bank account. If someone were to win a judgment against them for $1 million, the company would probably go out of business and only $500,000 would change hands. The person who won the legal judgment against the corporation would have no immediate legal basis for getting money from the shareholders personally.
However, this is not the case with a partnership or sole proprietorship. As a partner or sole proprietor, your personal finances are put squarely at risk in this scenario, and you could lose a lifetime of work. You might end up owing an additional $500,000 to the judgment holder if that situation ever came to pass.
Another major corporate benefit involves raising money for the business by selling shares in the corporation. Once the buyer and seller agree to a price per share of stock, the buyer simply purchases the number of shares needed to equal the amount of money needed. For instance, assume you need to raise $100,000. If you find a buyer who is willing to pay you $4 per share, then you sell them 25,000 shares of stock to receive the $100,000. Life is rarely this simple, but this example outlines the basic benefit associated with corporation finances.
To further illustrate the point, assume you still need $100,000 but don’t know anyone with that kind of money on hand. Instead of selling 25,000 shares at $4 each to one person, you could sell 2,500 shares to 10 different investors for $4 each and still get the money you need. You now have ten shareholders instead of one, but you got the money you needed. Forming a corporation is the route to take if you eventually plan to sell a large amount of stock to a number of different people.