If you are the one willing to invest your money in business, and searching for the best option to make your investment worthy, the following piece of information is going to be certainly useful to you. There are multiple options available for the new comers to start a business, however, before making a choice you should initially know something about the various forms of the existing business organizations.
Business organizations are mainly categorized into six forms such as sole proprietorships, partnerships, C-Corporations, S-corporations, trusts and non-profit organizations. As it is usually said that every coin has two faces, each form of organization has its own merits and demerits and each one is suitable for specific situations.
However, nowadays the corporations are gaining more popularity, and no doubt many of them do prefer to incorporate their business because of its relative legal and financial benefits when compared to the other forms.
A corporation is a form of business, in which the business is incorporated with the existing state corporate laws and after which it is treated as a separate entity, and the company starts functioning independently. Though it takes some effort initially to start a business in the form of a corporation, it can be worth the numerous benefits that it has to offer in the due course. The following are some of them to mention a few.
Merits Of A Corporation
Protection Of Your Personal Wealth
One of the greatest advantages of incorporating your business is that, your personal assets are legally protected and you may not be responsible for the debts and obligations of the business. Though you are the owner of the company, your responsibility will be limited only up to the share of your investment in it, and the creditors of the business as such cannot claim your personal assets to recover any liabilities arising out of the business.
As a corporation is a separate entity, its life is unlimited and it has nothing to do with the existence or non-existence of its owners. It means that even if the owners do not exist, the business continues to operate irrespective of whoever operates it. The life of the corporation is not affected with the owner’s death or the withdrawal of the shareholders or a merger with another company.
The transfer of ownership is possible in a corporate kind of business. By a mere transfer of the company’s stock certificates, the shareholders can easily transfer their ownership rights to others without disturbing the company’s operations.
By incorporating your business, you may be able to increase the credibility of your company. A corporate form of business usually attracts the bankers, creditors and the customers and they usually prefer to deal with an incorporated organization, due to its organized and professional approach.
Moreover, its feature of limited liability draws the attention of potential investors and a company may be able to raise sufficient funds by issuing shares to the general public. The credibility and financial soundness of the owners does in no way matter, when a company is incorporated.
As an owner you can enjoy the tax benefits if you choose to incorporate your business. By incorporating, your tax liabilities will be separated from those of the business, and you may be responsible for the payment of personal taxes only for the income that you derive out of it in the form of salary or dividends. Further, the company will be separately responsible for paying the corporate taxes for the profits that it makes in the due course of business.
Demerits Of A Corporation
Of course the corporation form of business also suffers from certain disadvantages.
One of the greatest disadvantages worth mentioning is the double taxation levied in case of C-corporations. The C-corporations generally have to pay the taxes twice, once when the company makes the profit and the other when the company pays any dividends to its shareholders.
However, there is another option available to evade this situation, and that is to incorporate your business as an S-corporation. As an S-corporation enjoys the feature of “pass through”, you can easily pass through the credits and deductions to the shareholders and avoid double taxation.
Cost Of Incorporation
Incorporating a business is not only complicated, but it also involves some cost. Apart from the initial incorporation fees, you may also have to incur the fees of an accountant or an attorney, if you choose to hire one to assist in completing the paperwork involved in the process. Moreover, there may also be some ongoing fees that you might have to pay every year after incorporating the business.
There is too much documentation involved in a corporate form of business compared to the other forms. Apart from maintaining separate bank accounts and tax records, it may also be necessary for a corporation to file certain returns regularly such as annual returns, corporate tax returns, minutes of the board meeting and the shareholders meeting and maintenance of licenses and other corporate records, as and when necessary.
Excessive Rules and Regulations
When a business is incorporated, especially as a C-Corporation, it may have to face much difficulty in fulfilling the complex rules and regulations set by the government for it. As generally these corporations protect their owners and shareholders from the liability of taking up the debts and obligations of the business, these corporations face too much government intervention in their operations when compared to the other forms of organizations.
Thus, with the above information you must have had a general idea about what actually is a corporation, and what are its related pros and cons. Now, it is for you to thoroughly weigh its merits and demerits and arrive at a suitable decision. Here you should also know that, though this form of organization is both beneficial as well as non-beneficial, its merits outweigh its demerits and this is one of the reasons for its gaining popularity among the business community nowadays.
With the most unpredictable market environment today, a corporation form of a business might be a suitable option for you, if you want to withstand the heavy competition and survive in the long run.