We are all familiar with the famous corporate companies like Apple, Microsoft, Google, Coca-cola, McDonald’s, etc. But do you really know what is a corporate company? Do you know that all these companies are an entity that is separate and distinct from its owners? Do you know there are different types of corporations? Before going into that first let us understand how corporate differs from a company owned by a single person?
Forming a Company
An entity that engages in business and can be a proprietorship, partnership or corporation is a company. One of the first and most important steps in starting a business is deciding how it will be structured. To make an informed choice, you will need to know how the different business structures work, the advantages and drawbacks of each.
- Proprietorship: A proprietorship is a business comprising one individual and is not considered a formal organization. Legally, this business does not exist separately from its owner. The sole proprietor pays taxes on revenue from the business under his or her own name and is solely responsible for the financial operations of the company, including the payment of business debts. If the business is sued, the owner’s personal resources will be at risk.
- Partnership: A general partnership is similar in structure to a proprietorship, except that this structure involves two or more people. Each partner pays his or her own taxes separately, using his own social security or tax ID number, but the company does not exist as a separate entity. In the event of a lawsuit, the financial resources of the business partners are at risk.
- Corporation: A corporation is a business entity that legally exists separately from its owners. The owners are the shareholders and the percentage of ownership in the business is represented by their corporate stocks which are also called shares.
Advantages of a Corporation
- A most important benefit is that it separates business assets from personal assets. A company can go out of business or file for bankruptcy, and this won’t put personal assets of the owner at risk.
- Next is that fewer taxes are often paid in a corporate structure than in other businesses. This means that if there are large profits being made, the amount of savings can be remarkable.
Types of corporations
S-corporation and C-corporation.
- S-corporations are generally designed for small business owners. They aren’t usually required to pay corporate taxes and will instead pay taxes only on dividend earnings.
- C-corporations are suitable for larger businesses or any other business structure types that are growing unexpectedly fast. You’ll have to pay corporate taxes in this structure and set up a board of directors.
Disadvantages of a Corporation:
- Depending on the corporation, it may pay taxes on its income, after which shareholders pay taxes on any dividends received, so income can be taxed twice.
- Depending on the corporation, the various types of income and other taxes that must be paid can require a substantial amount of paperwork. The exception to this scenario is the S corporation.