One of the most recognized and widely known entity forms is the corporation. The corporation’s dominance in the business world stems from the very problems that hamstringed its predecessor: the general partnership. Members of a partnership often found they were exposed to unlimited personal liability—regardless of their actual participation in the business operations; were constantly dealing with instability within the partnership and were burdened by its joint management style; and their personal investment was illiquid and uneasily extracted from the partnership. As the modern corporate form developed, corporations sought to alleviate many of these inherent weaknesses of the partnership.
Modern law integrated four major characteristics into the corporate form. First, corporations became recognized as separate legal entities with indefinite lifespans. Unlike the partnership, the corporation’s existence was distinct from its owners and perpetual in nature. Second, corporations took on an ownership structure comprised of shares of stock easily transferred from one owner to the next, allowing for much more liquidity than in a partnership. Third, corporations were now centrally managed in a top-down approach, providing more efficient operation than what was afforded by the burdensome, joint management style of the partnership. Decisions could be made faster and more effectively by fewer people rather than by consensus among owners. Fourth, and perhaps most important, corporations now enjoyed limited liability for their their investors, officers, and board members. If the corporation is properly maintained and formalities followed, owners and operators are shielded individually from the corporation’s obligations and creditors, even if the corporation becomes insolvent.
There are, however, two main disadvantages that come with a corporation. First and foremost is double taxation. Any profits earned by a corporation are first taxed at a corporate tax level, and, then, if the corporation pays out those profits to its shareholders in the form of dividends, the shareholders must pay a second level of tax on their individual earnings. Corporations are thus said to be taxed twice. Other business entities, like partnerships or limited liability companies, are not subject to this tax treatment, and only experience one level of taxation. Second, corporations must abide by certain, sometimes burdensome, formalities in order to maintain the limited liability enjoyed by their individual owners and management. Corporate filings must be made, funds must be segregated, and separate tax returns filed. This makes the corporation relatively high maintenance as compared to other entities. While the Formalities and maintenance required to be followed are not overly difficult to complete, they are often overlooked when owners and management are busy dealing with other company business.
Other decisions must be made even after selecting the corporation as your chosen entity. A corporation can be operated and taxed in a number of ways, including as a “C” corporation, “S” corporation, a professional corporation, or a non-profit corporation. This decision is not always easy. It is important to seek adequate counsel both from an accountant and an attorney before determining what election is right for you. If you would like to discuss the possibility of incorporating your business, we are happy to help you make an informed decision. Once you’ve selected the form of ownership best suited to your interests, we can prepare the necessary