Over the coming weeks, The Wagoner Firm will be taking a deeper look at different entity structures from today’s post on corporations to s-corporations, limited partnerships and limited liability companies.
When researching the best entity for your business, corporations are a good place to start. Corporate structures provide centralized governance, in addition to protecting owners from personal liability. General corporations are the most popular corporate structure; they are considered separate legal entities. The advantages and disadvantages associated with the creation of corporations are numerous and some are briefly outlined below.
Financial Protection
Before the corporate form was created, investors and individuals that started an enterprise risked being personally liable for all debts incurred by the company, including any financial setbacks and lawsuits. States recognized that personal liability in a business venture was hindering entrepreneurs and responded by creating the corporate form. Today, corporations offer a full liability shield to all those involved, including directors, officers, investors, and stockholders. With personal liability off the table, investors and business owners do not have the ominous cloud of paying out of pocket for any business losses.
Raising Capital
With a full liability shield, corporations are often the best entity to attract investors and raise capital. This structure allows for investors to invest without placing their personal interests (outside the investment) at risk. In addition to investment capital, corporations also have another way of raising money: through the sale of stocks and bonds. Selling ownership in the company is straightforward, efficient way to raise some quick cash, which is often beneficial during times of rapid growth.
Flexibility in Ownership
Raising capital by the sale of stocks brings us to the next advantage: transferability. As you may know, just about anyone can buy and sell stock in a public corporation. With the help of the Internet, stocks can be purchased and sold from your own home. With that being said, these minor transactions can happen daily, and generally have no affect in the ownership or control of the company.
Continuation of the Business
Due to the fluid structure of corporations, the business can legally function until the end of time. The business is not affected by the death, disability, or sale of minor shares in the company. Businesses who offer services that will be available long after the death of a founding member should form corporations to make sure their companies thrive for the foreseeable future.
Corporate Formalities
However, a challenge for many smaller corporations is complying with the legal corporate formalities in order to maintain their limited liability status. For example, every corporation must have a set of By-Laws, which are the internal rules that govern how the corporation operates. Corporations must also formalize a board of directors, which must meet regularly and the secretary of the corporation should record the minutes of those meetings. Indeed, all major decisions that the corporation decides to take should be adopted through a board of directors vote and recorded in the corporate minutes. The corporation should also hold shareholder meetings to elect the board and the secretary must also record those meetings. There are a variety of other corporate formalities, but the burden of complying with them must be weighed against the benefits of operating in the corporate form.
For any questions concerning the formation of a business entity please feel free to contact Wagoner | Selchick for a free consultation.
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