Sacramento Businesses – Corporations
If you’re considering starting a business or you’ve been operating as a sole proprietorship or as a partnership, a corporation might be the next step for you. Corporations are business entities with shareholders that are either privately held, or they may be publicly held and sold to the public. The law views corporations as separate legal “persons.” This means that corporations may enter into contracts and incur debts separate from the individual shareholder owners.
Here are some of the advantages and disadvantages of forming a corporation:
Advantages of Corporations
- Limited Liability. The debts of the corporation are separate from the shareholders; therefore, the shareholders only stand to lose the amount invested in the corporation. Any personal assets of the shareholders are protected, like their bank account and house. Board members, however, may be liable in some circumstances, like mismanagement of corporate funds.
- Investor Opportunities. Ownership interests are great motivating tools for employee productivity. Corporations also provide outside investor opportunities such as venture capital and angel funds. If you are a startup seeking possible investments in the near future, C-Corporations are most likely the choice for you.
- Corporate Formalities. Adhering to corporate formalities is generally seen as a negative; however, these formalities can ensure there is a structured approach to doing business. They establish a Board of Directors and create a formal process for doing business. For some individuals, this hierarchy scheme is welcomed. Moreover, this hierarchy can help establish credibility with customers.
- Tax Advantages. A corporation may deduct health and life insurance premiums. Moreover, not all income is subject to social security, medicare taxes, and workers’ compensation withholdings.
- Corporation’s Life. Corporations live forever, or until they are disolved. Sole proprietorships, for example, are dependent on the life of their owners. If the owner dies, the sole proprietorship dies as well. Someone who owns an interest in a corporation may sell or transfer their interest at any time, and the business will continue to operate.
- Transferability of Ownership. Shareholder interests in C Corporations are easily transferred and sold.
Disadvantages of Corporations
- Double Taxation. Profits for C Corporations are taxed when the income is distributed to the shareholders. Shareholders receiving the distributed income are then taxed on their personal tax returns. This can be avoided by making an S Election; however, that changes investment opportunities.
- Corporate Formalities. In order to avoid what is coined “piercing the corporate veil,” the corporation must hold annual meetings, keep meeting minutes, maintain bank accounts, file taxes, maintain a board of directors, keep certain records, and ensure the proper compliance with all legal formalities. This can be tedious, burdensome, and scary for the uninitiated; however, Carson & Kyung can help walk you through all of these formalities.
- Personal Ownership. There is no personal ownership in corporations. The corporation is a separate entity governed by the Board of Directors. In essence, you alone will no longer have complete control of the business.
- Costs and Expenses. It is more expensive to start a corporation than a sole proprietorship DBA. You must pay state, and possibly federal, filing fees. You must also pay withholding taxes and other expenses.
Services Provided by Sacramento’s Business Attorneys:
- Name Inquiry;
- Name Reservation (if requested);
- Articles of Incorporation;
- Bylaws (or Operating Agreement);
- Minutes: First Meeting, Annual Meetings, and Operating;
- Statement of Information;
- Federal Employer Identification Number;
- Indemnification Agreements;
- Stock Purchase Agreements;
- Stock Certificates;
- Buy-Sell Agreements;
- S Election;
- Contract Drafting;
- Advice on Day-to-Day Operations.
Two New Subtypes of Stock Corporations
If you’re interested in learning more about these two new subtypes, check out the following blog posts:
These are only some of the advantages and disadvantages of corporations. Give our Business law firm call to schedule an initial consultation and learn more about the options involved with forming a business.