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CORPORATIONS << Back | Our Fees | Learn More >>
Advantages of a Corporation Corporations have several distinct advantages, including the following: Limited Liability for Sharholders. The primary advantage of a corporation is that sharholders are generally not responsible for the liabilities and debts of the business. As mentioned previously, a corporation is treated as a legal entity which is separate and distinct from its shareholders. Thus, if a corporation is sued and loses the lawsuit, shareholders are not required to satisfy the liability of the corporation from their own personal assets. Furthermore, if a shareholder is faced with a personal lawsuit (e.g., divorce), the assets held by the corporation are generally protected from any adverse judgement resulting from the lawsuit. Not only is this limited liability attractive to potential investors, it is not available to businesses operated as sole proprietorships or simple partnerships. However, it is important to recognize that there is a legal concept referred to as "piercing the corporate veil", where under certain circumstances, shareholders can be held liable for the debts of the corporation. These circumstances typically include: (1) personal funds of the shareholder are intermingled with corporate funds; (2) the corporation fails to follow corporate formalities, such as annual meetings with directors and shareholders; (3) the corporation maintains minimal capitalization or inadequate insurance; or (4) the corporation violates the law or fails to pay taxes. As you might imagine, these circumstances are largely avoidable. Access to Capital. In general, corporations have easier access to capital markets. A corporation can sell stock to raise capital. The corporation can sell different types of stock including regular stock and preferred stock. The corporation can even establish different voting rights for each type of stock. Moreover, given the limited liability of shareholders, investors are more willing to invest in a business formred as a corporation. Tax Write-Offs. With a corporation, it is much easier to write-off business and entertainment expenses, medical benefits provided to employees, tax-favorable pension plans, and so on. In addition, corporations are much less likely to be audited by the IRS than businesses operated as a sole proprietorship. Transfer of Ownership. Since a shareholder can sell his or her stock in the corporation, ownership interests in the corporation can be easily transferred without disturbing the operation of the business. Such ease of transfer is generally not available to businesses operated as a sole proprietorship or a partnership. Continuous Life. After the death of a director, officer and/or shareholder, a corporation continues to exist. Such continuous life is not available to businesses operated as a sole proprietorship or partnership, which typically cease to exist when the owners die. Distinct Legal Entity. Since a corporation is treated as a legal entity which is separate and distinct from its shareholders, the corporation can open a bank account in its own name. In addition, the corporation can obtain its own tax identification from the IRS. |
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