When you decide to start a business one of the first things you must decide is what legal structure your business will utilize. There are many different choices for legal entity and even some special ones if you are a certain kind of business.
Part 5, the final entry in this series, will cover Corporations. Corporations get the most publicity and are synonymous with business to many. A company is a corporation if you see an Inc., Co., or Ltd. after its name. Corporations are often the form of choice for large publicly traded companies, but generally are not a great fit for the average small business.
Corporations are probably the most complicated form of business. Becoming a corporation subjects a business to a whole slew of state and federal laws. Corporations often times have to comply with requirements for board meetings, record keeping, and annual filings. Corporations can lead to a lot of unnecessary paperwork headaches that a small business owner does not have to deal with. The formation process is even more complicated. When forming a corporation, decisions must be made about how many shares of stock the company will authorize, how many shares of stock the company will issue, stock issuance agreements, and actually giving stock certificates to owners. If you are issuing stock to people outside of your founding members (even family and friends), you must comply with state and federal securities laws. Trust me, dealing with the SEC is anything but a clear and easy process. Corporations are also subject to double taxation, meaning that the company is taxed on its income and then the shareholders are taxed on any amount that is distributed to them through dividends. This is the case unless the company can qualify as an S-Corporation. See how it can get complicated.
In a corporation, the owners (shareholders) have passive control in the business as they elect the directors of the company, but do not run the day-to-day operations. You can however elect yourself as the CEO of the company, and have a direct role in running the company.
Corporations do have the advantage of limited liability (although there are many other, less complicated forms to get this protection), and they make outside investment easier. Shares of stock can be split into different "classes" of stock allowing for different voting rights and priority in distribution of assets. This is why the corporation is most often the choice of angel investors, and venture capitalists. All of the different class of owners and voting rights can also be accomplished with an LLC as well. Corporations will most likely require the hiring of an attorney to have an active role in helping you set up and run your business. Otherwise you may run into legitimacy problems if your business is ever challenged.
The corporation is a complex creature and is more than a typical small business needs. Small business owners should stick to the LLC unless they are actively taking on professional outside investors who specifically request that the company incorporate.
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