Business Entity Types: What is a Corporation?

A corporation is a type of business entity that is legally separate from its owners or shareholders. It is one of the most common business structures, especially for businesses that plan to raise capital through public offerings. Understanding the basics of corporations is crucial for business owners who want to start their own corporation and take advantage of the many benefits that come with it. In this comprehensive guide, we’ll explore what a corporation is, what types of business it is best for, and the pros and cons.

What is a Corporation?

A corporation is a separate legal entity, meaning that it is considered a “person” under the law. It can own property, enter contracts, and sue or be sued in its own name. The owners of the corporation are its shareholders, and they elect a board of directors to govern the corporation’s business affairs. The directors, in turn, appoint officers to manage the day-to-day operations of the corporation.

Related Reading: What is the Best Entity Type for Your Small Business

What Types of Business is a Corporation Best For?

Corporations are best for businesses that plan to raise capital from investors, as well as businesses that are looking to protect their personal assets. Corporations can issue stock to raise investment capital, making it easier to fund larger projects or expansions. Additionally, corporations shield the personal assets of the owners from any liabilities or debts that may arise from the business. This structure is ideal for larger, more complex businesses with multiple owners and investors.

Examples of Businesses That Might Set Up as a Corporation

Large Companies

Large companies, such as those with multiple locations or high levels of revenue, may benefit from setting up their entity type as a corporation. Corporations offer several advantages to large companies, including limited liability protection for shareholders and the ability to raise capital through the sale of stock. Additionally, corporations have more flexibility when it comes to taxation and can take advantage of certain tax benefits that are not available to other entity types.

Startups

Startups may also benefit from setting up their entity type as a corporation. Corporations provide startups with limited liability protection for investors and founders, which can help to protect them from personal financial loss in the event that the company fails. Additionally, corporations can be attractive to potential investors due to their flexible structure and ability to issue stock options.

Franchises

Franchises may also benefit from setting up their entity type as a corporation. By forming a corporation, franchises can protect themselves from personal financial loss if the franchise fails and can take advantage of certain tax benefits that are not available to other entity types. Additionally, corporations have more flexibility when it comes to raising capital through the sale of stock or issuing stock options.

Professional Services Businesses

Professional services businesses, such as accounting firms or law offices, may also benefit from setting up their entity type as a corporation. Corporations provide these businesses with limited liability protection for owners and employees, which can help to protect them from personal financial loss if the business fails or is sued by a client or customer. Additionally, corporations have more flexibility when it comes to taxation and can take advantage of certain tax benefits that are not available to other entity types.

Real Estate Investment Companies

Real estate investment companies may also benefit from setting up their entity type as a corporation. Corporations provide real estate investment companies with limited liability protection for owners and employees and allow them to raise capital through the sale of stock or issuing stock options. Additionally, corporations have more flexibility when it comes to taxation and can take advantage of certain tax benefits that are not available to other entity types.

Technology Companies

Technology companies may also benefit from setting up their entity type as a corporation due to its ability to limit personal financial liability for owners and employees in case of failure or litigation against the company; this is especially important in an industry where new products often fail quickly due market saturation or lack of consumer interest in new products/services offered by technology companies. Furthermore, corporations have more flexibility when it comes to taxation and taking advantage of certain tax benefits that are not available under other forms of business entities, such as LLCs or partnerships.

Related Reading: How Your Entity Type Impacts Your Taxes

What are the Pros and Cons of Setting up a Corporation?

If you're considering setting up a corporation, there are a few things you should know. One of the biggest advantages of incorporating is that it limits your personal liability. As an individual, you are held responsible for any debts or legal issues incurred by your business, but as a corporation, your business is a separate entity. Additionally, corporations can more easily raise capital and attract investors.

However, there are also some downsides to consider. Corporations are subject to more complex laws and regulations, which can be costly to navigate. Additionally, corporations are taxed at a higher rate than sole proprietorships or partnerships. Ultimately, the decision to incorporate should be based on your specific business needs and goals.

Other Business Entity Types to Consider

While the corporation is a popular choice, other types of business entities can be just as beneficial and should be considered. One option is the limited liability company (LLC), which offers personal liability protection for the owners while allowing for flexibility in management and taxation.

Another option is the sole proprietorship, which is easy and inexpensive to set up, but offers no personal liability protection.

Partnerships, both general and limited, are also available for businesses with multiple owners.

Each business entity type has its own advantages and disadvantages, so it is important to do research and seek professional advice to determine the best fit for your specific business needs.

Why Pick a Corporation Over an LLC?

While both corporations and LLCs offer liability protection, there are key differences between the two structures. Corporations are typically subject to more regulations than LLCs, which can make the upfront costs of starting a corporation higher than starting an LLC.

However, corporations are generally better suited for businesses looking to raise significant capital or go public. Additionally, corporations offer more reliable protection for personal assets than an LLC, making it a safer choice for businesses with high liability risks.

How to Set Up a Corporation

Setting up a corporation involves several steps, including choosing a name, filing articles of incorporation with the state, creating bylaws to govern the corporation’s operations, and issuing stock. The paperwork can be complex, and the process can take several weeks or even months, which is why many business owners choose to work with an attorney or professional service to ensure that everything is done correctly.

Format Your Corporation with Firstbase

Starting a corporation as a small business owner with Firstbase is a simplified process. (Use our code PARTNER10 for 10% off Firstbase Start!) Here are the steps you should follow based on the information I gathered from the web:

1. Define Your Business Needs: Consider whether an LLC or Corporation is the best fit for your business. Firstbase provides guidance on which to choose if you're unsure.

2. Create an Account: Visit the Firstbase website and create an account. This will involve providing some basic information about your business.

3. Choose a Business Structure and Registration State: After creating an account, you'll need to choose the type of legal entity you want to form (LLC or Corporation) and the state in which you want to register your business.

4. Form Your Legal Entity: Firstbase will prepare your legal documents, file your paperwork, and create all the essential post-incorporation documents.

5. Appoint a Registered Agent and Get a US Business Address: To remain in compliant standing, founders must purchase a registered US business address and appoint a Registered Agent.

6. Open a Bank Account: You can open a bank account without needing an EIN through Firstbase. They also offer expedited EIN services if needed.

7. Create a Cap Table on Carta: Firstbase's integration with Carta allows you to create a cap table just one click after incorporation.

8. Enable Hiring with Payroll Tax Registration: With Firstbase, you can file taxes, expand to new states, and compliantly hire remote employees.

9. Manage Your Physical Mail: Firstbase offers a professional business address and virtual mailbox service that allows you to manage all your mailing needs online, from any device.

10. Utilize Growth Tools: Apply for banking, payment processing, payroll, accounting, and more, in one click with Firstbase.

Remember, starting a corporation is a significant step, so it's important to carefully consider your options and seek legal advice if needed.

Find Your Next Formation Partner Through Fundid

In conclusion, corporations are a popular choice for businesses looking to raise significant capital and protect their personal assets. While setting up a corporation can be complex, the benefits are worth it for larger and more complex businesses. If you’re considering starting your own corporation, it’s important to do your research and work with professionals to ensure that everything is done correctly and legally. By understanding the basics of corporations and the key differences between various business structures, you can make the best choice for your business and set yourself up for success.