Corporation - an association of individuals, created by law or under authority of law, having a continuous existence independent of the existences of its members, and powers and liabilities distinct from those of its members. (http://dictionary.reference.com)
As the definition above so succinctly states, a Corporation is an entity existing independently of its owners or leaders. While owners and leaders can have limited liability for the actions of the corporation, cases like Citizens United v. FEC indicate that Corporations have 1st amendment constitutional rights not unlike the average citizen. With that being said, Corporations are citizens of the state they are formed. In other words, if you file your articles of incorporation in Florida, your Corporation is technically a citizen of Florida. It is allowed to do business in other states, or even in other countries. If it does, it must follow all of the local laws associated with a "foreign entity" doing business in that state or country. These rules can be very complicated.
What are the benefits of Incorporating?
There are a variety of benefits associated with incorporating your business. Perhaps the most important benefit is that all owners of the company have a liability shield. In other words, except under very specific circumstances, an owners personal assets could not be attached to law suits involving only the Corporation.Only those assets invested are at risk of loss. In addition, Corporations can have multiple classes of stock (Preferred, Common, Voting, Non-Voting). For this reason, Corporations can more easily "go public" or raise additional equity capital when the time comes.
What are the Drawbacks of Incorporating?
The first and foremost drawback to incorporating is the opportunity for double taxation. Double taxation means that the Corporation is taxed on its profitability, and then its shareholders are also taxed on the income they personally garner related to the Corporations success, usually in the form of a dividend. This can be easily avoided if the Corporation meets the qualifications for Sub chapter "S" status. See our blog post on S-Corp's here.
Another drawback can be increased levels of regulation. While many Corporations operate as non-public companies, if and when a Corporation wishes to "go public", it will be subject to increased federal and state regulations designed to protect consumers and investors alike.
Is a Corporation the right entity for me?
Unfortunately, this isn't a simple answer. Often times, entrepreneurs must choose between a Corporation, and an L.L.C. Keep an eye out for our next blog dealing specifically with the L.L.C. While there are some distinct advantages to forming a Corporation over an L.L.C., those advantages do not always match up with the needs and wants of the entrepreneur. We would be happy to help you find the perfect business entity for your business. Contact Us for a Free Consultation!