A corporation exists as a distinct entity that has a separate legal existence from the shareholders who own the business. A corporation can accumulate debts and assets, enter into contracts and sue or be sued independently of its shareholders. Big advantages of incorporation include continuity of existence and personal asset protection for company shareholders. Corporations may consist of a single shareholder or an unlimited number of owners.
A corporation has a specific structure that must be followed in order to maintain corporate status. Every corporation must select at least one individual to serve on the company’s board of directors. States like Arizona and California require corporations to select at least three directors. A director has the responsibility for implementing strategy and policy, enforcing the rules outlined in the corporate bylaws and allocating the company’s resources in an efficient manner. Directors of the business select the officers who oversee the company’s day-to-day activities. Officers of a corporation include the president, vice president, treasurer and secretary. Corporate officers carry out the instructions issued by the company’s directors. The officers of the business manage the company’s employees. A single person may act as the company’s lone director and shareholder. A shareholder may hold all officer positions in a corporation.
Shareholders, officers and directors of a corporation have limited liability for business obligations and debts incurred while operating the business. This means a creditor cannot pursue a shareholder’s home, automobile, jewelry and other personal assets as compensation for company debts. A shareholder’s liability for company debts does not extend beyond her investment in the business. Also, a shareholder’s personal creditor cannot pursue corporation assets as compensation for personal obligations. However, issuing a personal guarantee on a business loan makes a shareholder obligated to pay the debt.
Corporations have the ability to issue stock as a way of financing the company’s business activities. In other words, a corporation can issue stock to raise money to expand the business or pay existing obligations. Furthermore, a corporation can attract employees by offering ownership in the business as part of their compensation. Shares in a corporation can easily be transferred from shareholder to shareholder without interrupting the company’s day-to-day affairs.
Continuity is another feature present in corporations. A corporation can literally exist for centuries despite changes in ownership and management. A shareholder’s death or decision to retire does not automatically end the existence of the business, as is the case with a partnership or sole proprietorship. A major downfall of a corporation concerns the issue of double taxation. The first layer of taxation occurs when a corporation pays taxes to the Internal Revenue Service at the company’s corporate tax rate. The second layer of taxation occurs when the company distributes dividends to shareholders of the business. A shareholder must pay taxes on dividends according to his personal income tax rate.