As with all business entities, corporations have pros and cons.
But if you have ambitious goals, like creating a fortune 500 company, don't think you have to form a corporation from the get-go. Facebook started out as an LLC. In time, to attract investors, it incorporated and offered shares. Corporations can attract investors much better than other entities can. A corporation also gives owners the flexibility to structure ownership depending on the type of investor. For example, it can issue preferred stock with no voting rights to certain investors. When dividends are declared or when the corporation is sold, these investors will be paid first.
Corporations also attract lenders like banks because of their structural formalities. For example, a corporation can structure a deal whereby a bank will have the right to appoint a board member for a period or to veto specific expenditures that the corporation wants to make. A corporation can even offer lenders a chance to buy future shares at its current low price.
Another advantage of corporations is that owners can attract or reward employees with shares. It can set up incentive stock option plans where employees can buy shares at very low prices. This creates an automatic buy-in with the corporation, which leads to loyalty and, hopefully, truly dedicated employees. The corporate flexibility allows it to issue a special nonvoting class of shares to the employees. That enables the owners to maintain full control of the corporation, while rewarding its employees. Also, a corporation can offer its employees fringe benefits that are tax deductible to the corporation.
And of course, corporations live in perpetuity. Owners may come and go, retire, or die. Corporations live on.
Corporations have built-in management formalities that may make running a business more effective. Directors manage the corporation. They meet regularly and set the vision for the corporation. Officers oversee the day-to-day operations. They implement the board's mission. Shareholders own the company and provide initial and ongoing capital.
One downside to a corporation is the ongoing required formalities. For example, Virginia requires the corporation to document annual meetings of shareholders and directors. The corporation must also keep minutes of important corporate meetings. There is no upper or lower limit as to the number of owners a corporations can have. So, in a large corporation, these formalities may not be much of a hassle. However, a corporation with one or a couple of owners might find these requirements tedious. While they should be focusing on growing their corporation, owners must take time to comply with the formalities. If they don't, they risk losing their limited personal liability.
Corporations are more expensive to start and to continue. Though initial fees are comparable to LLCs, other fees are based on the number of shares that are authorized in the corporation's articles of incorporation. That means that start-up costs can be in the thousands of dollars, versus $100 for an LLC.
Corporations are less flexible in that profits must be allocated in proportion to ownership interests. Other types of companies can compensate certain members more than others, for example members who contribute more capital.
Many people shy away from corporations because of double taxation. Corporate owners are taxed twice: once at the corporate level, and the other as individuals on their dividends. While double taxation may be a reality for medium to large corporations, it is normally not for small businesses. Many small business owners do not pay themselves a dividend. They pay themselves salaries and bonus. These are business expenses that the corporation deducts from its profits.
However, upon dissolution of the corporation, the tax burden may be significant to the corporation and the owners. Both may be liable for income taxes on the same assets! For example, upon dissolution, the corporation must pay tax on the difference between the market value of a corporate asset and its tax basis (what it paid for the asset minus depreciation). When the corporation sells the asset (liquidates it) and distributes the money to shareholders, they too have to pay an amount that is dependent on that shareholder's individual basis in that person's shares. Just be aware that if you plan to transfer an asset into a business that you will soon create, and that the asset will likely appreciate over time, then a corporation may not be the right entity for you. An LLC may be a much better option. Or if you insist on forming a corporation, simply sell the asset and use the money to capitalize the corporation or lease the assets to the corporation. Advice from a lawyer and an accountant can help you navigate these tax implications.
Just as partnerships and LLCs can elect to be taxes as corporations, corporations can elect to have pass-through taxation. They can do this by making an S corporation tax election.
With corporate law, there are a lot of moving parts and there is no way I can list all of the issues that might arise or how I might be able to be of assistance to your company. But here are some ways:
How exactly can I help you?
1. Analyze your business and identify legal needs.
2. Draft, prepare, review, or amend pre-incorporation agreements, corporate bylaws, stock agreements, and stock certificates.
3. Ensure that all formalities are being followed.
4. Ensure that all internal and external compliances are satisfied (see sections: Corporate Governance and Compliance)
5. Prepare all necessary documents, including the following: notice of shareholders'/directors' meetings, shareholder proxy, minutes of shareholders'/directors' meetings, consent of shareholders/directors.