A business is any organization that seeks profit by providing goods and services to the economic system. People can form a business in sever ways. One of the forms of business organizations is a corporation.
Although the word corporation makes people think of big businesses like General Motors, IBM, Ford, it is not necessary to be big in order to incorporate (start a corporation). Obviously, many corporations are big. However, incorporating may be beneficial for small businesses, also.
The purpose of forming a corporation is to get way from the disadvantages of sole proprietorships and partnerships.
Corporations often are divided into publicly held and close corporations. The stock of the close corporation is held by a family or small group of people who know one another. A publicly held corporation sells shares to people who may have little interest in it except as investors.
A non-profit corporation is a special type of corporation formed for charitable and other purposes. It does not seek profit. Such a corporation has many of the features of business corporations with the major exception of its tax status. Owners of a non-profit corporation can contact the Internal Revenue Service for forms to qualify for tax-exempt status.
The advantages of such an entity:
More money for investment. To raise money, a corporation sells ownership (stock) to anyone who is interested. So a major advantage of corporation is their ability to raise large amounts of money.
Size. A major advantage of corporations is that they have size and resources to take advantage of opportunities anywhere in the world.
Tax advantages. Once a person, partnership, or group of individuals has incorporated, they often receive significant tax advantages. They can deduct expenses for automobiles, meals, trips, and much more from their taxes. They can reinvest profits into the corporation to postpone paying taxes, and more. One of the most important tax advantages is tax- free fringe benefits, such as retirement funds.
Perpetual life. Because corporations are separate from those who own them, the death of one or more owners does not terminate the corporation.
Ease of ownership change. It is easy to change the owners of a corporation. All that is necessary is to sell stock to someone else. This means that new owners can be brought in easily as well.
Separation of ownership from management. Corporations are able to raise money from many different investors without getting them involved in management.
Here are a few of the disadvantages:
Initial cost. Incorporation may cost thousands of dollars and involve expensive lawyers and accountants.
Paperwork. A corporation must keep detailed records, the minutes of meetings, and more
Two tax returns. If an individual incorporates, he or she must file both a corporate tax and an individual tax return.
Size. Large corporations sometimes become too inflexible and too tied down in red tape to respond quickly to market changes.
Social security. A corporation has a high social security and unemployment compensation burden; that is, it must contribute to these funds.
Termination difficult. Once a corporation is started, it's relatively hard to end.
Double taxation. Corporate income is taxed twice. First the corporation pays tax on income before it can distribute any to stockholders. Then the stockholders pay tax on the income (dividends) they receive from the corporation.