Table of Contents
- Corporation in Business
- Characteristics of corporation
- Types of corporation
- Advantages of corporation
- Disadvantages of corporation
- Forming a corporation
- Choose a business name
- Check the availability of names
- Register a DBA name
- Appoint directors
- File articles of incorporation
- Write down your corporate bylaws
- Draft a shareholders’ agreement
- Hold initial board of directors meeting
- Issue Stock
- Obtain business permits and/or licenses
- Register with the IRS, and the state and local tax agencies
- Open a corporate bank account
- Dissolving a corporation
- Hold a board meeting and seek shareholder approval
- File a certificate/articles of dissolution with the state secretary
- Pass a notification to the IRS and other tax authorities
- Give formal notice of dissolution
- Settle existing claims with your creditors
- Liquidate all corporate assets
- Dispense/apportion funds to shareholders
- Close all business accounts
- File the company tax returns and documents
- Owning a corporation
- Structure of corporations
- Corporation Vs Company
- Corporation tax
Corporation in Business
A corporation in business (corporate business) is a legal entity which individuals, stockholders, or shareholders established with the purpose of making a profit. It is a single entity that may comprise individuals or a company but it is a separate legal entity from its owners.
Corporations are allowed to go into contracts, sue, and be sued, own assets, pay federal and state taxes, and collect loans from financial institutions. This implies that they enjoy most of the rights and responsibilities that individuals possess. Some people refer to it as a legal person.
One of the most characteristics of this entity is limited liability. This means that its owners can only take part in the share of profits but not in the liabilities of the business.
Almost every well-known business is a corporation. Examples include Microsoft corporation, Coca-cola Company, apple, google, Microsoft, J.P Morgan Chase, and Toyota. Some do business under their names and also business names as Inc.
Creating a corporation involves a legal process which we call incorporation where they have to draft legal documents that contain the primary purpose of the business, name and location, and the number of shares and types of stocks they issue.
The process of incorporation gives the entity a distinguishing characteristic that protects its shareholders from being personally liable to the debts of the business or other lawsuits.
Characteristics of corporation
A corporation offers limited liability to its owners against debts, lawsuits, and charges against the company. This means that the personal assets of the shareholders/owners are protected from the claims that creditors charge against the company. Since it is a separate legal entity from its owners, creditors and claimants cannot go after the personal assets of the shareholders.
In an event of bankruptcy and other debts, losses only end on the investment of each shareholder.
The corporation is owned by shareholders. When the corporation is formed, a fixed number of company stock shares are issued. One or more individuals can own stock shares. Thinking about the that sell their shares, there are potential shareholders willing to buy the stocks/shares.
Shareholders are allowed to vote based on the number of shares they own; the more shares an owner has the more control he has over the company’s decisions.
For smaller corporations, double taxation is an important factor to consider. When shareholders receive an apportionment of their profits and dividends, the government taxes them. The government also taxes the entity at a corporate level. C corps are the ones usually subject to double taxation, unlike the S corp.
The lifespan of a corporate entity only ends when the shareholders and the board of directors decide or vote to dissolve it. That means that the life of the business entity extends beyond the lives of the owners. There is no cause to worry about the death or the withdrawal of the owners. This is because ownership is transferrable in an event of the death of an owner.
The shareholders in a corporate entity may be able to elect decisions for appointing a board of directors, but the shareholders will not necessarily manage the company. For many small businesses, the majority shareholder is the founder and main leader of the company.
However, it is possible for any corporation to hire a company leadership, while also reaping the benefits of the profits. The board of directors takes certain decisions on major item budgets.
Separate legal existence
The corporate entity is a separate legal entity from its owners. In other words, the corporation can sue and be sued in its own name. The owners/shareholders are not personally liable for the financial obligations and other liabilities of the firm.
Access to capital
Raising capital is relatively easy through issuing stock for sale. It is usually attractive to an investor, buying stock in corporations because the shareholder has limited liability. Also, the fact that ownership is easily transferrable constitutes easy access to capital.
A lot of individuals can become shareholders by investing slightly small amounts of money.
Ownership is transferrable since the shares of capital stock constitute ownership in a corporate entity. Shareholders simply transfer their ownership by selling their stock to others.
This transfer of ownership does not have any effect on the daily operations of the entity. It is a transaction that takes place between individual owners. The company does not partake in the transfer of ownership after the initial sales of capital stock.
Corporations are subject to a lot of federal and state rules and regulations as well as series of formalities. The government always interferes in their activities and monitors them very strictly.
Ownership, control, and management
Shareholders do not have the right to actively participate in the management and control of the entity. They appoint a board of directors to manage and control the affairs of the company. In essence, the company is owned by the shareholders while it is managed and controlled by the board of directors. In other words, management comes about as a result of the delegation of authority/power.
Types of corporation
The 3 major types of corporations are the C corporation, S corporation, and the non-profit corporation. The 4 types of corporations are the C corp, S corp, the non-profit corp, and the limited liability company.
This is a corporation that the state/tax authorities tax separately from its owners. This is under the US federal income tax law. It does have a limit to the number of shareholders, either foreign or domestic. The entity treats any distribution from earnings and profits as a dividend for the purpose of US income tax.
Though there are exceptions when treating certain distributions in exchange for stock rather than dividends. One of the exceptions is distributions in complete termination of the interest of a shareholder and also distributions in the liquidation of the corporation.
The Coca-Cola Company is a famous example of C corp
The federal income tax law does not tax this entity separately from its owners. The S corps merely elect to pass corporate income, losses, deductions, and credit through their shareholders for the purpose of federal tax. Usually, the taxation of this entity looks like that of a partnership business.
The state taxes its income at the shareholder level, and not at a corporate level. Also, the entity distributes payments to S shareholders and these payments are tax-free. This goes to the extent that the state did not previously tax these distributed earnings. There are certain penalty taxes that do not apply to an S corp.
Examples of these taxes include accumulated earnings tax and personal holding company tax. To carry out an election for the state to treat an entity as an S corp, there are certain requirements. These requirements include;
- Has to be an eligible entity, that is a domestic corporation or an LLC which has chosen to be taxed as a corporation.
- Should have only one category or set of stock.
- It must not have beyond one hundred shareholders.
This is an organization that uses the surplus of its revenues to achieve certain goals instead of sharing them as profits or dividends. While a nonprofit organization has the permission to generate surplus revenue, the organization has to retain the surplus for self-preservation, expansion, or plans.
The non-profit entities usually fall under the class of charity organizations. They dedicate themselves to a particular social goal such as educational and religious purposes. This is to attend to the social welfare of a particular geographical area.
Limited Liability Company (LLC)
Though not really a corporation, a limited liability company is a flexible business entity that the characteristics of a partnership and corporate structures. It is a legal entity separate from its owners that provide limited liability to its members/owners. The primary feature it shares with a corporation is a limited liability while its common feature with a partnership is the pass-through taxation. It is usually more flexible in nature than a corporation and it is usually suitable for single-owner companies.
C corporation Vs S corporation
Most of the major corporations are the C corps and they are usually smaller firms than the S corps. The notable and major difference between the two is that the shareholders of the C corp are subject to double taxation while the shareholders of the S corps are not.
This implies that the state will tax the income of the C company at corporate rates and still tax the dividends after the corporation has shared them with the shareholders. An S corp can pay itself salary without the government subjecting it to self-employment tax.
Advantages of corporation
The shareholders of the company are only liable for the amount of their investment through the purchase of shares. In other words, if the entity goes bankrupt and does not have money left to pay back to the creditors, it will use the money which the shareholders invested to pay back the creditors.
The shareholders will only lose the amount of money they invested. Creditors do not have claims over the personal properties and the assets of the owners/shareholders. Here, limited liability means that the liability is limited to the extent of the amount invested.
We can say that limited liability reduces the amount that a shareholder can lose. It allows corporations to raise large amounts of money for their company by combining funds from different owners of stock.
Corporations are able to socialize their costs, that is to spread it to society generally. This attracts more potential shareholders as well as increasing both the number of intending shareholders and the amount they are bound to invest.
Availability of capital
Relatively, it is easy to raise a huge amount of capital in corporations through the general public. Since the total sum of money a company wishes to raise is usually split into thousands of shares, the price of each share turns out to be very small.
A small price allows more people to buy shares from a company. As a result, it becomes easy to raise a large sum for corporations by splitting it into smaller units.
Corporations continue to exist even after the deaths of the executives, board of directors, and managers. Only the board of directors and the executive team can put to an end its existence.
Because of this, the investors do not have to worry about the death or illness of the executives because other people will come to take their place. In other words, the assets and the structure of the corporation can continue beyond the lifetime of its shareholders.
Continuity gives managers the room to carry out a long-term plan and do better.
Easy transfer of ownership
In a corporation, ownership is easily transferrable just as it is in the public limited liability company. In private companies, it is difficult to transfer shares because there are certain restrictions.
Many people have considered a corporate form of business to be more stable than other forms of business organizations. Also, it is easier for a corporation to attract top talent in the market to help rapidly grow their business.
Here, this form of organization portrays its credibility to suppliers, customers, and other stakeholders in the business.
It is possible for some corporations to be able to choose to be treated as S corp which excludes them from federal income tax rather than taxation on some capital gains and passive income. However, this advantage is only limited to the S corp.
Disadvantages of corporation
Setting up a corporate business involves a very complex process, government agencies monitor corporations and this results in heavy paperwork to set up this company.
Many norms of different regulatory bodies have to fulfill before this business can start. Because it takes a long time to arrive at a conclusion, it is bound to demotivate the founders.
Double tax means levying of tax by two or more authorities on the same income in cases of income taxes, assets in cases of capital taxes, or financial transactions in cases of sales taxes. Here, any profit that the firm distributes to its shareholders will be taxed twice.
In other words, the corporation is mandated to pay a flat corporate tax on its profits, and then the government will still tax the dividends that the shareholders receive in their hands. This makes it more demotivating for business owners to set up this form of business.
Corporate profits are usually subject to higher overall taxes because the government taxes profits at the corporate level. Again, the government tax profits at an individual level.
Conflict of Interests
In a corporate business, the appointed officers and the board of directors may end up carrying out decision-making that will only fulfill their personal interests. Some of these decisions may not be good for the corporation’s wellbeing.
For example, the board of directors may decide to pay themselves higher salaries from the profit or perhaps purchase luxury offices with expensive facilities. Some of these self-interest-based decisions can be harmful to the entity and its image especially when it is not making good profits.
In other words, when ownership is different/separate from management, the management will begin to neglect the interests of the owners. This eventually leads to a malfunction in the company.
No business confidentiality or privacy
Just as it is part of the federal rules and regulations, a corporate business must provide annual reports and other different reports. As a result of this, the business loses confidentiality.
These reports most times present pieces of information on the volume of sales, purchase of new assets, debts, and other quantitative and qualitative information. Because these reports are available to the general public, the entity may end up disclosing sensitive information and business strategies to its competitors.
Extensive rules and formalities to follow
There are many rules that the law has laid down on how corporations are to govern themselves such as having a board of directors, holding regular and periodic meetings, keeping records, and publishing some documents and periodic reports.
Any slight mistake of manipulation will lead to a heavy penalty on the corporation. For example, an entity forgets to disclose its liabilities such as bank loans, the federal government will count it as a fraud and this will bring attract heavy penalties.
This can cause the corporate to gain a bad image which can bring down its valuation in the stock market.
The fees and legal costs required to form a corporation can very large in amount. This will be harmful to the business especially when it just started and has low financial resources. Aside from time requirements, forming a corporation requires more money than when forming other business structures.
Forming a corporation
The process of forming a corporation varies from state to state. One has to gather information from the state he wants to establish his entity. However, we shall look at the following processes.
Choose a business name
The first step is usually selecting a business name when starting the corporate. You may need to include a corporate designation, which is a word that helps to identify your business as a corporation such as incorporated, limited, or corporation (usually the abbreviated versions of the terms).
It is always advisable to find out the restricted words in your state. The common restricted words are bank and insurance.
While choosing a name for your business, make sure your proposed business name does not encroach on any trademarks. In this instance, a trademark search can help to determine if there is any pending, active, or registered trademark with a similar name.
Check the availability of names
After selecting a marketable name that works with your brand, you have to make sure that the name is legally available. Choose a name that is no other corporation in the state has used. To determine the name, you can check your state’s office of business and corporations.
In most instances, the relevant authorities will register your new business after you have filed your articles of incorporation. Also, after selecting a business name, you can check with the state office to find out if you can reserve the name until you are able to file your articles of incorporation.
Register a DBA name
If you want to operate your business under a different business name other than the corporate name you have chosen, you will have to register a fictitious name (doing business as).
The laws that guide DBA vary from state to state and also from country to country. Also, to get more information about registering a DBA name, find out from your local, state, or country office of business development, corporations, or small businesses to get details for your location.
Typically, owners do appoint directors but in most cases, owners appoint themselves as directors. An owner can be a director while a director cannot be an owner.
The number of directors to appoint depends on the state’s regulations and rules. For example, some states will require a certain number of directors depending on the number of owners.
File articles of incorporation
You have to get, complete, and file/document articles of incorporation with the secretary of state office in your state. They may refer to the articles of incorporation as certificates of incorporation or charter depending on your state.
Some states require the names of the directors on the articles of incorporation. Also, you may need to appoint a registered agent who will receive notices, rules and regulations, and other compliance documents on your corporation’s behalf.
Write down your corporate bylaws
This contains the rules that govern how your corporation will operate. In general terms, corporate bylaws cover things like stocks that the corporate business has the authorization to issue, the required number of directors, and the procedures in relation to meetings and record-keeping.
Though you do not need to file bylaws with the state, they are very important in running a corporation. You can consult a legal practitioner to assist you in drafting appropriate bylaws for your business.
Drafting a shareholder’s agreement is optional but it is needful in case of the death or withdrawal of an owner or probably an event that will cause the owner to transfer ownership of his shares in the entity.
Such agreements will help in protecting the interests of the remaining shareholders if one shareholder dies or withdraws. You also need an experienced legal practitioner to assist in drafting out this agreement.
Hold initial board of directors meeting
You need to hold an initial board of directors meeting to deal with different matters whether your corporation has one or more than one board of directors.
The matters necessary to address in this meeting include the adoption of bylaws, the appointment of corporate officers, and the authorization to issue stock.
If you wish to elect an S corp status, you should address the matter, and the board of directors should approve it in the initial board meeting.
You may be exempted from demanding and imposing requirements of the security exchange commission (SEC) and your state’s securities regulation agency. Once the board of directors has approved the issuance of stock, you can go ahead, and you can even issue stock certificates if necessary.
Obtain business permits and/or licenses
You need to obtain certain business licenses/permits in order to be open for business. These requirements may differ depending on your state and local government and also the industry under which your business operates.
You can check the small business administration website to see the licenses and /or permits your entity will require.
Register with the IRS, and the state and local tax agencies
C corporations are separate taxpaying entities and because of this, one has to obtain tax identification numbers (TIN) from the IRS and the state’s local revenue agencies. You can visit the IRS site to get more information about the taxation of corporations.
Open a corporate bank account
Your corporation needs to have a bank account that is separate from its owners’ bank account. The bank will guide you on the documents your business will require to open a corporate bank account. Some banks may require a corporate resolution to open a corporate account while some may need just a copy of the articles of incorporation.
Most banks will also require the corporation’s EIN (employer identification number) which is obtainable from the internal revenue service (IRS).
Therefore, a corporation comes into full existence when it is incorporated by a group of shareholders who possess ownership of the entity, holding common stock, and pursuing a common goal or objective.
The goals of a for-profit corporation are not the same as that of a non-profit organization. We know that majority of corporations aim at providing returns for their shareholders. Shareholders are percentage owners of the entity and they are only liable for the payment of their shares to the treasury of the company upon issuance.
Dissolving a corporation
The dissolution of a corporate business can either be voluntary or involuntary. If it is involuntary, it is usually a case whereby the creditors of an insolvent corporation trigger it. This may result in the bankruptcy of the entity.
It may take just a few days to formalize the dissolution of a corporate entity with the state once the company files the articles of dissolution and pays the filing fee. Other processes such as making a decision to close the business, liquidation of assets, claims settlements, and filing of the final tax returns and other documents may take many months.
Just like the way corporations are formed under the laws of the state, they are dissolved under the same laws. Most of the information that relates to how to dissolve a corporation is obtainable from the state secretary’s office. Here are the steps necessary for dissolving a corporation;
In dissolving a corporation, you need to obtain the required permissions. Corporate bylaws usually state the procedures that one has to follow to dissolve the business entity. In addition, some states/jurisdictions may possess some requirements and laws that control how to dissolve a corporate.
The board of directors usually holds a meeting to elect a resolution to carry out the dissolution. After the approval of the dissolution by the boards, the shareholders will either vote for or against the resolution. Most times, the simple majority vote is okay to pass a decree for corporate dissolution.
The board of directors should develop a plan of dissolution after the shareholders have approved it.
File a certificate/articles of dissolution with the state secretary
After the approval of the corporate dissolution, they must prepare and file the certificate of dissolution with the relevant state office. This certificate of dissolution is a formal notice to the general public and the government that the corporate has been dissolved.
The fee involved in filing a certificate of dissolution varies from state to state. There are some offices that provide the dissolution form and this form includes instructions for completing and filing the form in addition to the fees that they must pay.
It is mandatory for you to pass a notification to the internal revenue service (IRS) and other tax authorities that your corporation has been dissolved. it is necessary for your company to file a final annual tax return for the tax year you dissolved the business and also other required tax forms.
Most times, corporations retain corporate legal practitioners, tax professionals, and accountants to ensure that they overlook nothing.
If the corporation has not been able to meet its financial obligations, the government can seize the assets for the payment of taxes, penalties, and interests.
If shareholders try to dissolve their entity and dispose of assets in an attempt to avoid paying taxes, the government can hold them legally liable for the taxes for other penalties.
Give formal notice of dissolution
You have to notify your creditors and other parties in interest about the dissolution of your entity. Most times, the company will send emails to creditors, notifying them of the dissolution of their business and direct them on how to submit their final claims for payment.
Also, some companies would publish the notice of dissolution in addition to sending the required notices via emails.
The laws regarding the proper notification of dissolution and whether the company may turn down some claims after the deadline for claims submission vary from state to state.
It is best to consult a legal practitioner to ensure taking proper steps in order to eliminate any future liability for the shareholders, board of directors, officers, and the company’s employees.
Settle existing claims with your creditors
The company can accept to pay the claims that creditors have filed or dispute them. If the corporation disputes or declines a claim, the creditor can choose to file a lawsuit/sue the company to collect the debt.
There are times that the corporate business will decide to settle those disputed debts with less than the amount they are owing to avoid lengthy and costly litigation that is bound to prevent the finalization of the dissolution.
A business legal professional can guide officers, shareholders, and the board of directors through the process of settling the claims filed by creditors in accordance with state and federal laws.
Liquidate all corporate assets
After paying corporate debts, the company should liquidate the remaining corporate assets. The board of directors can authorize different methods of liquidating corporate assets. The method can include discount sales and auctions.
It is required for the corporate to keep thorough records of every transaction to prove that the board of directors and the officers to reasonable steps to obtain the highest possible values for those corporate assets.
The corporate bylaws should be able to detail the procedure/steps in distributing final funds to shareholders. Usually, shareholders receive a proportion of the remaining assets according to the percentage of stock each of them owned.
For example, if a shareholder owns 30 percent of the corporate shares, that person will receive 30 percent of the final apportionment of the assets. If the corporation has multiple classes of stock, the board of directors and the corporate officers have to carefully follow the corporate bylaws to make sure that the shareholders receive the actual distribution based on the class of the issued share/stock they own.
Close all business accounts
After distributing all assets, the corporate officers and board members should complete a final accounting to make sure that they balanced all corporate books and zeroed them out. At this point, they have to close the corporate bank accounts.
File the company tax returns and documents
At this point, you are free can file the corporate tax returns alongside other tax forms you have not filed to date. Most corporations usually allow their tax professionals and accountants to prepare the final tax returns with the internal revenue service and other tax authorities.
This is to reduce the chance of overlooking anything. A skillful tax legal professional will help prevent any mistakes that can cause problems for every party involved in the corporation after the dissolution.
Is it possible to reinstate a corporation?
If the shareholders and the board of directors voluntarily dissolved the corporation, the business is no more active. The owners will need to file new articles of incorporation to set up a new company. If the corporate however dissolved involuntarily or administratively dissolved, the owners may reinstate the company/entity.
Reinstatement here means bringing a corporation into good standing. Inactive corporations that are still in good standing should be able to resume business at their desired time. If the business is not active and not in good standing, the entity has to take the necessary steps to bring the entity back to good standing.
In reinstating a corporation, the requirements may include filing annual returns, paying outstanding fees/debts and taxes, and filing a reinstatement application. This process also varies from state to state. To get more information about this subject matter, visit the website of the corporate division of the state secretary.
In most states, corporations in good standing can still be in existence until a formal dissolution takes place as long as the entities are still in good standing with the state.
Remaining in good standing with the state may require the owners to take steps every year to in compliance with the state laws for corporations. It is important to learn how to dissolve a corporation that no longer conducts a business.
Corporate owners are bound to believe that it is easier and less expensive to allow a corporation to remain inactive instead of learning how to formally dissolve it. In this case, the meaning of an inactive corporate entity slightly varies from state to state.
Many states consider a corporate entity not active when it is no longer conducting any business by rendering any service, entering into purchase and sales contracts, entering new contracts, owning any property in the state, and not having employees.
What are the outcomes/consequences of not carrying out a formal dissolution of a corporation?
There may be consequences for choosing to let a corporate entity remain inactive. Some states may penalize a corporation for remaining inactive without being in good standing with the state. It also implies that if the state administratively dissolves a corporate business, the owners can be personally liable or responsible for the outstanding debts and liabilities of the business.
Once the state dissolves the entity, additional penalties on outstanding taxes can become the owners’ liability.
There can be major liabilities for owners that choose to allow their business to become inactive. The best way is to learn how to dissolve a corporation and follow up the dissolution.
There may be few instances where allowing the entity to become inactive for a short period is the best. If the business owners are not certain about whether to allow the company to remain inactive or go ahead with the corporate dissolution, it is a wise thing to seek assistance from experienced corporate/business legal professionals.
There are many factors that influence the time it takes to dissolve a corporation. Mostly, larger corporations take a longer time to dissolve than smaller ones.
Also, the type of business is another factor that affects the dissolution timeline, and also the federal and state rules and regulations for dissolving certain businesses. Business attorneys/legal practitioners are always helpful because they have the right understanding of how to dissolve a corporation and efficiently follow each step to avoid unnecessary problems and delays.
Owning a corporation
It is possible to argue that one cannot truly own corporate businesses. It is acceptable that the shareholders are the owners of the corporation but they are not the legal owners. In this instance, legal ownership is the ability to make the actual decisions of the business and use the assets of the company.
So in this case, we can say that shareholders are not the actual owners of the corporate entity. We still consider them as the actual owners of the entity because of their ownership of shares/stock.
This ownership depends on the proportion of shares each individual possesses in the corporation. For example, a person holding 50% of shares in a corporate entity has a controlling interest in it. Such a person has greater voting and decision-making power.
The following are the rights of shareholders;
- Receiving a percentage of the company’s net revenue
- Vote on the board of directors
- Inspect the books of accounting records of the corporate
- Sue the board of directors for wrongful acts such as breach of duty or fraud
- Transfer of ownership through selling their stock
- The right to receive dividends
- Buy more shares/stock if there is another public offer
Every shareholder possesses the right to vote/elect who to be on the board of directors. This gives them the oversight or the ability to supervise how they should run the business.
A shareholder who holds a large number of shares such as the 50% in the example above may be able to appoint the board of directors alone.
A shareholder who wants to sell his shares/tock to another individual but yet possesses beneficial ownership over the shares can turn over the right of his shares without turning over the title. When this happens, they will make a third party the registered owner of the stock/shares.
This implies that the initial shareholder still continues to possess the above rights that other shareholders possess.
The board of directors is the decision-makers of the business while the shareholders are termed the owners. This implies that a board member does not necessarily need to possess any share in the entity.
Structure of corporations
The organizational structure of a corporation comprises different departments and divisions that contribute immensely to the overall mission and goals of the company.
The segments may comprise the marketing department, finance department, accounting department, human resource department, information technology department, and the operational part of the entity.
Corporate structures comprise different departments that contribute to the goals and objectives of the company. Some businesses consider the marketing department as the most important section in the corporate structure.
Without the marketing department, the company cannot realize sales and new customers. The finance department also is vital and it is responsible for the capital formation necessary for running the organization. The accounting department, human resource department, information technology department (IT), and the operational segment are other segments the company may consist of.
These are the six major departments of the corporate entity that represent the major managing resources in a publicly trading company. Though there are usually smaller departments that are either within the major segments or are independent.
Another way to define the structure of a corporation is through business divisions, A business division is a unique part of a firm, yet the company is still legally responsible for the debts and other financial obligations of each segment/division. Some segments of a corporate can be separate entities.
A typical example of a corporate structure that has many divisions or sections is Hewlett Packard (HP). Such as the printing and multifunction department, the servers division (mini and mainframe computers), the handheld device segment, etc. Google is another department, YouTube is a separate business entity though Google still owns it.
Corporation Vs Company
Just as a company is a legal entity separate from its owners, a corporation is also a separate legal entity from its owners. In this article, we used the words, “corporation” and “company” interchangeably and some scholars describe a corporation as a company. We shall look at the aspects in which one is different from the other.
The size and suitability
Though there is no clear rule stating that corporations must be larger than companies, this is usually the case. A corporate business structure becomes applicable in cases whereby the company is listed on the open market and thereby becomes publicly traded, allowing larger numbers of shareholders.
Companies are sometimes large but they tend to be smaller in size. A corporate entity may likely trade abroad and have itself registered in other parts of the world.
The structure of ownership
Companies and corporations have different structures of ownership. Both of them are owned by shareholders but in companies, the shareholders are generally fewer than that of corporations. In companies, shareholders are likely to be the main directors while in corporate entities, they have a different body that runs the business, the board of directors.
Sometimes, the liability each entity bears can differ especially in the case of taxation. This can also have to do with many factors such as the size, shareholders, secured, and unsecured creditors.
Companies are different from corporations in the techniques of management. Corporations tend to require a different structure of management, looking at their larger size. This usually involves the board of directors instead of just one or two equal directors or majority shareholders of a smaller company,
Alongside the management structure, the hierarchy of a corporation is different from that of a company. Basically, this has to do with the number of people involved in the organization.
Names and terms
Though this seems to be similar between the two. The terms and names, when they apply to specific aspects of a corporation can also differ when we compare them to that of a company. This can also mean the difference between the single-member limited, the incorporated, or the public limited company. It affects how they operate, function, and trade.
Legal terms and agreements, administration, and compliance
Corporations usually have a noticeable stature/influential image in the marketplace and economy. Accordingly, the way the state or government rules governs a corporation can be different from that of smaller companies.
The regulation is more strict on corporations, that is, they face more inspections to ensure compliance. Therefore, their administration and bookkeeping must meet certain standards and criteria. Corporations have to face or go through rigorous formalities than a company. Because of this, corporations happen to be more complex than a company.
Accounting, record-keeping, and taxation
The processes of accounting and record-keeping can constitute a big difference between a company and a corporation. This is also because of the large size of corporate businesses and it follows from the greater attention on compliance.
The manner in which tax laws govern corporations is also different. This is a result of their profit, revenue, and status in the economy.
Transparency, openness, and public trust
Because of the public trading of large-scale corporate entities, there exists more public trust in their services. Being transparent and disclosure of material facts happen to be the focus points for corporations. Though it is important, private companies usually focus less on this.
The responsibility of disclosing prospective plans and arrangements for shareholders is likely to be in more detail for corporate entities. This is the reason why corporations do not have privacy. They have to give periodic reports with regard to their activities and business strategies. For companies, they have privacy and confidentiality.
A corporation tax or corporate tax is a direct tax that a jurisdiction imposes on the income or capital of corporations. A lot of countries impose these taxes at the national level and can impose such taxes at the state level or local level. We can also refer to this tax as income or capital tax.
- Usually, a country’s corporate tax applies to the following entities;
- Corporations that got incorporated in a country
- The corporations that are doing business in a country on the country’s income
- Foreign corporations that have a permanent establishment or set-up within the country
- corporations that are resident in a country for tax purposes
The first corporations that existed in the world include the Dutch and English East Indian Companies, the West Indian Companies, etc.
In conclusion, a corporation is a Quizlet when a group of individuals owns the entity and the state where it is located authorizes it to act as if it is a single person, separate from its owners.
The division of a business is a clear part of the business firm and the company is legally responsible/liable for all the financial obligations and debts of each division or department. In large organizations, different subsidiaries/subordinates may run the different sections of the business and each section/division may include one or more subsidiaries.
Either a single shareholder or multiple shareholders (who come together to achieve a common goal) can establish a corporation. Shareholders can form it as a for-profit or a not-for-profit entity.
Shareholders form for-profit entities to generate revenues and profit returns to themselves based on the ownership of each shareholder. This forms the majority of corporations all around the globe.
Chyou is a published author who focuses on the field of international business. After an established career facilitating mergers and acquisitions for medium to large corporations, Chyou turned to writing to help students better understand international business concepts.