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Neha PalTop Contributor
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Asked a question 4 years ago

Why do we need corporations?

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Corporations are the longest standing business structure leading the pack in the amount of protection and flexibility for shareholders. We examine the top reasons to form a corporation for your business. These benefits are provided by the corporate veil, which is the legal definition of the separation between the business and its owners.

  1. Limited Liability For Shareholders
    Corporations offer the strongest protection from business liability for the business owners, or shareholder. Corporations will pay their own taxes, can own property, enter contracts, sue and be sued independently of those who own them and are responsible for their own debts and actions. As long as your corporation is operated as a true separate entity, shareholders are not personally liable for business obligations.
  2. Raising Capital
    If your business endeavors include seeking financing from external sources, a corporation offers the most flexibility of ownership. There are several types of stock that can be issued and sold to finance the business. This aspect of the business structure makes corporations attractive to businesses with big plans for growing through raising capital. You can sell non-voting shares of stock, which means a shareholder is entitled to profit distributions based on their share of ownership, but have no control over the business activity. This creates silent partners, or more specifically capital partners of the business. Using the structure of the corporation you can create different types of owners, those who have control, those who are entitled to profit distributions or both. The corporate structure is attractive to outside investors and selling stock is easy.
  3. Flexibility of Ownership
    “C” Corporations have great flexibility of ownership. Shareholders can be individuals, foreign or domestic. Other corporations or legal entities can own stock in a corporation. Corporate stock can be held in a trust, partnership or other legal tool. Simply put, almost anything and anyone can be a shareholder of a C corporation. This affords the business opportunities to seek partners and capital from sources that other business types cannot.
  4. Credibility
    When any business is incorporated, you gain instant credibility. Operating your business as a corporation shows that the business is viable, which is more attractive to creditors and investors. Your customers also will recognize the “Inc” in your corporate identity as a factor that demonstrates credibility.
  5. Perpetual Duration
    Corporations have perpetual existence, which means that unlike other forms of business that cease to exist in the event of bankruptcy or the withdrawal or death of the owners, their continuity remains. The oldest corporation, still in business today, is the Hudson’s Bay Company which was formed in the 1670. Corporations are true separate entities from those who own them and will outlive shareholders, as long as they are maintained and operated properly.