What is a Corporation?
A corporation is a legal entity that operates separate from its owners, meaning there is a clear distinction between the company and the person(s) who own and run it. There a two different types of corporations, S Corps and C Corps, and each have similarities and differences from both each other and other business structures, such as an LLC or Sole Proprietorship. There are numerous benefits to incorporating your business as a corporation, but there are drawbacks as well. Learn more about corporations to help decide if this business structure may be right for you. Remember to always consult a professional before choosing a business structure.
S Corps and C Corps: Similarities and Differences
An S Corp is what’s known as a pass-though entity, meaning its profits and dividends can be passed through to shareholders without being taxed at the corporate level. A C Corp however, is subject to double taxation, so profits can be taxed twice, once at the corporate level and once at the personal level.
For C Corps, there are no ownership restrictions, but an S Corp may have only 100 shareholders, and all shareholders must be U.S. citizens/residents. S Corps cannot be owned by other entities, such as other S Corps or C Corps, and may only have one class of stock. Because of these differences, C Corporations can provide more flexibility when growing and selling the business.
Challenges for Corporations
Depending on the size of your corporation, one of the biggest challenges may be meeting shareholder and board member expectations. Because corporations can have 100 or more shareholders, the pressure to perform can be more intense than in an LLC or a sole proprietorship. When hundreds of people are looking for success and dividends, the corporation has to deliver or risk losing its shareholders. Plus, with a C Corp comes a board of directors, who not only appoint officers like the CEO, but also make critical decisions about the company, and who will want to be impressed and see goals met.
Another potential challenge for corporations are legal troubles. Corporations are seen as people in the eyes of the law, meaning the entity can buy, sell, sue, and be sued just as a person can. With all the different laws governing how corporations must be run, there can be a great deal of risk. The stakes can be higher for corporations than for other business structures, and avoiding legal issues could prove a challenge in some cases. Always consult a lawyer to make sure your business is abiding by the law.
Managing Risk as a Corporation
With so many shareholders and often large profits, hundreds of employees and numerous contracts, there is a lot of risk involved for corporations. In addition to common legal challenges, corporations still have to worry about employee fraud, business partnerships, acquisitions, insider trading, and more. With so much risk to manage there’s likely not just one way to effectively manage it. One thing that can help is business credit. Business credit can help you manage certain types of risk, like those surrounding contracts and cash flow.
Using Business Credit to Manage Risk
Your business credit file can help you show your company’s credibility to potential clients, partners and lenders, but other companies business credit files can help you manage your own risk. By checking the credit files of the companies you work with or are considering doing work with, you can help minimize certain risks to your business.
For instance, if you view the business credit scores and ratings of a company you are considering contracting with, but its file indicates it may pay late, you can either decide you don’t want to work with the company, or evaluate whether or not you can still effectively run your business despite late payments. You can also adjust terms and conditions to reflect the risk you incur by doing business with them.
You can also get an idea of whether or not the company will soon go out of business, which can save you a lot of trouble down the road. And you can get a credit limit recommendation so you don’t extend too much credit and hurt your business.
Building Business Credit as a Corporation
If your corporation is well known and very successful, like Coca Cola for example, you may not have any problems getting contracts or loans. But when you’re just getting started as a corporation, you’ll want to build your business credit so you can use your scores and ratings tohelp show your credibility to clients, partners and lenders. When you build a strong business credit file you may be able to get better terms on contracts, obtain funding, be extended more credit, or become a supplier. Learn how to start building your business credit today.
S Corp vs LLC
Both an S Corp and an LLC provide limited liability to a business owner, and help protect personal assets, but there are some small differences that could make a big impact on your decision.
- It costs less to establish an LLC than either type of corporation
- There’s less paperwork involved with an LLC
- If you’re a single owner, you may not need to hire a lawyer or accountant to help you with set up
- You can choose how you want to be taxed
- As the owner of an LLC, you’ll have to pay a quarterly self-employment tax to the IRS
- There is separation between the owner and the business, but not as much as there would be with a corporation
- If you decide to take on investors, most would prefer investing in a corporation, not an LLC
S Corp Pros:
- With an S Corp, you pay yourself a “reasonable” salary (in line with industry standards) and then you can collect leftover company profit as dividends, which are taxed at a lower rate than personal income
- An S Corp allows even more distinction between the owner and the business, which makes the company look better to investors
- You don’t have to pay a self-employment tax as an S Corp, which could save you money at tax time
S Corp Cons:
- There’s more paperwork involved when applying to become an S Corp
- There are also more regulations for an S Corp than for an LLC
- You will likely need to hire a lawyer and accountant to help you navigate the S Corp process, especially if you are changing your business structure from an LLC to an S Corp, which can be costly
- Some states may have additional taxes for S Corps
C Corp vs LLC
As a new or small business, you may not need or want to incorporate as a C Corp. C Corps are most suitable for medium and large businesses with investors and shareholders. C Corps also must have a board of directors and are subject to double taxation. Dealing with the regulations that come with being a C Corp likely won’t be beneficial for a new or small business.
However, if your company scales quickly and you begin taking on investors, you may want to consider the C Corp business structure. Most of the U.S.’s biggest businesses are C Corps, because once the company is bringing in large amounts of money, it becomes beneficial to operate as a publicly traded company with thousands of shareholders, a board of directors, and multiple classes of stocks. You most likely won’t file as a C Corp if you are a new or small business, but you should be aware of the differences between an S Corp and C Corp in case you reincorporate down the road.
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