What is a Corporation
A corporation is a group of people that have met the legal requirements needed to act as an independent legal entity, separate and distinct from its owners, as recognized by law. It is the most common form of a business organization and may act like a ‘legal person.’ It may sue, be sued in its name with limited liability, pay a loan, borrow a loan, pay taxes, enter contracts, hire employees, acquire assets, etc. The most prominent companies in the world, like Microsoft, Apple, and Amazon, are corporations.
Corporation vs. Company
Confusion rings loud between these two business forms. People have mistakenly been using the term ‘company’ when referring to ‘corporation,’ and vice versa. Most people think they are the same and can be interchanged independently without the meaning of changing its name, but this is at its core false and needs to be corrected.
Corporation refers to big businesses or entities. It is an association that has met the legal requirements needed to operate, do responsibilities, enjoy rights just like an individual, and are recognized by law. On the other hand, a company is a voluntary association of two or more people to do a business venture. Like the corporation, it is a separate, distinct, legal, artificial being, with perpetual succession, common seal, and registered head office. It also has the right to sue and be sued in its name.
The significant difference in both is the scope of operation. A corporation may operate within and outside the country where it is registered, while a company may only do so in the state in which they are domiciled. For example, if you put up a corporation in the USA, it has already given birth worldwide– it is legal and acknowledged. But, if you put up a company in the USA, it remains there. Outside the USA, your company is no longer lawful and acknowledged. Hence, the corporation is a much broader term and cannot describe the other interchangeably.
Types of Corporation
There are two types of corporations: the S and C Corporation. When people speak about a ‘corporation, they refer to the traditional C type. The S type, a kind of a pass-through business, developed much later on.
While they may be different, both types have more similarities in common. They are still independent and legal entities with limited liability protection that may file and form documents and exist with the same structure. However, the first type, which is also the standard or default type, the C corp, has a distinct feature of allowing an unlimited number of shareholders and may be owned by other corporations. Compared to S, it is more flexible in terms of rights and ownership but has a more solemn responsibility for taxes. C Corporations may be offered to the public through the stock market. As it provides its IPO or Initial Public Offering, the public can now acquire the corporation’s ownership through buying shares or stocks.
Meanwhile, S corporations are a bit different. It is an election filed and verified under the IRS to be a select type of corporation to exist with a corp’s benefits while being taxed as a partnership. It is also known as the S subchapter.
The major difference between the two lies within taxation and ownership. Double taxation may happen in the C Corp, wherein dividends at the individual level are paid after corporate income tax is done at the corporate level. It is a separately taxable entity. On the other hand, the S Corp is a pass-through taxation entity. Informational federal return is filed, but unlike the first type, they are not required to pay income tax at the corporate level. Any profit or loss of the corporation is passed-through and will only reflect on the owners’ tax returns, which they will pay at the individual level. It can be concluded from here that S Corporations have a tax advantage compared to the former.
In terms of ownership, there are no state corporation laws separating the two entities. However, there are restrictions placed on both. The C Corporation can have an unlimited amount of shareholders (because they are also offered to the public through the stock market), but the S Corporation is only limited up to 100 shareholders and must only be a citizen of the country in which it was registered. The C Corporation may be acquired and owned by other corps, but any business form cannot in any way own the S type. Lastly, in terms of stock, the S Corp can only have one class, and the other, multiple classes.
How Does a Corporation Grow
All corporations start when a group of people agree and exchange for capital stock. After choosing a name that is in line with a respective state’s corporation rules, the corporation’s initial directors must be appointed before filing the so-called ‘Articles of Incorporation’. The corporate bylaws or the operating rules must then be defined, and stock certificates must be issued to the initial owners or the shareholders. All required licenses and permits must be duly accomplished and needed for the corporation to be a separate and legal entity formally.
From here, your corp must thrive. Some ways on how to grow your corporation, which already has been proven by the existing ones, are first, to maximize your market. Second, reach more customers or widen your market reach. Third, continuously innovate. Fourth, kindly and actively seek referrals from your customers. Fifth, trim down unnecessary costs, or in some cases, invest in new assets or equipment that will boost your corporation’s performance and growth. Sixth, actively join conventions that will help promote your name. Seventh, diversify your offer. Eighth, venture on franchising if it is in line with your product or service as duplication may lift your corp exponentially. Ninth, penetrate a niche market, then specialize, and lastly, tenth, take a leap and export your products or service.
The Main Advantages of Corporations
The main advantage will always be limited liability. If you are an owner or a shareholder of a corporation, whether it may be a C or an S type, you are always under protection by this advantage. Limited liability protection means you are only liable up to the amount of your investment. Any liability further than that is not included. Thus, your assets are protected.
Another advantage is the perpetual succession or perpetual life. The ownership of corporations may be passed through generations.
There are also ownership transfers, which is very evident in the C type wherein shares of stocks are evidence of ownership and thus may be sold and acquired any time by any person, except if it is privately-held.
The S type also has a unique advantage: the pass-through, wherein profits and losses are reflected in the owners, which protects the corp from paying any income taxes.
Lastly, since it can be sold to the public through shares or stocks, the C type may raise higher amounts of wealth, especially if they are performing well in the market.
Corporation Quarterly Payments
Like any other business form, Corporations are due to pay taxes as they earn, either through estimated or withholding tax payments. Otherwise, necessary penalties will be charged to the corp.
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