The Corporation is an entity type that I’m sure you are familiar with. Chances are good that if you are a regular Aridni reader, you might own stock in a few of them. A lot of companies are set up as corporations. The original concept of a corporation came from England, long before the US ever existed.
The problem was basically people who had money would not start businesses, because of the unlimited liability. The only options at this point were sole proprietorships and partnerships. If something went wrong, the person has everything to lose. You would be personally responsible for the companies debts and other obligations. If you have wealth, then this is certainly not an attractive option.
The British government came up with the idea of a corporation that allows for an entity type that allows you to have limited liability to stimulate the growth of business. This changed quite a bit of things as it made it so the most money you could potentially lose, would be only the amount that you invested.
During the first century and a half of America’s existence as a country, (Up until the very late 1900’s) a Corporation was the only entity type that would allow you the limited liability. This is why corporations are the only types of businesses that are traded on the open market. (with perhaps a few exceptions from small markets somewhere) In order for a company to issue stock through any of the big exchanges such as AMEX or NYSE, you are subject to regulations by both the particular stock exchange as well as the rules put in by the SEC.
Being as it was the only type of entity allowed at these markets, Corporations became the standard for American business. Which is interesting as the British Corporations were a big catalyst for the revolution. The Boston Tea Party against the English and the British East India Company being one of the biggest examples. This planted the idea in Americans that corporations are inherently evil, and of course many American Corporations haven’t really gone to any great lengths to improve it’s image. But that of course is another article for another blog!
So if the upside is that you are can’t lose more than you invest into the company, the downside is of course that you will be subject to double taxation. The company is taxed as it must report it’s income. Then you are personally taxed when you get paid from the company. This includes payment from salary, dividends, and even bonus. The issue is a huge issue that pretty much has to be accepted. Double taxation that affects all the shareholders, employees, and directors.
Corporations are also fairly complicated to organize and run. But that is another article in itself!
For corporations the pros are
+ Limited Liability
+ Tradeable on Most Exchanges
And the cons are
– Double Taxation
– Complicated to run and organize
In a nutshell, that’s some of the benefits and drawbacks of organizing your business as a corporation, as well as some history.