Corporations have long been the power structures by which most large companies in the United States operate. While corporations provide many unique benefits, they also come with a long list of duties that company owners must comply with.
Pros of a Corporation
- Owners of corporations have limited liability for the debts, obligations, and activities of the corporation. In other words, if the company is sued, the personal assets of the owners are generally protected.
- Corporations have a unique ability to attract investors because the investors can own a piece of the company (by owning shares/stock), have little personal liability, and have absolutely no management responsibilities.
- A corporation’s unique ability to issue stock provides the corporation with the option to both sell a piece of the company to an investor, and incentivize employees with stock benefits and stock options. This is a valuable tool for business owners, especially in the start-up phase of a business, because it enables owners to sell a portion of their company to get the funding they wouldn’t otherwise have without being forced to share management responsibilities.
- In the business world, a corporation is given more credibility than any other kind of business structure.
- The filing fee to start a corporation in Utah is $70.
Cons of a Corporation
- A corporation pays state and federal income taxes and, additionally, the shareholders (owners) pay taxes on any personal income they receive from the company.
- Complying with all of the legal formalities to ensure the owners’ personal assets are properly protected can be quite burdensome. This includes record keeping; holding regular meetings; maintaining the corporations’ financial independence; and ensuring that the owners of the corporation are operating the corporation as a legal entity separate and distinct from themselves.
- Similar to the operating agreement for an LLC, corporations should always adopt bylaws. Bylaws are rules that govern the rights, responsibilities, and powers of the corporation, the managers, and the shareholders. Having bylaws in place before a serious issue arises can limit owner disputes and possibly avoid the need for litigation.
- Articles of Incorporation & the Business Purpose. File your Articles of Incorporation with your desired state. You will be asked to state your business purpose when filing the Articles of Incorporation. Don’t limit your business purpose any more than you have to, because if you fail to comply with your stated purpose at some future date you may be subjecting yourself to personal liability. In Utah, individuals are allowed to state a general business purpose, such as “The purpose or purposes for which this corporation is organized is to engage in all lawful acts concerning any and all lawful business for which corporations may be organized under the Utah Business Corporation Act and any amendments thereto.”
- Wait for State Approval. Wait to obtain approval from the secretary of state before conducting business. Engaging in business prior to approval, or conducting business under the mistaken belief that you have formed a corporation when in fact you have not, can subject the owners of the company to personal liability for business debts, obligations, and/or lawsuits.
- Adopt Company Bylaws. As stated above, bylaws are crucial to protecting the company and the owners of the company. Consult an attorney who has experience drafting bylaws and handling business disputes to either draft your bylaws for you, or go over the bylaws you already have.
- Familiarize Yourself With Stock. There are several different types of stocks and equities. One can own cumulative preferred stock, convertible preferred stock, common stock, warrants, etc. Additionally, one can own classes of stock, such as Class A common stock or Class B common stock. Having a good understanding of how these different types of stock interact with one another can enable you to structure ownership of the company in a way that best achieves your goals.
- Keep Corporate Records. Keep records of shareholder meetings, elections, issuances of stock, corporate finances, etc. Keeping good records can protect you in case of a lawsuit against your company or against you individually.