According to the United States law of the land, corporations are people. Avoiding the actual politics of that definition, I wanted to try to break down and simplify what corporations actually are, what makes them different from other types of businesses, and what the pros and cons to both (or all) are.
A corporation refers to a company that has been incorporated; in basic terms, this means that the business is separate from the individual business owner or owners and has its own rights, et cetera. If a business is not incorporated, the business owner is essentially one and the same with the business.
One of the main benefits when it comes to incorporating your business is that, as a business owner, you are not liable individually for anything (or most things) that happen with the business, whereas the business owner of an unincorporated business would be for the most part. If a customer sues, for example, in a corporation there is a separate financial entity that would be responsible and liable for that issue, whereas an unincorporated business owner would shoulder the financial responsibility and liability individually, or along with however many other owners, there are. Further, if the business goes into debt, in a corporation, the individual owners are, for the most part, not going to be responsible for that debt, but rather the debt will be handled based on the corporation as if it were an individual.
There are also taxation benefits with an incorporated business that unincorporated businesses and individuals do not enjoy. The general tax rate for a corporation tends to be lower than for individuals, or unincorporated business owners and corporations have the option of paying taxes at a later date than the rest of the population. An unincorporated business owner can file one single tax return for him or her and the business whereas a corporation must have a separate tax form filed from its individual owners. An unincorporated business has some advantages in taxation, as with the fact that the owners can file personal tax deductions that are not allowable with incorporated businesses. Further, the owner of an unincorporated business can file for business losses in a way that decreases their declared personal income.
It costs money to incorporate the business, but depending on your state, it isn’t necessarily all that much. There are, however, annual costs that are incurred and there can be multiple entities to which fees are owed by an incorporated business. It is also advisable to involve legal counsel when incorporating a business because you can get into great (and costly) trouble if you do it incorrectly and don’t cover all your bases. This, of course, involves further initial cost but is definitely worth it compared to the alternative of inadvertently breaking the law or something like that. Often there are also going to be what are known as maintenance costs with an incorporated business; because it is a more complicated setup, you’ll want to ensure that your accounting records are regularly maintained and updated, and there may be ongoing tax filings you’ll have to deal with.
Government agencies which are taxed with overseeing incorporated businesses in particular generally expect regular reports, likely quarterly but possibly annually. A corporation also typically involves more than one person. Anymore, to qualify as such, these organizations must be able to show that they have held regular shareholder meetings. These meetings can be decadent affairs at towering heights within the office buildings on one skyscraper or another.
You’ll want to make sure your incorporated business has meetings like the ones mentioned regardless, as this gives you the opportunity to make sure that your shareholders are on board with the direction and actions of the business. Also, these stuffy rather than social affairs prevent disgruntled shareholders from suing or denouncing your business; neither of which are good for your reputation or standing. You’ll likely need employees who are tasked with gathering and distributing the information that shareholders need in advance of such meetings in addition to other necessary and ongoing paperwork. Shareholders generally need to see financial information that is up-to-date as well as other information that is relevant to the operations of the business. As an individual business owner, you would not necessarily have these ongoing considerations to deal with.
As far as the future of a company, a corporation has a more certain one. This is because a corporation is not the sole responsibility of a single individual. Legally, incorporation has a life of its own that can continue even if and when the owner is no longer able to run the company. For whatever reason, when an owner departs his incorporated business, what occurs is much more of an easy transfer or roles and responsibilities than that of an individually run business. Having no shareholders or cooperating owners usually means the estate or the assets of the deceased go to a beneficiary, or into probate. An unincorporated company will have more hoops to jump through if they want to change owners, whether due to death or other ownership change-overs. There is lots of paperwork and legal filings that must be taken care of to legally change the ownership in an unincorporated business.
Finally, there is a lot more oversight generally when it comes to incorporated businesses. Because they are legally incorporated, they owe transparency to both their shareholders and the government along with other agencies or commissions depending on the type of industry they’re a part of. Unincorporated businesses have a bit more privacy in the long run.
- Corporations are People, Too – Public Discourse
- Mitt Romney says ‘corporations are people’
“Corporations!” a protester shouted, apparently urging Romney to raise taxes on corporations that have benefited from loopholes in the tax code. “Corporations!”“Corporations are people, my friend,” Romney said.Some people in the front of the audience shouted, “No, they’re not!”“Of course they are,” Romney said. “Everything corporations earn ultimately goes to people. Where do you think it goes?”
- When Did Companies Become People? Excavating The Legal Evolution