By: Allen T. May, C.E.O. of Westwood Associates, LLC
Back in 1837, William Procter and James Gamble, two sole proprietors, formed a partnership called Procter & Gamble (P&G) and set out to compete with 14 other soap and candle makers in Cincinnati, Ohio. Then, in 1890, Procter & Gamble incorporated to raise additional capital for expansion that eventually allowed the company to become a global giant. Today, 4 billion times a day, Procter & Gamble brands touch the lives of people in 180 countries around the globe. Like many large corporations, P&G's market capitalization is greater than the gross domestic product of many countries.
While not all sole proprietorships and partnerships become corporations, there are reasons why business owners choose the corporate form of ownership. Perhaps the best definition of a corporation was given by Chief Justice John Marshall in a famous U.S. Supreme Court decision in 1819. A corporation, he said, "is an artificial person, invisible, intangible, and existing only in contemplation of the law." In other words, a corporation is an artificial person created by law, with most of the legal rights of a real person. These rights include:
* The right to start and operate a business
* The right to buy and sell property
* The right to borrow money
* The right to sue or be sued
* The right to enter into binding contracts
In the United States, the corporation is the stalwart business entity most commonly formed for the purpose of raising capital and limiting individual liability for its owners. The corporation is a legal separate "person" which may live on forever or be empowered to protect the shareholder from financial harm. Worth noting, since a corporation is a "person" then a real person, like you and I, are legally known as a "natural person" so its good policy to have a clear understanding of these two legal terms. As a "person" the c-corporation may own assets such as buildings, land, office equipment, etc. It can also sue and be sued just like a "natural person" and it can transfer its ownership easily, borrow money, mortgage its assets, and file for bankruptcy. The c-corporation has a board of directors and corporate officers which handle its daily operations and management. Its shareholders have the power to elect the board of directors at its shareholder meetings.
Some of the general characteristics of a C-Corporation include:
> Continuity of Life: The C-Corporation may live forever without interruption by death of its shareholders, board members or officers. Consider companies such as Hershey's, Firestone, JP Morgan Chase, and Macy's. While its original founding members are no longer with us, the c-corporation they started remains here today. The corporation exists forever so long as corporate regulations are met.
> Separate Entity: The C-Corporation is a separate legal entity to be a "fictitious legal" person. Moreover, it has easy transfer of ownership and assignment of equity.
> Limited Liability: This has always been a HUGE plus for forming a corporation. Owners, a.k.a. shareholders, are insulated from debts and liabilities of the corporation by state law. Certain provisions, of course, must be met. Essentially, no shareholder, officer or director may be held liable for debts of the corporation unless the corporate law was breached.
> Corporate Articles: This legal document must be filed with the Secretary of State to form the corporation. Please search this blog for "Corporate Articles" to learn more as I will cover this topic in great detail.
> Capital Generation: The C-Corporation has the legal ability to borrow money, issue bonds, sell common and preferred stock, as well as enter into investment contracts. Moreover, it can mortgage assets, or enter into contracts for many other types of financing.
> Centralized Management: Practical control of business is performed by officers at the direction of the board of directors.
There are tax implications that must be considered when forming a C-Corporation. I urge all of my clients to seek out the advice of a CPA (certified public accountant) who specializes in corporate tax law. Its vital that you speak with a CPA who have the ability to articulate clearly to you the tax implications involved. Knowledge is power and every entrepreneur should get their head around the tax structure and its benefits before selecting a specific type of entity for their new venture. That said, with regards to a C-Corporation, consider the following:
> It will file annually on IRS Form 1120 and report earnings and taxable profit.
> It may be subject to estimated tax payments (quarterly). For additional information, please read IRS Publication 542, with can be found at their website http:
www.irs.gov
> It MUST file for a "Federal Tax Identification Number" using IRS Form SS-4. This form can be completed online, for FREE. Simply Google "IRS Form SS-4" and you will find both the instructions to complete the form online as well as a pdf file to complete and submit. During normal business hours, the IRS computer system will automatically generate you an instant EIN number to use.
> It must withhold and match employment taxes on any wages paid to its employees, and this includes directors and officers of the corporation. In this blog, I will cover in great detail information on federal employment taxes.
Unlike a real person, however, a corporation exists only on paper. There are approximately 6 million corporations in the United States, which comprise about 20% of all businesses, yet they account for 83% of all sales revenue.
CORPORATE OWNERSHIP: The shares of ownership of a corporation are called stock. The people who own a corporation's stock - and thus own part of the corporation - are called stockholders. Once a corporation has been formed, it may sell its stock to individuals or other companies that want to invest in the corporation. It may also issue stock as a reward to key employees in return for certain services or as a return to investors in place of cash payments. Worth noting, a closed corporation is a corporation whose stock is owned by relatively few people and is not sold to the general public, whereas, an open corporation is one whose stock can be bought and sold by any individual. Examples of an open corporation include Google, Microsoft, American Express, and Procter & Gamble.
Although you may think that incorporating a business guarantees success, it does not. There is no special magic about placing the word "incorporated" or the abbreviation "Inc" after the name of a business. Unfortunately, like sole proprietorships and partnerships, incorporated businesses can go broke. The decision to incorporate a business there fore should be made only after carefully considering whether the corporate form of ownership suits your needs better than the sole proprietorships or partnership forms. If you decide that the corporate form is the best form of organization for you, most experts recommend that you begin the incorporation process by consulting a lawyer to be sure that all legal requirements are met. While it may be possible to incorporate a business without legal help, it is well to keep in mind the old saying, "A man who acts as his own attorney has a fool for a client."
While these are some of the highlights of a C-Corporation, there is significantly must more information you should read before selecting this type of business entity. Please search my blog for additional information when needed.
For additional information, you can reach me as follows:
Allen T May
