What is Corporation? Types, Advantages and Disadvantages of Corporations

What is a Corporation?

A corporation is a business structure and legal entity whereby a group of people (called investors) buy shares as an evidence of being a member of the corporation.

To simply put it, the corporation is a business structure owned by shareholders and managed by a Board of Directors.

The shareholders own shares and stocks in the company (corporation).

Please read on an introduction to business structure here.

Note: The corporation can be profit or nonprofit oriented.

The nonprofit or not-for-profit corporation will always have a specific goal outside making profit. These goals are usually of benefit to a certain group of people in the society; for instance, the widows, less privileged and physically challenged. These may all be beneficiaries of a nonprofit corporation like the religious corporation. Other nonprofit corporation may focus more on education and human empowerment.

You can read on pressure group and types of pressure group here.

The nonprofit corporation is typically seen in Non Governmental Organizations (NGOs) that render humanitarian and empowerment services to the less privileged in the society. These nonprofit corporations must be legally recognized by the state where they are present.

Please read on sole proprietorship here.

Note: A nonprofit corporation does not pay income tax to the state or federal government on the money it generates while carrying out various services. It is important to state that the money generated from an NGO must be used for community services. It should not be siphoned by its founding members for their respective personal interests.

You can read on community service and it's benefits here.

In a profit oriented corporation, its main goal is to make profit and such profits (and possible liabilities) goes beyond a single individual. In this case, it covers all the shareholders who own shares, buy shares, as well as sell shares.

Please read on limited liability company, its advantages and disadvantages here.

Types of Corporation

Corporations usually exist in two types or forms. These are:

1. C Corporation
2. S Corporation

The C Corporation is the more common form of corporation. It can be owned by an unlimited number of shareholders; and they exist as the large, publicly traded companies present in various cities around the world.

Note: The C Corporation cost more in its formation and typically, there is a double taxation on the business profits.

You can read on the concept and types of cost here.

The S Corporation shares most of the features of a C Corporation. However, it employs a better tax structure for the shareholders when compared to the C Corp.

The owners making up an S Corporation are limited to a maximum of 100 shareholders. In addition, the types of shareholders are limited in the S Corporation.

Please read on partnerships, types advantages and disadvantages.

Advantages of a Corporation

1. Liability is limited to the amount invested by the shareholders.
2. Easy transfer of ownership via the selling of shares and stocks.
3. Capital can be easily raised through the sale of stocks and bonds.
4. A corporation continues to exist after the death of its owners (shareholders).
5. There is no double taxation in an S Corporation.
6. The shareholders can receive tax-free benefits. For instance, a deduction of tax from their retirement and insurance plans is nullified.
7. The C Corporation has an unlimited number of investors.

You can read on the advantages and disadvantages of a franchise business structure here.

Disdvantages of a Corporation

1. Shareholders may pay tax twice on their income and dividends. This is termed double taxation.
   You can read on the double entry system here.
2. The investors may have very little knowledge on how the corporation is managed.
3. Forming a corporation can be quite rigorous and expensive.
4. States will typically charge an annual franchise fee for corporations.
   Please read on franchise and types of franchise here.
5. Only one class of stock is allowed in an S corporation.
6. The maximum number of shareholders in an S corporation is 100.
7. There are limitations in the type of stock in an S corporation.
8. The tax filing process for a corporation can be complex.