The creation of a Corporation creates a unique legal entity that is independent from you and the other Shareholders. A corporation offers your company structured and officially defined ownership and management frameworks that distinctly outline the rights, responsibilities, and obligations of the business owners and managers.
A Corporation is held by its Shareholders, overseen by its Board of Directors, and run by its Executive Officers. By incorporating your business, the resulting corporate framework will assist you in managing, assessing, and expanding your enterprise.
Here are 8 key reasons for incorporating your business:
Good Fences Make Good Founders
Understanding the ownership structure of the business and the roles and responsibilities of the stakeholders is crucial. The incorporation procedure frequently reveals the personal motives and contentious issues of the Founders, acting as an effective way to assess the true nature of your business partners and their egos and motivations.
Even if you think you have an excellent working relationship with your Co-Founders at the start of your new venture, it’s crucial to establish a strong ownership and management structure, as people frequently change and your business will undoubtedly develop.
Improve the Chances of Fundraising
A well-organized Corporation can assist your business in securing funds. For instance, Investors usually comprehend the frameworks and contracts utilized by Corporations to obtain funds, which can aid the Financing procedure. Moreover, the Corporation offers multiple methods for financing your business, which may appeal to prospective investors and lenders along with the specific financing features they seek.
Investors appreciate several attributes of the Corporation, such as Limited Liability Protection for Stockholders, perpetual existence, and the simplicity of transferring ownership. For significant capital needs, it’s essential to note that numerous Venture Capital and other investment funds are unable to invest in legal entities that are not Corporations (like Limited Liability Companies) due to the specific tax obligations of these Investors.
Safeguard Your Personal Assets
A fundamental characteristic of the Corporation is the restricted liability of its Stockholders. When well-organized and kept up, a corporation can lower your individual risk regarding the Debts, Liabilities, lawsuits, and other responsibilities of the business.
Thanks to the limited liability characteristic, the Corporation’s Creditors can only claim the Corporation’s Assets for payment and cannot pursue the Stockholders directly, even if the corporate Assets are insufficient to settle all outstanding Debts and Liabilities.
Develop Enhanced Equity Incentives
Equity incentives or Stock Option Plans implemented by a corporation are widely recognized and frequently offer more appealing incentives and advantages for employees and other individual service providers compared to other alternatives. For instance, workers might benefit from the more advantageous tax treatment of Incentive Stock Options, which are exclusively available through Corporations.
Moreover, a Corporation may possess various types of Capital Stock, which could allow for reduced and more advantageous exercise prices, thus providing greater potential value for those receiving the equity incentive awards. Employees usually find it simpler to grasp how equity incentives function within a Corporation. Employees must comprehend the characteristics and advantages of these instruments to create greater opportunities for positive incentives that benefit both the Corporation and themselves in the end.
Endless Existence
A Corporation does not possess a finite term or lifespan and it persists even after the passing of a Stockholder or following other modifications in the ownership or equity framework of the Corporation. A Corporation must keep progressing its business despite changes and evolution in its ownership.
Transferability of Ownership
Shareholders can shift their equity ownership without interrupting the business operations. A Corporation typically allows for the easier transfer of ownership interests compared to other legal entities, which is an advantageous characteristic for Investors who might wish or need to switch their equity stakes later on.
This convenience of transferability also reduces the administrative tasks involved in upkeeping and overseeing the ownership framework of the Corporation. For these reasons, a corporation is often the most suitable legal structure when there are several owners.
Business Transparency
The Corporation, particularly Delaware Corporations, operates under a comprehensive framework of laws that ensures stability in its ownership and management. The corporate framework and governance regulations are well-known to Investors, Stockholders, Directors, Officers, and employees, which aids in the functioning of the Corporation.
Monetary Advantages
An S-Corporation (or similar tax flow-through entity such as a Limited Liability Company or LLC) may be appropriate if the business plans to distribute its profits immediately, thus circumventing the additional tax that would typically be levied on a C-Corporation. A tax flow-through entity can also provide extra advantages when designed to enable Stockholders to utilize the business’s initial tax losses on their personal returns.
An S-Corporation can also function as an effective means to handle the payment and allocation of salaries and dividends, along with the resulting combination of income and employment taxes. If your aim, on the other hand, is to create lasting value with your company, then there is a significant justification for organizing your business as a C-Corporation.
If a C-Corporation meets the criteria for a Qualified Small Business Corporation (this does not apply to S-Corporations), the shares of Qualified Small Business Stock that you maintain for no less than five years will experience a considerable decrease in the capital gains tax owed when these shares are transferred.
Whether you choose to do it or hire someone to assist you in structuring your corporation, you need to set the essential elements in place when incorporating your business. At the beginning, you need to establish the correct groundwork for your business properly, allowing you to concentrate on your operations and avoid distractions and extra expenses that come with an early (and frequently complex) overhaul of your company’s framework.
It’s better to set up your business sooner rather than later. Establishing the Corporation will create a strong ownership and governance framework, preventing scenarios where one or more Co-Founders begin to lag, leading to instability and uncertainty.
If organized correctly, the new Corporation will start to acquire and control the “secret sauce” of the business, ensuring that all the new business value is funneled to the Corporation. On the other hand, postponing the establishment of the company might expose the Founders to increased personal liability and result in team disintegration and lost business potential.