The Pros and Cons of Operating as a Corporation 

Welcome back to part three (3) of our four-part series.  Over the last couple of weeks, we began exploring the different ways businesses operate.  So far, we have discussed sole proprietorship and partnership. Today we will discuss corporations, the first formal business formation. 

Listen and learn as Attorney Murray begins part three of our four-part series on the pros and cons of the four main business formations.  Today’s episode explores the history of corporations and how it is the foundation for other business formations. 

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Episode Transcript

Happy Wednesday, geniuses. I’m coming to you another year older and wiser. I want to thank you all for all the birthday wishes. People keep asking me, like, how old am I? And I keep telling them, I’m not sure, because I have to think about it. I’m 44, but I have to think about it. Then when I tell them that I’m not sure, they look at me like with this double-blink stare like Dora does. 
If you have kids, you watch Dora the Explorer, you know, she asks you a question and then she like blinks her eyes a couple of times. Anywho, I just know that I’m just happy and grateful to be here. I think I stopped keeping up with my age around 23, 24 years old. And I mean, it works. I’m just grateful to, like they say, being the number one more time. I really am. And my birthday’s on the 18th. I was on the 18th. 
And it was very chill. I didn’t check my email. One time, I was very proud. I was trying to figure out what I was going to do. Because I take the day off because my mother taught me at a very young age that birthdays you don’t work on. Like she never worked on her birthday, so I don’t work on my birthday. And so I ended up, I think I just ended up like walking through Target, they sent me a discount. I went to Books for Millions, I went to a novel meeting and someone mentioned a TD J book and I went and grabbed that.  
Then I went to the Riverwalk and I just relaxed under a tree and I was going to read and write, you know, kind of journal a little bit. But then my oldest daughter called me and she was like, hey, ma, do you want to go to lunch? And I was like, okay. And so she met me at the Riverwalk and we kind of sat out there for a little bit and talked and then we went to lunch and I will say the evening was topped off by my middle child wanting to cook dinner. Instead of going out she said hey can I cook dinner for you and I was like yeah you can cook dinner for me. So she made something that she saw on TikTok and I can’t remember what the young people call it but anyway the food was good. She made, what did she make? Cheeseburger sliders? I don’t know. But I let her do her thing and she did do that. But enough about me.  
Let me ask you this question. Are you enjoying this series so far? Is it bringing you closer to deciding which business formation is best suited for your business? I really hope it is. In part one and part two of the series we discussed sole proprietorship and partnerships and you can listen to that in episodes 118 and 119 if you missed it. Today we’re talking about corporations. In the beginning when you want to start a business, it was just you and your business or you and your partner and the business all tied up as one. And that can be a little scary.  
So they formed corporations. Corporations became a thing and they’ve been around for centuries. As early as the 1700s here in America, corporations have played a crucial role in driving the economic growth, industrialization, and innovation. Here in America, they provide a platform for entrepreneurs, innovators, and investors to collaborate, invest in new ventures and develop and commercialize new technology. And one of the things that I like about the corporate structure is that it allows for large scale operations and expansion into new markets and it creates employment opportunities. So today we’re going to talk about what a corporation is, how it’s formed, and the benefits and consequences of operating as a corporation. 
Welcome back to the Own Your Genius podcast where we discuss building businesses, growing brands, and what else? Owning your genius. I’m your host, attorney LaConya Murray, owner of Off The Mark IP Solutions. Off The Mark is a boutique intellectual property firm representing innovative entrepreneurs, a.k.a. geniuses, who are looking to protect their brand and grow their business with ongoing legal support and business mentorship. We have a good one for you today. So let’s get started.  
So like I said before the break, the concept of corporations, they date back to ancient times, but corporations as a legal entity, the way that we recognize it, they begin to take shape in the Middle Ages. And then in the 1700s, corporations gained significant importance as they played a crucial role in financing and organizing long distance trade expeditions. So people will come together if they wanted to trade overseas, you have a group of business owners come together and pull their resources so they can make that happen. Over time, laws and regulations evolve to govern the formation and operation of corporations, leading to the establishment of various types of corporate structures, such as C-corps, S-corps, and y’all’s favorite, limited liability companies. 
So what exactly is a corporation? A corporation is a legal entity that is separate from its owners, and those owners are referred to as shareholders. It’s formed through a legal process on the state level. In most states, you file your paperwork with the Secretary of State. And unlike sole proprietorships and partnerships, corporations operate as a distinct entity with its own rights, liabilities, and obligations. A corporation can engage in business activities, enter into contracts, own assets, and be subject to legal actions. 
Now, you notice I said a corporation can do all these things, not the owners, right? It’s separate. The corporation is separate from its owners. When you get ready to form a corporation, you have about five steps that you need to take. So let’s get into these five steps. The first thing that you want to do is choose a name and reserve it with your secretary of state. That’s how we do it here in Alabama. We have to reserve the name of the secretary of state. Whatever state you’re in, go to that government agency and do those steps. Just choose your name and reserve it for the corporation. 
Important part about choosing the name is that you have to remember the reason that you’re choosing this name is because it’s its own entity. The corporation is separate from you, so it needs its own identification.  
The second thing that you want to do to form your corporation is you want to appoint directors and officers. Every corporation, and I mean every corporation, must have board of directors and officers. And the number of board of directors and officers are going to vary depending on what state you’re in. And there are also laws concerning whether or not the officers can have multiple positions and if the directors can be related.  
And I just threw that in there because I know that sometimes people want to form a corporation for the benefit and be like, oh I’m going to be the president, the treasurer, and the secretary. And then I’m going to be on the board, I’m going to have my great-grandmother who has Alzheimer’s and can’t really think well, be on the board, and I’ll just put down a cousin who really doesn’t care about what’s going on with the intent of having control.  
So before you do that, look into the laws concerning what you can and cannot do when you’re forming your board of directors and choosing your officers. Anyway, let’s talk about what these directors and officers do. The directors are responsible for overseeing the corporation’s activities and making key decisions, while the officers are going to manage the day-to-day operations. 
So again, listen to me, the directors and the officers are responsible for running the company, not the shareholders. Remember, shareholders are owners. So the owners are not responsible for running this company. Your directors and your officers are, and they’re doing it for the benefit of the owners, but the owners aren’t the people that are a.k.a. doing the legwork, unless of course they are on the board of directors and their officer.  
The third step that you want to take in forming a corporation is you want to prepare and file the Articles of Incorporation. This documentation is filed with a government agency on the state level. I keep saying this is on a state level. When you start forming these entities, it is going to be based on the state that you reside or the state that you form this entity in. It’s not a federal thing. It’s on a state level.  
So it typically, the Articles of Incorporation typically includes information like the corporation’s name, the purpose of the corporation, you want to know who your registered officer is and what that address is, the director’s name, the share structure. And when we get into corporations, you want to hear a lot about shares and shares are units of equity in the company, like how much ownership is in the company. And so when you talk about the share structure, it’s a description of how the ownership equity is split up. And so the share structure reflects how many shares exist and how much ownership of a company each share represents. 
The next thing you want to do, we’re going to go to step four when we’re forming this corporation. You want to draft your corporate bylaws. And bylaws outline the internal rules and procedures for operating a corporation. So what’s going to govern the directors and the officers as they’re running this company? That’s what these bylaws do. And they typically cover matters such as shareholder meetings, how much or how often the shareholders will meet the director’s responsibilities, voting procedures, and the rules, practices, and processes by which the company is directed and controlled. All that is going to be in those bylaws. So your bylaws are very, very important, especially when you’re in a corporation where you have a lot of people that you’re dealing with.  
And the fifth thing that you want to do to form this corporation is issue shares. You want to decide on the initial share structure of your corporation, then issue shares to the shareholder. You want to determine the amount of share capital, like how much each share is worth, and the number of shares that are going to be issued. Now once you issue these shares, once you’ve done that, you issue each shareholder their shares. You want to give them share certificates as evidence of ownership. So a lot of companies, they do that. Some of them do it digitally now, but shareholders want to have proof that they own some part of the company. 
Listen, as you can see, this is a lot more work than just performing an activity for profit like you would do for a sole proprietorship or a partnership. Not only does forming a corporation take more time, it costs more money. Like, you have state balance fees as well as your attorney and CPA fees. Before you start rolling your eyes, you’re like, why do I need an attorney or an accountant, CPA to help me form a corporation. Listen, if you choose to form a corporation, you’re going to need to hire the professionals in order to make sure that it’s structured properly, that your bylaws are written right, and that the share structure is established and distributed properly. I don’t know if I was forming a corporation and it’s not something that I do on a regular basis. I wouldn’t want any parts of that because it sounds like a lot. And if I mess up, what happens?  
The corporations, they do have the one thing in common with partnerships. I will say this, we talked about what it takes to form a corporation, and we’ve already determined that it takes a lot more to form a corporation than it does to enter into a partnership or a sole proprietorship. But the one thing that they have in common, the corporation has in common with a partnership, is that there are several types of corporations. And each corporation type has its own characteristics and legal requirements. And we’ll just talk about a few. How about that?  
So you have a lot of times when people refer to corporations, they’re talking about C-Corps. And they’re the most common type of corporation. And it’s a separate legal entity from its owners, a.k.a. shareholders. And they provide a limited liability protection to the shareholders. The C-Corporations are subject to corporate income tax. And their profits are taxed at the corporate level. 
If the corporation decides to distribute the profit dividends to their shareholders, then the shareholders are going to have to report that on their personal income tax and their tax again on that. The C corporation does not have any restrictions on the number of shareholders that they can have or where those shareholders can live. So that’s C corporation.  
And S corporation is a special type of corporation that meets specific eligibility requirements that are outlined with the IRS in the United States.  
When I’m talking about things on this podcast, it’s here in the United States, people. If you’re listening overseas, nine point eight times out of Ten this one out of 52. Right? So make sure you check with the people in your country about how things work.  
But when you talk about an S Corp, it also offers limited liability protection to its shareholders. But what it also does is it provides a pass through taxation.  
So when we talk about the C Corp, remember Isaid, the C Corp, the corporation is going to get taxed and then when they distribute the dividends to shareholders and they’re going to get taxed again, but with the S Corp, you have passed through taxation, which means the corporation itself is not taxed. Profits instead the profits and losses are passed through to the shareholders and then the shareholders will report them on their individual tax returns and that’s when they will beat access corpse also have a restriction on the number and type of shareholders you can have as well as the limitation on the classes when the types of stops that are going to be issued. So there’s some benefits to the S Corp and there are some drawbacks depending on again.  
The nonprofit corporation nonprofit, corporations are formed for charitable, educational religious, Scientific or other nonprofit purposes, these corporations operate with the mission to serve the public rather than generating progress for the shareholder. The nonprofit corporations may be eligible for tax exempt status as well. Allow them to receive donations that are tax deductible for other donors, offer donors, but at the heart of it this is what I want you to know when it comes with nonprofit corporations because I’ve run across a lot of people who wants to form nonprofits because of the donation, part of it because in their mind is easier to ask people for money, rather than I guess running a business but here’s the thing here’s the gag. 
As Keke Palmer would say, a nonprofit corporation is a business. You have to do the work just because you have that tax-exempt status. It does not disallow you from doing the work. You have to do the work, it takes work. The only difference between a for-profit corporation and a nonprofit corporation, is that at the end, when you have this money, you have this profit with the nonprofit, you cannot distribute that profit to yourself or the shareholders. It has to go back into the organization. But it’s still a business. 
I’m just going to step down off my soapbox but I just really wanted to put that out there that nonprofit corporation is indeed and in fact a business. 
Professional corporations that also known as professional service corporations are professional service firms and this is specifically designated for licensed professionals such as doctors, lawyers, accountants, architects and what these corporations do is they provide limited liability protections for the professionals within the corporation, but the individual professionals may still be liable for their own professional negligence. 
The fifth corporation I want to talk about is a closed corporation. And this Corporation is the type that has a small number of shareholders. And a lot of times, you see this with family members or a close-knit group of individuals. It’s not open to the public. So they have relaxed corporate formalities and they can be exempt from certain regulations that apply to large corporations and C corps. This type of corporation allows for greater flexibility and easier decision making among shareholders. The number of shareholders are limited. 
The sixth type of Corporation is a benefit corporation. A benefit corporation is also known as the B Corp. And these are entities that are legally required to consider their impact on society and the environment alongside their financial interest. So it’s not just them making decisions that are going to get them the best profit. They also have to take into accountability how they’re affecting the, the environment. These corporations had to find Social Environment Mission and their activities and performance are evaluated against those standards. And it’s important to note that this specific types of classifications of Corporations, may vary, just depending on the type of legal framework regulations of the different jurisdiction, which is why I keep saying all this stuff is done on a state level, what does your state require?  
So we talked about what it takes to form a corporation. We talked about the different types of corporations; we know that it’s a lot of work to form a corporation. So my question is, with all this additional work and money because It’s going to cost money, if it’s taken additional work, it’s going to cost additional money to pay these professionals to get it done. Why would anybody? Why would anybody want to form a corporation? I’m gonna give you four reasons.  
The first reason, limited liability and risk mitigation. One of the primary reasons for forming the corporations is to provide individuals or groups engaging in business activities with limited liability protection. So, what happens is when you form as corporation, the shareholders limit, their personal liability, to the extent of their investment in the company, that means that the personal assets are protected from being seized to satisfy any type of corporation that are legal obligation because you remember as a sole proprietor or partnership, you were responsible for the debts, but that’s not true of corporation. So that’s one of the great benefits of having a corporation.  
The second benefit is raising capital. When you’re trying to raise money, it can be difficult to raise money as a sole proprietor or partnership. But a corporation has various options to raise capital because they can issue stocks or shares when they’re seeking investors or venture capitalists, and angel investors or even to the public. 
So keep in mind that when they’re doing that, it’s not like they just issuing stocks and it’s not tied to anything, those stops are directly tied to equity in the company. But this way the corporation is structured. It makes it easier to attract investors because of that ownership. They have a clear right and ownership interest. Makes it more appealing. When you know that you have ownership in something, it makes it more appealing to give them that money.  
The third reason someone might want to form a corporation and it’s because it exists forever. Perpetual existence, unlike Sole proprietorships and Partnerships that are dependent on the owners or partners. A corporation does not have that. They can last forever. The corporation continues to exist even if the shareholders leave, even if they sell their shares or pass away. This provides stability and longevity and allows for easier transfer of the ownership of the company.  
And the fourth reason that I think the people want to form a corporation is because of the enhanced credibility. When people see that Inc or corporations or corp at the end of a name, it gives them some type of oh, quote unquote, is a real business and I don’t know why that is, but it is operating at a corporation can enhance credibility and reputation among customers suppliers and partners, which can instill confidence in stakeholders. I want life, the benefits are hitting like I feel like, oh, girl in the Jerry Maguire movie, you had me at limited liability, and while the benefits of former corporations are good, we can’t ignore the consequences.  
So, the first thing I would say as a consequence that you need to argue or something that you need to consider to form corporation is its complexity of it in the compliance that you have to abide by. You heard what it takes to form a corporation. It’s not easy. Corporations face more regulatory requirements and paperwork compared to other business structures. And then to keep the benefits associated with being a corporation, they must comply with legal and financial obligations, maintain proper records, hold annual meetings, and file tax returns separately from their shareholders. And this can lead to an increase in administrative burgling and higher costs for legal and accounting services.  
The second consequence would be loss of control. As a corporation and tracked investors and issue shares. The original Founders may experience a dilution of their ownership state and as a consequence, a loss of control over the decision-maker. Shareholder interest in voting rights are determined by the number and the class a.k.a. type of shares they hold, so we can lose control. Remember Steve Jobs, the founder of Apple, he got kicked out by the board of directors and he was founder. So let’s just something to keep in mind.  
And we mention this too earlier, this is the third consequence. That double taxation. You had to pay taxes on the corporate level and then had to turn around and pay taxes on a personal level if dividends are issued to you.  
And the other consequence is similar to the first thing that we talked about, not the first one. Yeah, the first thing that we talked about as far as being complex, but I would say the formalities in the government, meaning corporations are a lot more formal and then the when they run, they had me running specific way so it’s not enough to have your paperwork in order corporation. Is must adhere to specific formalities and government structures, which means appointing, directors and officers. It means maintaining your bylaws and holding regular shareholder meeting and board meetings. And the purpose of these requirements is to provide transparency and accountability, which we all want, right? Especially if you are a stakeholder or shareholder in a corporation, you want to be able to know what’s going on when you’re not there. However, these things can also add to the complexity that we talked about earlier, especially as relates to decision making in process. 
Let’s take a breath. That was a lot of information. If you’re a business or corporation, what made you choose that structure? I want to hear from you in the comments. What do you think of corporation?