Features of Corporation
A corporation is a legal entity that is separate and distinct from its owners. It possesses many of the same rights and responsibilities as individuals. These include entering contracts, loan and borrowing funds, suing and being sued, hiring employees, owning assets, and paying taxes. A corporation’s distinguishing characteristic is limited liability.
- A corporation shields owners’ personal assets from business risks.
- Corporations can raise money more easily through the sale of stock.
- They have access to additional sources of funding not available to sole proprietorships.
Comparing Business Structures
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Advantages of a Corporation Compared to a Sole Proprietorship
- The advantages of a corporation compared to a sole proprietorship or partnership include liability protection. In a sole proprietorship, the owner is fully responsible for the company’s debts and obligations.
- Corporations can also raise money more easily through the sale of stock. They have access to additional sources of funding not available to sole proprietorships.
- Partnerships are easier and cheaper to form than corporations while offering the same liability protection. However, liability protection doesn’t cover personal negligence. LLC owners are liable if they personally guarantee loans, engage in fraudulent activities, or become negligent.
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Tax Implications
- The profits and losses of an LLC "pass through" to owners’ individual tax returns, avoiding double taxation.
- S corporations can avoid the double taxation that hits C corporations. Their profits and losses pass to stockholders for reporting on personal tax returns.
Comparing Business Ownership Structures
- Features Comparison: Corporation, Sole Proprietorship, Partnership
- A corporation is a legal entity separate from its owners. Corporations possess rights like individuals – entering contracts, borrowing money, hiring employees. Corporations have limited liability shielding owners from business risks.
- Sole proprietorships have one owner responsible for all debts. Partnerships divide responsibility among owners. Partnerships are easier to form than corporations. Limited liability companies (LLCs) provide liability protection but profits/losses pass to owners, avoiding double taxation.