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Corporations: Types, Advantages, Disadvantages & Examples

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  • 0:05 The Corporate Form of…
  • 1:28 Advantages of Corporations
  • 2:33 Disadvantages of Corporations
  • 3:40 S-Corps Versus C-Corps
  • 4:42 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley
Corporations are a popular form of business organization for large and small businesses. In this lesson, you'll learn about the advantages and disadvantages of a corporation. You'll also learn about S-corporations and C-corporations.

The Corporate Form of Organization

Meet Tom and Tim. They own a small business that is starting to grow rapidly. However, they need more money to fund their business. They don't want to take a bank loan. Instead, they have decided to look for investors. They're also getting a little concerned about being sued if something happens with the business, and they want protect their personal wealth.

Since Tom and Tim are looking to expand and take on investors, their accountant and attorney recommend they form a corporation. A corporation is a business organization that is considered a separate entity from its owners, who are called shareholders. Tom and Tim will form a corporation by filing articles of incorporation with the secretary of state for the state in which they want to form the corporation.

As the only shareholders of the corporation, they will have to elect a board of directors who set the policy and vision for the corporation. The board of directors will also appoint corporate officers who run the day-to-day operations of the corporation. Usually a corporation will have at least a president, a secretary and a treasurer, although there can be other officers, such as vice presidents.

The board of directors will also approve corporate bylaws that govern the operations of the corporation. Naturally, Tom and Tim elect themselves as the directors of the corporation and appoint Tom to serve as the company's president and Tim to serve as its secretary and treasurer.

Advantages of Corporations

The corporate form of organization presents some advantages for Tom and Tim. The biggest advantage for Tom and Tim is the limited liability that a corporation provides for its shareholders. Shareholders of a corporation are not personally liable for the contractual obligations, debts, negligence or wrongful acts of the corporation. The most money that a shareholder can lose is his investment in the corporation - the value of his stock.

Another advantage of a corporation is that it can have a perpetual existence, which means it can outlive Tom and Tim because it is a separate person in the eyes of the law. This means investors don't have to worry about the untimely demise of the owners. It also allows the corporation to plan for the long-term.

Tom and Tim want investors. One of the great advantages of a corporation is that it's easy to transfer ownership interests in a corporation. The board of directors can authorize the issue of shares of stock in exchange for investors' capital infusion into the company. Of course, Tom and Tim need to be careful and work with their attorney to comply with state and federal securities law, which governs the offering of stock and other securities to investors.

Disadvantages of Corporations

Tom and Tim do face some disadvantages if they take the plunge and form a corporation. A corporation is not cheap or simple to operate. Tom and Tim will have to prepare and file articles of incorporation as well as corporate bylaws. The state also requires the filing of annual reports. And they have to file corporate income tax returns as well.

They'll have to hold board meetings and annual shareholder meetings. All of this costs money. Most corporations will retain the services of an attorney and accountant to help them with drafting legal documents and corporation filings and maintaining compliance with complex corporation law and regulations.

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