The Corporation

The corporation is by far the most complex of the three business structures. For the purpose of this Guide, we shall discuss only the general characteristics of the corporation, not its intricacies.

As defined by Chief Justice Marshall's famous decision in 1819, a corporation "is an artificial being, invisible, intangible, and existing only in contemplation of the law." In other words, a corporation is a distinct legal entity, distinct from the individuals who own it.

Formation of the Corporation

There are actually two forms of corporations to choose from: the S Corporation and  the LLC (limited liability company) . You should consult a tax expert before deciding on either of them.

A corporation usually is formed by the authority of a state government. Corporations which do business in more than one state must comply with the Federal laws regarding interstate commerce and with the state laws, which may vary considerably.

The procedure ordinarily required to form a corporation is that, first subscriptions for capital stock must be taken and a tentative organization created. Then, approval must be obtained from the Secretary of State in the state in which the corporation is to be formed. This approval is in the form of a charter for the corporation, stating the powers and limitation of the particular enterprise.

Advantages of the Corporation

Limitations of the stockholder's liability to a fixed amount of investment. However, do not confuse corporate liability with appropriate liability insurance considerations.

Ownership is readily transferable.

Separate legal existence.

Stability and relative permanence of existence. For example, in the case of illness, death or other cause for loss of a principal (officer or owner), the corporation continues to exist and do business.

Relative ease of securing capital in large amounts and from many investors. Capital may be acquired through the issuance of various stocks and long term bonds. There is relative ease in securing long term financing from lending institutions by taking advantage of corporate assets and often personal assets of stockholders and principals of guarantors. (Personal guarantees are very often required by lenders.)

Delegated authority. Centralized control is secured when owners delegate authority to hired managers, although they are often one and the same.

The ability of the corporation to draw on the expertise and skills of more than one individual.

Disadvantages of the Corporation

Activities limited by the charter and by various laws. However, some states do allow very broad charters.

Manipulation. Minority stockholders are sometimes exploited.

Extensive government regulations and required local, state, and federal reports.

Less incentive if manager does not share in profits.

Expense of forming a corporation.

Double tax - income tax on corporate net income (profit) and on individual salary and dividends.

You should be aware, also, of the possibility of selecting subchapter S status. The purpose of subchapter S is to permit a "small business corporation" to have its income taxed to the shareholders as if the corporation were a partnership. One objective is to overcome the double tax feature of our system of taxing corporate income and stockholder dividends. Another purpose is to permit the shareholders to have the benefit of offsetting business losses incurred by the corporation against the income of the shareholders.

Among the conditions for the making and maintenance of subchapter S election are that the corporation have ten or fewer shareholders, all of whom are individuals or estates, that there be no nonresident alien shareholders, that there be only one class of outstanding stock, that all shareholders consent to the election, and that a specific portion of the corporation's receipts be derived from active business rather than enumerated passive investments. No limit is placed of the size of the corporation's income and assets.

Summary

In summary, review the following eight questions:

1.  What is the size of the risk? That is, what is the amount of the investors' liability for debts and taxes?

2.  What would the continuity (life) of the firm be if something happened to the principal or principals.

3.  What legal structure would insure the greatest adaptability of administration for the firm.

4.  What are the influence of applicable laws?

5.  What are the possibilities of attracting additional capital?

6.  What are the needs for and possibilities of attracting additional expertise?

7.  What are the costs and procedures in starting?

8.  What is the ultimate goal and purpose of the enterprise, and which legal structure can best serve its purposes?

The business owner is required to wear many hats, but none can be expected to be a lawyer, certified public accountant, marketing specialist, production engineer, environmental specialist, etc. Therefore, you should get the facts before making decisions. When necessary and if possible, you should also get professional counsel to help you avoid misunderstanding technical or legal issues and avoid making bad decisions and false starts that require backtracking and added expense. This is especially true when you are deciding what legal form to adopt. This Guide has presented an introduction to the options and guidelines for selecting the best legal structure for your business.

Finding the Cash Needed to Starting a New Small Business. Now that You have computed your initial financing requirements, where
will you get the money? The primary source is your personal savings. Subsequently relatives, friends, or other individuals might
be found who would like to"enterprise" their savings in your company. Before obtaining too big a share of money from outside
sources, remember that you should have personal control of enough to guarantee yourself possession.

Once you can show that you have carefully worked out your fiscal Requirements and can demonstrate expertise and integrity, a
financing institution might be willing to finance part of your working requirements. This may be done on a short term basis of
from 60 days to as much as one year. Any institution which has money to give is primarily concerned with security. The security
might be a business advantage, but when you are just starting the best safety is usually your house or some other private
advantage.

The next thing that the lender will want to see is Some Kind of Business plan. If you finish a business strategy - which includes
a cash flow forecast - the lender will observe you have done some realistic and serious thinking about your company and be more
inclined to think about your request.

Become acquainted with your banker. In selecting a banker consider Progressiveness, mindset toward your company, credit services
offered, and also the dimensions and direction policies of the bank. Is your lender innovative? The physical look of this lender
may give you some indication. When the workers are reasonably young, considering your problems and active in civic affairs the
bank is very likely to be progressive. The nature of the lender's advertisements may also be a clue for its progressiveness.

To succeed the banker should be interested in helping you to Become a better manager, and build a continuing relationship that
will mean profitable business for you as well as the bank through time.

Will the bank give you the kind of credit you need? By Way of Example, If seasonal accumulations of stock turned into an issue
will the bank create a loan against field or public warehouse receipts? If your funding is tied up in accounts receivable during
your heavy selling season, will the bank accept these receivables as security for a loan? Will the lender contemplate a term loan?

In the end, understand the dimensions and direction policies of the bank. Will Your maximum requirements fall well within the
lender's"legal limit"? If you plan to do some export company, does it have a currency department? In the event that you or your
dealers sell on installation terms does the lender have facilities for managing installment paper? How deeply is the lender
concerned with the rise and prosperity of your regional community?

When you deal with your banker, sell your self. Whether or not you Need a bank loan, also make it a practice to stop by your
banker at least once every year. Openly discuss your plans and problems. It's the bank's business to not betray a confidence. If
you need financial aid carefully prepare, in written form, complete information that will present a thorough comprehension of your
whole proposition. Many business-people or prospective small business operators destroy their chances of getting financial help by
failing to present their proposition correctly.

Trade creditor or gear manufacturer, Companies from which you Buy equipment or product may also furnish capital for you in the
form of extended credit. Producers of store fixtures, cash registersindustrial machines frequently have financing plans under
which you may purchase in an installment basis and cover out of future income. You need not cover the merchandise at once. If
goods are for resale, then no safety aside from repossession rights of these unsold goods is involved. But too long a use of
charge may prove expensive. Usually cash discounts are quoted when a bill is paid within 10, 30, or 60 days. For example, a term
of sale quoted as"2-10; net 30 days" signifies a cash discount of two percent will be awarded if the invoice is paid within 10
days. If not paid in 10 days, the whole amount is due in 30 days. If you do not take advantage of the cash discount, you are
paying 2 percent to use money for 20 days, or 36 percent each year. This can be high interest. Prevent it.

Among the principal causes of failures among companies is Inadequate financing. If you do enter company, remember it's your
responsibility to provide, or obtain from other people, sufficient money to supply a firm foundation for the business.

Sharing Ownership With Others. Now that you have decided what Company to start and how much capital will be required, you may find
it necessary to connect with a couple of partners to launch the enterprise.

If you lack specific technical or management skills that are of Major value to your chosen business a partner with these skills
may prove a satisfactory means to pay the deficiency. If you're very skilled in your particular area but lack direction training
and skills, you might search for a partner using a background in management. If you might need more startup money, then sharing
the possession of this business is 1 way to get it. Great care should be taken in deciding upon a spouse. Personality and
character, in addition to capability to render financial or technical aid, affect the success of a pa333ship.

A partnership can be a mixed blessing. A partner who puts in time Or money has a right to expect a share in running the
enterprise.

In a partnership the liability for the debts of the firm is Infinite, just as it is in a single proprietorship. This means the
owners are Personally accountable for the company's debts, even in excess of the amount that they Have spent in the organization.
In a business the liability of the owner is limited To the amount they pay for their shares of stock. A partnership, such as a
single proprietorship, lacks continuity. Thus, the business terminates upon the Death of the proprietor or a partner, or upon the
withdrawal of a partner.