Steps to becoming a Corporation
A corporation is a kind business which is recognized by law to be separate and distinct from its owners. Thus the ideal definition of a corporation is that whose legal entity, obligation and responsibility are separate and distinct from its founders. In this sense, the founders establish a board that governs the affairs of the business.
When forming a corporation, first you have to identify a unique corporate name for the company. Once you have identified the corporation name, next is to identify the headquarters or location of operation. It is preferable that you locate the headquarters in your home state. Thirdly identify the kind of shares that would be in your corporation, that is, choosing between common and preferred stocks. Appoint the directors and apply for certificate of corporation as this may be done by your company lawyer.
Advantages
One of the greatest advantages that corporations enjoy is the limited liability for the owners. This implies that since the corporation is defined as a separate legal entity from its owners, any liability arising from the business cannot affect the assets of the owners. Secondly, if the corporation has its shares publicly traded, selling and buying such shares is rather easy. Finally, corporations have continuity in business due to its existence different from that of the owners.
Disadvantages
The definition of corporate entities as distinct and separate from its owners creates an organization and regulation complexity. Several government regulations and capital authority requirements have been put on corporations in order for them to operate within the law. A second disadvantage is the double taxation in which the corporations are taxed corporation taxes and in cases of dividends pay out to the shareholders, such payouts are taxed.
References
Bhattacharyya, A. K. (2010). Essentials of Financial Accounting: 2nd Edition. Boston : PHI Learning Pvt. Ltd.
Mancuso, A. (2009). Form Your Own Limited Liability Company. Berkeley : Nolo,.
Preferred stock
The term preferred stock is used to refer to a class of ownership of a company that is said to have a superior state and claim in terms of earnings and assets as compared to ordinary shares. This implies that preferred stocks shareholders have superiority in terms of dividends in that, preferred shares holders have a fixed dividend that must paid out before common stocks. Additionally, preferred shareholders are usually given priority when it comes to liquidation, in that the value of their assets is paid first before common stocks are considered. Thus preferred stocks can be viewed as assured income (fixed dividend) and appreciating asset value (priority on liquidation). However, preferred shareholders do not have the right to vote.
If I were to invest, I would opt for the preferred stocks options. This is due to the basic reason that earning in the investment is assured in terms of fixed dividend. Secondly, in case of liquidation, the assets that I have invested will be paid in preference.
References
Ayyagari, M., Beck, T., & Demirgüç-Kunt, A. (2007). Small and Medium Enterprises across the Globe. Small Business Economics , 415-434.
Bendrey, M., Hussey, R., & West, C. (2004). Essentials of Financial Accounting in Business. New York : Cengage Learning EMEA.
Dividends
There are several kinds of dividends that a company could pay to its shareholders. A dividend is simply the manner in which a corporation pays its shareholders as a reward for investing in the company. However, dividends can only be paid out in cases where the company is reporting profits. There are two common types of dividends employed by most corporations.
The first kind of dividend is the cash dividend. Here, cash is paid per share of stock owned, where the board of directors decides the portion of the profits that can be shared out and divides these profits by the number of shares of the company. However, cash dividend is taxable income.
Stock dividends are a kind of dividend where instead of offering cash, the company converts this cash into ordinary stocks. Thus the shareholders will the number of stocks increased without having to pay any taxes. If I were to receive dividends, I would prefer stock dividend due to the tax complexities involved with cash dividends.
References
Raiborn, C. A., & Barfield, K. (2006). Insights: Readings in Managerial Accounting, 2nd ed. . St. Paul, MN: West.
Schick, A. (2010). Perspectives on Budgeting. Washington, DC: American Society for Public Administration.
