Key Takeaways

  • Corporations and LLCs offer key advantages such as limited liability, perpetual existence, and professional management.
  • The corporate form makes it easier to raise capital through stock issuance and borrowing, giving businesses stronger financial flexibility.
  • Corporations enjoy credibility with banks, vendors, and customers, enhancing growth and partnership opportunities.
  • Ownership interests are easily transferable, allowing shareholders to sell or gift stock without disrupting business operations.
  • Tax advantages, such as potential deductions and benefits for employee compensation, may apply depending on the type of corporation.
  • If you’re asking “what are two advantages of the corporate form of business?” the most recognized are limited liability protection and ease of raising capital.

The advantages of company form of business are determined by the type of company you form, but you could enjoy up to six basic advantages, such as limited liability.

What You Should Consider Before Creating a Business

When you are forming a business, you will first have to consider what type of structure it should have. Consider the following:

  • The rights and legal liabilities of those who take part in the business
  • Who controls the business and the level of control you want to have
  • How complex you want the company's structure to be
  • The lifespan of the business
  • The finances, including taxes, debt, and liabilities

The Types of Business You Can Create

Your above considerations will determine the type of business you'll create, but you should probably get legal advice on the best type of company for your situation. Following is an overview of the types of businesses you could form:

  • Sole proprietorship: In a sole proprietorship, the owner and the business are legally one and the same. This is one of the easiest ways to start a business and the most common type of business.
  • Partnership: Like a sole proprietorship, a partnership is easy to create, but it involves two or more people.
    • General partnership: In this type of setup, participants may equally divide the profits and losses and shoulder the liability, unless a written agreement specifies how these things are to be shared.
    • Limited partnership: The partners each have limited liability, which only extends to their level of investment in the company.
    • Limited liability partnership: These types of businesses usually involve certain professionals, like lawyers, physicians, and accountants. Like any partnership, members report their share in the loss or profit on their income taxes, but they are liable for malpractice.
  • Professional corporation: In this type of business, owners are not personally liable for debts, but they are liable for any damages they cause.
    • C corporation: This type of business is a separate tax and legal entity from the people who created it. The shareholders provide money and/or property to the business; in turn, they receive a share of the company's capital.
    • S corporation: This type of business can avoid some corporate income taxes while enjoying the limited liability of corporations.
    • Nonprofit corporation: A nonprofit does not have to pay any income taxes for funds it receives for charitable purposes. Some benefits a nonprofit receives can be deducted if categorized as business expenses.
  • Limited liability company (LLC): This is a hybrid of a corporation and partnership. Also, the lifespan of the company is limited, but it can be expanded by a vote.
  • Professional limited liability company: In this type of company, a state licensed professional can run a business like an LLC.

The Advantages of a Company Form of Business

If you opt to form a corporation or an LLC, there are six types of advantages of a company form of business, based on the type of company you create:

  1. Limited liability: In a limited liability company, the main risk shareholders have is connected to the value of their shares that they hold or were promised.
  2. Perpetual existence: When a corporation has a perpetual existence, it can still exist regardless of what happens to its founders or shareholders. That is because the company is considered a separate entity and its ownership can change hands.
  3. Professional management: This type of management for a business involves directors who are elected by shareholders and have a lot of experience running companies. The directors then hire professional managers, who are in turn responsible for overseeing the day-to-day operations of the business.
  4. Expansion potential: In a public limited company, there is no limit on the number of shareholders. Companies can expand by offering new shares and use their reserves to expand further.
  5. The ability to transfer shares: Shareholders can sell their shares for any reason, especially if the company is not as profitable as they'd hoped. Even though shares are changing hands, the business will continue to run.
  6. Sharing the risk: The whole risk of the business is shared among shareholders based on their number of shares. This is an advantage, especially for small investors.

Additional Benefits of the Corporate Form

Beyond the six core advantages already discussed, corporations provide several other important benefits that often make them the preferred structure for entrepreneurs and investors:

  • Enhanced Ability to Raise Capital: Corporations can issue stock to attract investors and borrow more easily from banks, giving them access to greater funding than sole proprietorships or partnerships.
  • Tax Planning Opportunities: Depending on whether a business chooses C corporation or S corporation status, there may be opportunities for tax deferrals, deductions on business expenses, and employee benefit plans that lower taxable income.
  • Credibility and Reputation: Operating as a corporation can improve a company’s credibility with suppliers, lenders, and clients, signaling long-term stability and a strong governance structure.
  • Continuity and Transferability: Unlike partnerships that may dissolve when a member leaves, corporations continue indefinitely. Shares of stock can be sold, transferred, or gifted, ensuring business continuity while allowing flexible ownership changes.
  • Employee Incentives: Corporations can offer stock options, profit-sharing, and retirement plans, making it easier to recruit and retain talented employees. This not only strengthens the workforce but also aligns employee and company success.

Frequently Asked Questions

  1. What are two advantages of the corporate form of business?
    The two most recognized advantages are limited liability protection for shareholders and the ability to raise capital by issuing stock.
  2. How does limited liability benefit corporate owners?
    Limited liability protects shareholders from being personally responsible for the corporation’s debts or legal obligations beyond the amount they invested.
  3. Why is raising capital easier for corporations than other structures?
    Corporations can sell stock to investors and typically have better access to bank loans, giving them more flexibility to fund growth.
  4. Do corporations have tax advantages over other business forms?
    Yes. Depending on whether the corporation elects C or S status, it may benefit from deductions, lower personal tax liability for owners, and employee benefit programs.
  5. Is the corporate form right for small businesses?
    It can be. While small businesses may find corporations more complex to manage, the advantages—especially liability protection and credibility—can outweigh the added compliance requirements.

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