It is important to understand the basic differences between a corporation and a sole proprietorship, partnership or limited liability company says, William D King.
Corporation vs Business
Many people use the words “business” and “corporation” interchangeably when in fact they are very different legal entities. One of the main differences is that an entity operating as a corporation has perpetual existence regardless of changes in ownership. This means that if one owner dies or sells his/her shares in the company, the company still continues to exist under state law.
A business can be owned by either natural persons or corporations who exist on a set timeline regardless of changes in ownership. Even though it may have been incorporated, a business can dissolve itself by returning its articles of incorporation signed by the owners of the business is a corporation.
Partnerships can also dissolve according to the number of partners and provisions in their partnership agreement says, William D King. The main difference between a limited liability company and a business is that an LLC has members while a business has owners (shareholders). A member-managed LLC means that all of its members must agree on who will manage and enter into contracts on behalf of the LLC, while with a board-managed LLC, shareholders elect directors to make these decisions for them. An LLC may only have one class of ownership whereas it may be owned by two or more classes like corporations that can issue common or preferred shares.
Both corporations and businesses use income tax returns to report profits and losses, but corporations pay taxes on earned income with a corporate tax return using the internal revenue service. Owners of businesses and sole proprietors pay their taxes through the personal income tax returns and file under IRS, and they also must report business profits and losses on Schedule C of form 1040 of U.S individual Income Tax Returns.
A corporation is more likely to be able to raise funds for investment compared to a business or partnership. Because it’s perceived as safer by investors than smaller entities. That does not have statutory protection from creditors explains William D King. However, there are more filing requirements for corporations. Such as registering more officials like directors which require them to submit annual reports. That includes financial statements to states or federal governments where it is incorporated. As mentioned earlier, partnerships dissolve when one partner dies or sells its interest in the company. While a corporation continues to exist regardless of changes in ownership.
Businesses are usually more flexible when it comes to dissolving themselves compared to corporations. Because they can dissolve by returning their articles of incorporation sign by the owners if it is a corporation. Dissolve through passing resolutions by all partners or members if it is a partnership or limited liability company. (Hofstetter, 2007)
What are some differences between an LLC and an S-Corporation?
It’s important to note that there are many similarities between LLCs and corporations. For example, both offer their owners protection from personal liability for business debts. That said, there are key differences between these legal entities as well.
This article will explore some key distinctions between corporations and their shareholders:
1) Shareholders own stock in the company. The most significant difference between a corporation and its shareholders is. That the shareholders own stock in the company, while the corporation owns everything else (e.g., office equipment, fixtures, etc…).
2) Ownership shares may be unequal. Shareholders can also have different levels of stock ownership explains William D King. For example, one shareholder may hold 10% of all shares owned by others while another holds 90%. When determining how to distribute profits or losses among themselves, they should treat equally.
3) No right to the company’s assets. This is not to say that a shareholder cannot benefit from owning stock in a corporation. After all, a shareholder does have a share of ownership in the company. The difference is that this doesn’t entitle them. To take profit distributions or claim any collateral benefit from the use of the corporate property. They do not possess the same legal rights as shareholders because they lack such an entitlement (Robertson & Robertson, 2012).
4) Owning both debt and equity. Shareholders are typically looking for a return on their investment, but also want protection against loss. Oftentimes, this means buying some preferred shares (i.e., high dividends and seniority in receiving company assets in the event of a bankruptcy) and some common shares (i.e., they receive a higher return on their investment but they also have more risk).
5) No “limited liability”. In general, when a shareholder has been involving in the corporation’s operations. He or she has no right to immunity from a suit if there is a legal violation. This lack of limited liability is one of the most significant differences between a corporation and its shareholders. (Hofstetter, 2007).