For an aspiring entrepreneur the path towards growth is to attract capital for business. Investors generally look for a few qualities in the business they want to invest. For any investor, the return on investment is the foremost criterion. The returns can be in the form of regular cash flow or appreciation in the value of investment. For attracting such investors, the best form of business is a corporation. The advantage of a corporation is that the shares are freely transferable. The investor can invest or divest in a corporation and there are very few formalities to be observed. Another advantage of a corporation is the personal liability protection it offers to the shareholder. Due to these advantages, investors are readily willing to invest in corporations and hence the ease in attracting capital for expansion.
The state laws govern the incorporation of your small business. The incorporation rules vary in each state. The key procedure for incorporating a business is to file a certificate of incorporation with the state and pay a filing fee. In some states the certificate of incorporation is also called the articles of incorporation. The ownership in a corporation is structured as units of stock or shares, which is subscribed to and promised to pay for by the shareholders. The corporations can be of two types namely an S Corp or a C Corp. The basic legal structures of both forms are similar. The main differences are the share holding and taxation. Shares in an S Corp are restricted to natural US citizens and limited to a maximum of 100. There are no such restrictions in a C Corp. C Corporations are subject to corporate taxation where as the S Corporation advantage is that the profits are passed through to the share holders and taxed as their personal income.
Limited Liability Companies also offer personal liability protection to its owners who are called members. The advantage in LLC Vs. Corporation is that in the eyes of the general public, corporations are ‘perpetual’. LLCs are considered to be bound to the life of its members. One advantage in LLC is that procedure for taxation can be decided by the members and they can elect to be taxed as a partnership or a corporation. The advantage in LLC Vs. S Corp is that LLCs are relatively easy to form and less cumbersome to operate. Members of an LLC can elect to be taxed as an S Corporation and avoid the double taxation of a C Corporation.
