A corporation is separate from its owners, in that it is recognized as its own legal and tax entity. Corporations are created following specific guidelines in the statutes. Once incorporated, the law assigns a corporation certain rights and responsibilities much like an actual person. For this reason, corporations become more complex than sole proprietorships and partnerships, although basic incorporation can be simple and inexpensive. Corporations tend to be more stable than partnerships, as they are more attractive to lenders and creditors. Likewise, transferability of ownership interests in the corporation is relatively simple, so long as agreements are not made to limit the transfer of shares.
Shareholders in corporations have limited personal liability, so they generally cannot lose more than they invested in the corporation. However, shareholders may be required to provide personal guarantees in certain transactions such as corporate loans or leases, which can create broader liability. It is also possible for creditors to “pierce the corporate veil,” and attack shareholder’s personal assets if shareholders undercapitalize the corporation or fail to observe certain corporate formalities.
Forming a corporation also has its set of obstacles for people to deal with. For instance, it is not always simple or inexpensive to form a corporation. Also, managing shareholders must observe legal and accounting formalities, which can become quite complex. Finally, depending on the corporation, certain accounting information must be made public. Despite these hurdles, however, corporations are often the most suitable entity for a business to take.
