How do Corporations Work? How About Financing Them?

Corporations are businesses that offer outside investors the opportunity to buy 'shares' of the business and pay them dividends on a quarterly or yearly basis. If your business venture is promising and appears attractive, it will probably be easy to attract outside investors-however, always remember to keep in mind the condition of the business market, your location and your ability to promote your business.

A corporation is a legal entity separate from the individuals who own or operate it. The shareholders, people who invest money in the company, are the owners of the corporation. These investors are given shares of corporate stock in return for the money they invest in the corporation. Having shares of stock gives the investors certain rights, such as the right to vote on important business decisions and the right to receive dividends from the corporation's profits. The “C” corporation, discussed here, is the traditional type of corporation. Most large companies in the United States are considered “C” corporations.

Corporations that do not offer shares to the general public are called privately held corporations. If you have a privately held corporation, you may own all the stock in your corporation, or you and several other people may own the stock.

For Example:

No more than thirty-five shareholders can hold stock in a privately held corporation in the state of California, and you can have only one class of stock in a privately held corporation. You will need to investigate the laws of your state to determine how many stock holders you may have in order to be considered a privately held corporation.

In a privately held corporation you as the stockholder and owner may be the only employee, or you may hire other workers. Generally, the directors, officers and shareholders of a privately held corporation are also its employees. They will receive wages or a salary from the corporation. A privately held corporation may also pay dividends to shareholders if the corporation makes a profit.

Large corporations, such as those listed on the stock exchange, are considered publicly held corporations. They sell stock to the general public and anyone can buy shares. There is not limit to the number of potential shareholders in a public corporation. Because we are focusing on Start-Up businesses in this article, we will focus on the privately held corporation, which is most likely to be the corporate structure you initially select for your business.

Because a privately held corporation is a separate legal entity from its corporate shareholders, the corporation is responsible for its own debts. The shareholders, directors or officers are generally not personally liable for the corporation's debts. This means that they have limited personal liability, and are liable only for the money they have invested in the corporation. Creditors of a corporation cannot recover from the personal assets of individual shareholders to settle corporate debts. Limited liability is the most advantageous feature of incorporating your business. However, exceptions to this rule do exist. Shareholders and officers and personally liable for paying the corporation's payroll taxes, which are taxes the corporation must withhold from its employees' wages. Make certain that your corporation's payroll taxes are paid accurately and on time. You will probably want to hire an accountant to assist with this facet of your business.

Shareholders might also lose the protection of limited liability if they “commingle,” or mix personal money with the corporation's money. Again, it is important to keep your corporate and personal financial accounts separate to keep your limited personal liability. You are also personally liable for your corporation's debts if you personally guarantee them. You may decide to borrow money from a bank to finance your business. If you sign loan papers in which you 'personally guarantee' repayment of the loan, the bank can recover from your personal assets to repay the loan. Most banks will require you to sign such a form if you accept a business loan from them, so it is very hard to avoid this situation.

Despite its disadvantages, a corporation may be one of the easiest forms of business to gain financing for. Because you can attract outside investors with the promise of dividends, business growth and the excitement of investing in a new venture, you will probably be able to reach your financing goals more quickly than if you applied for loans yourself or attempted to save enough money to start your own business.

Again, carefully examine your business goals and personal ability to achieve them. Do you need to attract outside investors to get your business started? Also, is it likely that you will need to be able to attract outside investors to maintain or enhance your business in the future? If so, it is likely that you will want to discuss starting a corporation with your legal and financial advisors.