Small Business Primer - Part 2: What Type of Business Will You Run?

Incorporating a Business

A corporation is considered its own unique entity. It functions and has rights and privileges, somewhat like a person. A corporation can sue others in court, and be sued by others in court; can enter into, and be bound by, contracts. A corporation has the ability to borrow money from creditors, and even the government. Any corporation is required to hold a business license in its own name, and must pay taxes.

Incorporating a business also promotes the existence of a company. For example, recently the founder of the fast-food chain Wendy’s, Dave Thomas, died. As Wendy’s is a corporation, it will remain open and continue to grow (not to mention make delicious hamburgers). Had it been a partnership or sole proprietorship, it might have folded on the death of the founder.

Unlike partnerships and sole proprietorships, corporations face limited liability, which means that the owners (called shareholders) are not held financially responsible for the debts of the business. However, this does not mean that the shareholder is completely “off the hook”, so to speak. The shareholder is still responsible for the number of stocks they own, so in some cases, the shareholder could very well lose their whole investment if these funds are needed, for example, to pay creditors.

Corporations can also enjoy great tax advantages, but these will depend on where the corporation is located. Your local accountant or tax lawyer will have more information regarding this.

Additional funds and capital can be easily gained in a corporation, as shareholders can simply sell off additional stock, and this use of stocks to represent (to some degree) a person’s power within the business also allows company ownership to be easily transferred. Lastly, the corporation’s Board of Directors can contribute considerable knowledge in many areas, and this is usually extremely beneficial to the corporation’s overall success.

Corporations are much harder to set up than other types of businesses outlined here. Many government laws and regulations must be met, and because of this, a corporation usually requires more time and money than the other forms of business to set up. In some cases, instead of tax advantages, the business may actually face tax disadvantages through incorporation, and the business’s minority shareholders can be exploited if their knowledge and experience isn’t valued by majority stockholders.

Now that you’ve got the skinny on setting up the proper business, get out there and do it! Make the calls, meet the lawyers, complete the paperwork, and put your college education and experience to work.

Don't miss the next article, where we'll address the question of client relationship management . We'll look at what's involved -- and what tools are available to make the job easier...