Why are most large businesses organized as a corporation? Originally appeared on Quora: the place to gain and share knowledge, empowering people to learn from others and better understand the world.
There are a number of financial and legal advantages gained by operating an organization in corporate form.
Organizing a business in corporate form allows a company to function independently from the owners of the business. And one or more people may operate a company in corporate.
Protecting Personal Assets
Organizing a business as a corporation provides owners with personal asset protection. When a business incorporates, its owners have limited liability protection against the company’s debts and obligations. This means creditors of an incorporated business may not pursue the business owner’s personal assets in an attempt to recover business liabilities and obligations.
Companies operating as an incorporated business may find it easier to raise money. Incorporating allows a company to issue stock in an effort to raise money, allowing a company to issue multiple classes of stock provides greater opportunity for a company to grow and expand by taking on more investors.
Businesses that organize as a corporation find it easier to transfer ownership. Ownership interest in a corporation may be sold or assigned by transferring the company’s stock certificate to another shareholder. Furthermore, potential investors may be more likely to invest in a corporation as opposed to a sole proprietorship or partnership, due to the limited liability protection given to its owners. In some instances, an incorporated business may have a “buy-sell” agreement that prohibits when and to whom shares of the company may be sold.
Organizing a business in corporate form increases the credibility of the company. In most cases customers, suppliers, and lenders may feel more at ease when dealing with a corporation. In addition, businesses organized in corporate form appear more professional in comparison to other forms of business. A business that takes the effort and money to organize a corporation sends a signal that the company is around to stay.
A business organized in corporate form has unlimited life. This means the corporation may be in existence well beyond the lifespan of its original owners. A corporation will continue to exist, and will not be dissolved or cancelled when shareholders die or withdraw from the company. In fact, a business organized in corporate form will continue to operate in that manner, regardless of who owns it.