Overview of Corporations
The last of the three types of business structures we’re going to talk about is the corporation. While it does take more time and expense to set up, and requires more work to keep up with the paperwork needed, for many businesses it’s the right choice.
Unlike sole proprietorships and partnerships, it takes more than just an agreement to start a corporation. There are some legal steps you have to take to get it set up, so you’ll need to find an attorney that has experience in establishing corporations. How difficult it is to get things started really depends on the type of corporation your starting (I’ll get into the different types of corporations and how to go about getting them set up in a later post).
Separate Entities
One big difference between a corporation and the other to business structures is that a corporation is considered a separate entity form the owners. What that means is, if Joe decided to start a sole proprietorship called “Joe’s Junk”, legally Joe and the business are considered to be one and the same. If Joe started a corporation called “Joe’s Junk, Inc.” Joe and the business are not one and the same. Joe, the owner is separate from Joe’s Junk, Inc.
That separation is an important point when it comes to liability. It means that if some took Joe’s Junk, Inc. to court, the business would be responsible to cover the amount of the judgment, but Joe would not. The same is true with any business loses. Creditors would be able to go after Joe’s Junk, Inc’s assets, but they would not be able to go after Joe’s personal property. That takes away a great deal of the personal risk of business ownership.
Transfer of Ownership
Another advantage of the separation between the business and the owners is that the business lives on past the death of the owner. Ownership can be left to a family member, or transferred at any time without a prior agreement with the other owners. Your share of ownership is yours to do with as you please.
A corporation also makes it easier to add additional owners if the need arises. All that is required is for the Board of Directors to vote to allow it to happen. Once the resolution is passed, the new owner is allowed to be a part of the corporation. It does not require any legal change to the corporation’s structure.
Taxes
On the down side, a corporation’s profits are subject to double taxation. When a corporation earns money, that money is taxed at the corporate level. If the owners decide not to reinvest all of the earnings, and they take some of the corporate profits as individual earning, that money is taxed again at the personal rate of each owner. This issue does make owning a corporation more expensive to maintain than the other two forms of business.
So you can see that there are pros and cons to each of the different types of business structures. Which one is right for your restaurant? That’s really up to you.
