Incorporated businesses are also known as corporations and have features that distinguish them from sole proprietorships. The have unique benefits, but drawbacks as well. Small businesses attempt to incorporate for reasons that include expansion, improved operational efficiency, and protection against liabilities.
Corporations can generate large amounts of money by selling stock shares to investors. The ownership of an incorporated business is distributed among stockholders, instead of focusing on a single owner or small group of owners. They are listed on stock exchanges and have accessible financial data.
Incorporated businesses are their own legal entities. This means they are liable for their own taxes, debt, and legal actions. Owners or stockholders enjoy limited liability, which means they are not held liable for the corporation’s debts. If company finances worsen, stockholders lose the amount proportionate to their investment in the company.
Corporate income can be taxed twice. The corporation pays taxes on its own income and stockholders pay their personal income taxes on money received from the corporation. This feature differentiates corporations from sole proprietorships, where business income is essentially merged with personal income. Unique business structures such as limited liability companies (LLC) avoid double taxation, making this form of business more attractive for owners to set up with.
The original founders of the company may lose all management control based on the voting powers granted to stockholders. The Securities and Exchange Commission (SEC) can also perform numerous reports and auditing on the corporation.
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