Why Choose Corporation?
With the flexibility of a Limited Liability Company (LLC), one may
wonder why any company would still choose to become a corporation.
The primary reasons to become incorporated are:
- Corporations find
it much easier to obtain large amounts of financing,
liability is reduced with more shareholders,
- Ownership is
transferred more easily than in LLC's, and
- Being taxed as a
corporation is typically better when revenue earned is significant
due to avoidance of the Self-Employed SECA tax on all income.
Furthermore, for tax purposes, any LLC
with more than 100 shareholders is automatically taxed as a
corporation, even if the company is legally a LLC. So if the owners
of a company intend to grow their business into a significant
enterprise, then a corporation is likely the best business
classification to pursue.
It is also important to note that when
a business becomes incorporated for the first time, it often earns
significant funds from the first sale of shares of the company. The
business is essentially giving people ownership rights in exchange
for their money, which can generate millions of dollars for an
already established company.
In addition, whenever the company needs
to raise funds in the future, creating and selling additional shares
of the company is an option only available to Corporations.
Investor Response to New Public
Offerings of Ownership
It is important to mention that
investors often consider it to be a negative event when an already established corporation
chooses to raise additional funds via creating and selling new shares
of the company.
The reason why is because creating more shares of the
company invites more owners to join; which causes personal liability
is be further dispersed, but it also means that potential earnings as
dividends will also be further dispersed. Therefore, logically
speaking, if management of a company has a negative outlook of the
company's future, then they might try to further disperse personal
liability in order to limit personal risk. However, if the company
has a positive outlook, management will likely pursue other financing
options in order to keep more earnings for themselves.
At least, this
is how investors typically perceive a new public offering for stocks
for an already established Corporation. Whether or not this is an
accurate deduction of managerial decisions is a separate issue.
Final Verdict: Corporation or LLC?
Overall, whether or not a Corporation
or Limited Liability Company (LLC) is better depends on the size of the company and the overall
business goals. If the company intends to eventually become a
significant enterprise, then incorporation is almost guaranteed to
become a necessity. Rapid growth is also a major catalyst for
incorporation, due to the initial revenue generated from offering
shares of the company as well as the future financing opportunities
available only to corporations.
Types of Business Organizations
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