Types of companies
Joint Stock company, Corporation – S Corporation/an
LLC
Join Stock company
1. In the UK: the original name (17 th century) for a corporation in which the liability of the
owners is limited to the nominal value of the stock (shares) held by them.
2. In the US: Corporation with unlimited liability for the shareholders. Investors in a US
joint stock company receive stocks (shares) which can be transferred, and can elect a
board of directors, but are jointly – and – severally liable for company`s debts and
obligations. A US joint stock company cannot hold title to a real property.
Corporation
A corporation is an organization—usually a large business—with specific characteristics.
Under law, corporations are deemed separate legal entities from their owners. This means
that corporations themselves, not the owners, are legally liable for their actions and debts. If
a corporation incurs debts, creditors have claims against the assets of the corporation, not
the personal assets of the owners. This is called limited liability, and is a major
corporate advantage.
Joe’s Lawn & Garden is not a corporation. Joe and ten other people are owners who share the
profits. The company is sued for $500,000, but the company only has $350,000 in assets. All
ten of the owners must dig into their personal assets to pay off the remaining $150,000.
Now instead, let’s say Joe’s Lawn & Garden became a corporation the year before, and is now
called Joe’s Lawn & Garden Incorporated. The company is sued for $500,000, but it only has
$350,000 in assets. Although creditors may collect the $350,000, the corporation owners are
not personally liable for the rest.
The advantages of forming a corporation
include:
-limited liability
-ability to raise money by selling shares
-separate corporate tax treatment
-and advantages when recruiting employees
Disadvantages
include the time, complex paperwork and costs to form a corporation. In addition, in some
cases, profits of a corporation are double taxed—once when the corporation pays taxes,
and again when the owner receives dividends and pays his own taxes.
S Corporation vs. LLC – What’s the
Difference?
Many businesses – small ones in particular – make the decision to seek some type of legal
and liability protections, as well as special tax treatment. This is typically done through
adopting a business organization form that will effectively separate the business owner(s) from
the business itself. In doing so, the obligations and liabilities of the business become the
responsibility of the business entity, and not its owners.
Two prominent forms of ownership are corporations and limited liability companies (LLC’s).
Each will provide the needed liability protection as well as certain income tax advantages.
Corporation status is generally more formal in its structure and can be better suited to large,
established businesses. LLC’s, being less rigid, tend to work better for newer and smaller
businesses.
S Corporation
S Corporations are distinct legal entities created under state law. They enable business
owners to separate themselves, legally and financially, from the business itself. This provides
a strong level of protection for owners from creditors and lawsuits seeking financial
compensation from the company.
S Corporations require a substantial level of compliance – sometimes referred to as corporate
formalities (see the chart below) – that are necessary to establish a dividing line between the
corporation and its shareholders. For this reason, small business owners often choose
simpler business organization forms, such as LLCs.
One of the primary advantages of corporations is that ownership of the company can
change hands without disturbing the operation of the business. This also allows for
the continuation of the company in the event of the death of one of its shareholders,
and makes it easier to hire non-shareholders to manage the company’s operations.
Limited Liability Company – LLC
A Limited Liability Company offers a business owner considerable flexibility. The owner can
have many of the same legal and liability protections available to corporations, but corporate
formalities are greatly relaxed. The major exception are loans and obligations (such as leases)
personally guaranteed by an owner – they will remain a potential liability of the owner despite
the LLC status of the business
LLC regulations vary from state to state, so you will need to be familiar with the rules in your
state before making the decision to create an LLC status for your business. This is partially due
to the fact that LLCs are a relatively recent phenomenon compared to corporations, which have
been around for centuries. In many states, regulations and practices regarding LLCs is still
being worked out.
A Summary of the Difference Between a
Corporation and an LLC
Corporation
LLC, or Limited Liability
Company
Created Under
State law
Same
Owners are Called
Shareholders
Members
Purpose
To create a distinct legal
entity for the purpose of
income taxes, liabilities and
legal challenges
Similar protection to
corporation but without the
heavy requirements for
corporate formalities (See
below)
Tax Consideration
Corporation files income
tax returns (IRS Form
1120) based on it’s own
profits; unless dividends
are paid shareholders can
avoid double taxation by
being compensated
through salary, benefits and
bonuses, which while
taxable to the shareholder,
are also tax deductible to
the corporation
Three options: Can be
taxed as a sole proprietor
(Form 1040, Schedule C),
as a partnership with more
than one owner, or as a
corporation with a special
election
Liability Protection
Shareholders are generally
not responsible for debts
and other obligations of the
corporation, including taxes
and legal claims (See
Corporate formalities below
for exceptions)
Similar to corporations
(except for income tax
liability for non-corporate
LLC’s), except that
personal guarantees on
loans and obligations of the
business will remain a
liability of the
member/owner as well
Business Management
Shareholders can manage the
business operations of the
corporation, or they can hire nonowners to manage it for them
Ownership and management are
usually the same, but LLC can
hire non-owners to manage the
business
Corporate Formalities
In order to determine and
maintain separate legal status of
the corporation, the company
must issue stock, maintain
adequate capital in the company,
keep asset accounts separate
from those of shareholders,
appoint officers, hold annual
meetings, and record minutes of
those meetings – shareholder
liability protection can be lost if
these procedures are not
maintained
Varies from state to state, but
generally much less involved than
for corporations; general
requirements are 1) Articles of
Organization, and 2) Operating
Agreement
Life of Business Entity
Since a corporation is a separate legal entity, it can continue in existence forever; the death of
one or more officers of the company will not necessarily result in it’s termination
LLS can be a perpetual entity if it is provided for in it’s Articles of Organization, otherwise
dissolves upon the death, resignation, termination or bankruptcy of a member
Multinational Corporations
A multinational corporation is just that – a corporation that operates in multiple nations, with
a home office that coordinates global management. Being a multinational corporation is a
complicated and expensive proposition. Most are large, powerful organizations that can
afford to hire the business managers and legal experts necessary to navigate the laws and
regulations of various countries, and adapt when those laws change.
Opponents of multinational corporations argue they are too large, have too much power
and/or exploit less-developed nations.
Supporters argue multinational corporations provide large resources for job creation and
infrastructure in less developed countries, which helps improve their standard of living.
Another issue regarding multinational corporations involves taxation. Because these
corporations do business around the globe, they frequently adjust their business practices to
pay the least amount of taxes possible, often by shifting the home office to a country known as
a tax haven – a territory where tax rates are exceptionally low or nonexistent. Some
companies also keep large amounts of funds outside the United States to avoid paying taxes
on profits upon repatriation.
Annual General Meeting - AGM
A mandatory, public yearly gathering of a publicly traded company's executives, directors
and interested shareholders. At the annual general meeting, the CEO and director typically
speak, and the company presents its annual report, which contains information for
shareholders about its performance and strategy. Shareholders with voting rights vote on
current issues, such as appointments to the company's board of directors, executive
compensation, dividend payments and auditors. Shareholders who do not attend the
meeting in person are asked to vote by proxy which can be done online or by mail.
Extraordinary General Meeting - EGM
A meeting other than the annual general meeting between a company's shareholders,
executives and any other members. An EGM is usually called on short notice and deals
with an urgent matter.
Board of Directors
A group of individuals that are elected as, or elected to act as, representatives of
the stockholders to establish corporate management related policies and to make
decisions on major company issues. Every public company must have board of
directors. Some private and nonprofit companies have a board of directors as
well.
In general, the board makes decisions on shareholders` behalf as a fiduciary and looks out for the
financial wellbeing of the company. Such issues that fall under a board's purview include the hiring
and firing of executives, dividend policies, options policies, and executive compensation. In addition
to those duties, a board of directors is responsible for helping a corporation set broad goals, support
executives in their duties, while also ensuring the company has adequate resources at it’s disposal
and that those resources are managed well.
In recent years some boards of directors for publicly held companies have shifted focus from
considering their fiduciary duty entailing watching after just the financial wellbeing of the corporation
to a more broad goal of working to “promote the success of the company for the benefit of its
members as a whole,” as the 2006 U.K. companies act lays out.
Structure and Makeup
The structure and the powers of the board is determined by an organizations’ bylaws, which
can include number of members, the manner in which they’re elected, how often they’re
elected, and how often they confer. The number of members of a board can vary in size: some
companies have boards with as many as 31 members or as few as 3. The ideal size of the
board is 7.
No matter the number, ideally the board of directors should be a representation of both
management and shareholders' interests by consisting of both inside and outside members.
Too many insiders serving as directors will mean that the board will tend to make decisions more
beneficial to management but possibly not to the company as a whole, and too many independent
directors may mean management will be left out of the decision-making process and may cause
good managers to leave in frustration. Because of these concerns, striking a balance on the types
of members on any board is important for their success.
Structure differs slightly in some countries in the EU and in Asia where the governance of a
company is split into two tiers: an executive board, and an supervisory board. The executive
board is made up of insiders elected by employees and shareholders and is headed by the CEO
or managing officer. This board is in charge of the daily business operations of the company.
The Supervisory board is chaired by someone other than the presiding officer of the executive
board, and concerns itself with issues closer to what a board of directors would deal with in the
U.S.
Election
While members of the board of directors are elected by shareholders, those put up for
nomination are decided by a nomination committee. When executives within the
corporation participated in the nomination process, they ended up nominating candidates
who were less likely to aggressively monitor the managers of the corporation. In 2002 the
NYSE and NASDAQ required the committee to consist of independent directors, so as to
ensure the fiduciary duties of the board of directors would be fulfilled. In some cases,
depending on the structure set up for the board of directors and the laws in the state, in the
case of the death of a director or their resignation. Ideally, the terms of directors are
staggered, so not all directors are up for election during the same year.
Removal
Removal by resolution in a general meeting is challenging because most bylaws allow for a
director to be given a copy of the proposal, and then respond to it in the meeting,
increasing the possibility of an unpleasant split. Even then, most director’s contracts
include a disincentive for firing, a golden parachute clause that requires the corporation to
pay the director a bonus upon being let go.
However, there are a series of foundational rules that if violated can lead to the expulsion
of a director.
- Using powers as director for something other than the financial benefit of the corporation.
- Making deals with third parties promising to vote one way or the other at a board meeting
compromises a directors unfettered discretion.
- Conflict of interest by engaging in transactions with the corporation. Members of the board
cannot engage in business or deals with a corporation on which they serve on the board without
ratifying the deal with the corporation or disgorging all funds received from deal.
- Using information gathered in meetings for personal profit.