If you’re interested in starting a new business or are looking to restructure an existing company, you may be considering structuring the venture as a corporation. This option presents both advantages and drawbacks to business owners and the companies themselves, and working with an experienced and knowledgeable lawyer to review your options can help ensure you’re making the right choice for your situation and goals.
SBS Law PLC serves clients in Grand Rapids, Kalamazoo, and throughout Michigan. Contact us today to arrange an initial case evaluation with a corporations and business law attorney from our law firm to learn more about whether the corporate form might suit your business needs.
What Does the Corporate Structure Entail?
A corporation is a legal entity that separates a business from its owners, called shareholders. Because a corporation has a separate legal existence from its owners, it can conduct business, enter into contracts, own property, and pay taxes independently of its shareholders. A corporation operates through a board of directors, elected by the shareholders. Directors can appoint officers to oversee day-to-day management, although authority to run the business remains with the directors. The corporate law of the incorporation state governs a corporation’s management and ownership, along with its governance documents, including its bylaws, shareholder agreements, and stock purchase agreements.
Why Should You Choose the Corporate Form for Your Michigan Business?
Corporations can provide an advantageous legal structure for many businesses in Grand Rapids, Kalamazoo, and other Michigan communities. The suitability of the corporate form can depend on a company’s owner (s) and their needs, concerns, and business objectives. Some of the primary benefits of choosing a corporation for a company’s legal structure include:
- Limited Liability – A corporation provides its owners (shareholders) with limited liability protection. A shareholder does not have personal liability for the corporation’s debts or legal obligations. Instead, the corporate form limits a shareholder’s financial liability for a corporation to the money they have invested in the business, as the shareholder may lose their entire investment if the company becomes insolvent.
- Transferable Ownership – A party owns an interest in a corporation through stock. Transferring shares of stock in a corporation can occur more easily than transferring ownership interests in other types of legal entities.
- Perpetual Existence – A corporation will continue to operate regardless of changes in its ownership. A corporation’s existence will continue unless the shareholders vote to dissolve or the state dissolves or administratively terminates the corporation.
- Access to Capital – Corporations can raise capital by selling stock, which allows other parties to invest in the business. Due to the formal structure of a corporation, outside investors may view corporations as better investments than companies organized as other legal entities.
- Tax Flexibility – By default, the federal government taxes corporations under Subchapter C, under which a corporation pays taxes on its income, and shareholders also pay taxes on profits the corporation distributes as dividends, potentially resulting in double taxation of the corporation’s income. However, corporations that meet specific requirements can elect taxation under Subchapter S, which can result in more advantageous tax rates for the business.
- Credibility and Prestige – Organizing your business as a corporation can enhance its credibility to customers, vendors, lenders, and investors. Having a corporation can help owners appear more organized and formal than operating as a sole proprietorship, loose partnership, or joint venture.
A skilled lawyer can help you assess the suitability of a corporation for your business needs and objectives.
Drawbacks of Structuring as a Corporation
Although corporations offer Michigan business owners various advantages, owners and entrepreneurs might choose a different option for multiple reasons, such as:
- Higher Costs – Corporations face higher initial setup fees, including filing and legal expenses, as well as potentially higher ongoing administrative and regulatory expenses.
- Increased Complexity – Managing a corporation involves more complex and formal procedures, including extensive paperwork and recordkeeping. Corporations must act through formal processes, such as annual shareholder meetings and regular board meetings, where shareholders and directors can vote on various matters. Corporations also have ongoing reporting requirements, including the obligation to file annual reports with the state.
- Separation of Ownership and Management – In a corporation, shareholders own the company, while directors and officers manage it. Because directors and officers need not be shareholders, owners may lack direct control over the business and may have conflicts of interest with management.
A business attorney can discuss the downsides of a corporation and why the corporate form might not work best for your needs and objectives.
Alternatives to the Corporate Form
Grand Rapids entrepreneurs and business owners have other options for structuring a company. For example, two or more owners may choose to form a partnership. In a partnership, each owner (a partner) shares in the management of the business and in the company’s profits and losses. A partnership’s tax liabilities pass through to its partners. Partnerships come in several forms, including:
- General Partnership – All partners share equally in management, profits, and losses, and bear personal liability for the business’s debts
- Limited Partnership – Has two classes of partners – general partners who run the business and assume full liability, and limited partners who have no management responsibility and enjoy limited liability protection
- Limited Liability Partnership – Protects partners from personal liability for the negligence or misconduct of other partners
Some Grand Rapids and Kalamazoo businesses choose to structure themselves as limited liability companies. A limited liability company combines features of corporations and partnerships. LLCs create a separate legal entity from their owners, called members. As a result, members avoid personal liability for the LLC’s debts and legal obligations. LLCs offer flexibility in structuring the ownership and management of the business, as members can choose aspects of how partnerships or corporations operate, such as giving members full control of the company, as in a partnership, or structuring equity in stock-like “units,” as in a corporation.
Solo entrepreneurs may forego formally structuring their business and instead operate as a sole proprietorship. Although sole proprietorships have little or no formalities, they also offer their owners no personal liability protection, as the law recognizes no distinction between an owner and their sole proprietorship.
Why Choose SBS Law PLC?
Forming a new business will involve evaluating various legal structures for your company. Let a Grand Rapids business formation attorney from the law firm of SBS Law PLC help you decide whether your business should register as a corporation and assist you with corporate structuring because:
- When you choose our attorneys to assist you with business formation, we will take the time to sit down with you and listen to your story to understand your needs, concerns, and goals, so that our law firm can provide you with the tailored advice you need to make informed decisions.
- Our lawyers offer honest, straightforward counsel throughout the business formation and structuring process, as we understand that your company represents a significant investment.
- At our law firm, you will always have dedicated attention and thorough support from our lawyers to guide you through each step of the business formation process.
- Our comprehensive, full-service law firm can provide holistic support to address the various issues related to forming and structuring a corporation or another business entity.
Contact Our Michigan Business Law Firm Today for Guidance and Support
The corporate form can provide an appropriate solution for your needs and business goals if you’re restructuring or starting a new business, but it can be useful to discuss the pros and cons with an experienced attorney before committing to this structure for your business. Contact our Grand Rapids Corporations Attorney at SBS LawPLC today for a confidential consultation with an experienced business formation lawyer from our Grand Rapids law firm to discuss whether the corporate form will best suit your objectives.
