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Finance & Accounting

Corporations and Limited Liability Companies (LLCs)

Corporations

Unlike a partnership and a sole proprietorship, a corporation is a separate legal entity, distinct from any individual or group of individuals. In fact, a corporation is a “person” in the eyes of the law, and it has many of the rights, privileges, and responsibilities of a person.

A corporation can do business as an individual entity distinct from its owners or shareholders. It can make contracts (and be liable for non-performance), sell ownership shares, borrow, and incur liabilities (such as tax liabilities). In contrast to sole proprietorships and partnerships, a corporation offers:

As such, an important advantage of the corporate form is the ability to raise cash via debt or by selling ownership shares.

The corporate form is fairly flexible. It can be anything from Exxon-Mobil to a two-person operation. However, regardless of size, every corporation must follow the statutory (legal) requirements of the state (if appropriate, as in the U.S.) and/or country in which it is incorporated. In the U.S., a corporation needs only to incorporate in a single state (it becomes a “resident” of that state) to do business throughout the United States. Corporations must pay corporate income tax, and any profits paid out as dividends to shareholders are subject to personal income tax.

Example: Ryser Corp.

Headquartered in Cupertino, CA, Ryser Corp. employs over 10,000 people worldwide. Ryser is a leader in the pharmaceutical industry, and has created dozens of drugs and therapies approved by the U.S. Food and Drug Administration (FDA). Ryser Corp. is a publicly-traded company, and its operations are strictly regulated by the FDA and various state and local government agencies.

Corporate Structure

Large corporations are usually structured as pictured in the image to the right.

Shareholders elect the Board of Directors, the Board of Directors select Managers, and Managers hire Employees.

Shareholders control the corporation. Unless they own shares of the company, directors, managers, and employees are not owners, but are stakeholders.

Shareholders elect the Board of Directors, the Board of Directors select Managers, and Managers hire Employees.

Shareholders control the corporation. Unless they own shares of the company, directors, managers, and employees are not owners, but are stakeholders.

Historically, financial management has chiefly been thought of as applying to profit-oriented businesses. However, all organizational forms should embrace the practice of making sound financial decisions. In addition to for-profit businesses, other types of organizations include:

  • Not-for-profit organizations (foundations, charitable and educational organizations, and non-governmental organizations (NGOs))
  • Government agencies at all levels
  • Individuals, families, and clubs

In other words, good financial management should be a concern for any business, organization, group, or individual.

Limited Liability Company (LLCs)

The limited liability company (LLC) is a relatively new form of business organization. An LLC operates and pays taxes like a partnership, but it offers its owners limited liability like a corporation. The business, not the owners (who in this structure are called members), is liable for the company’s debts. Many accounting and law firms operate as LLCs.

LLC-advantages-NEW

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