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 non-owners 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.