The most important initial step in forming a business is selecting what the type of business entity. Most often, this decision comes down to deciding between a corporation and a limited liability company. The advantages of forming a corporation, such as limited liability for owners and free transferability of owner’s interests- are now available in other entities such as limited liability companies. The major drawback to forming a corporation is double taxation (profits are taxed at the corporate level, then again when distributed to shareholders). This double-taxation can be eliminated by forming an S-corporation, but there are several limitations placed upon s-corporations.
Some business entities will elect to form a corporation (legally referred to as a c-corporation) for a number of reasons, despite the double taxation. While not meant to be an exhaustive list, these are some main reasons a c-corporation status will be selected:
If ownership is going to be diffuse and the company will be owned by many shareholders, then a c-corporation is the likely entity. While a limited liability company may have many owners, the shareholders are limited in their ability to transfer their ownership as there is unlikely to be a marketplace, such as the stock market, to transfer their shares. Thus, if there are many owners in a business, they will seek to have the business formed as a corporation to increase their ability to buy and sell shares in the business.
If the business plans to go public– by having an initial public offering of stock on a stock marketplace- the business will likely need to be a corporation. The main reason for this is that there must be a public marketplace to buy and sell the corporation’s shares. The initial public offering occurs on a stock exchange such as the New York Stock Exchange. Once public, the shares of the company can be freely traded by the public.
Depending on the type of investors, some businesses will need to form as a corporation. Investors want the “upside” of investing by purchasing shares in the business: the business prospers and thus, their investment grows. These investors want a large marketplace in which to sell their shares, such as a stock market. Facebook is a good example of this. The initial investors in Facebook (prior to it going public), such as Mark Zuckerberg and Google sought to make money. By going public, the shares of Facebook had a much larger marketplace in which to buy and sell shares. Facebook began trading at $38 per share in 2012, and now trades at $171.94.