A corporation is a separate legal entity from the shareholders who own the company. Non-corporation businesses such as a sole proprietorship or partnership include no legal separation from the owners of the business. It is easier to start a non-corporation because there are no fees to pay or papers to file to operate as a sole proprietor or a partnership. Corporations can be expensive to form depending on the state of incorporation and involve much more paperwork compared with non-corporations.
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Corporations must have a specific structure consisting of shareholders, directors and officers. Shareholders are owners of the business, and a shareholder may act as a director and officer of the business. Every corporation must have at least one director to allocate the company’s resources and govern the business. Directors have the responsibility of selecting the officers who manage the company’s day-to-day affairs. Non-corporations do not have such a specific structure.
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Raising capital is more difficult for a non-corporation compared with an incorporated entity. A corporation has the ability to raise capital by issuing shares of stock, while non-corporations cannot. Corporations can use the proceeds generated from issuing stock to expand the business or pay the company’s existing obligations. A non-corporation has to rely on an owner’s investment to finance the company’s business activities. If the owner of a non-corporation does not have good credit, he might not be able to secure loans to finance the company’s operations.
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Corporations deal with many more formalities and are more heavily regulated compared with non-corporations. Corporations are required to have at least one annual meeting, whereas no meeting requirements are placed on non-corporations. Corporations must record minutes from meetings and file annual reports with each state where business transactions occur. Non-corporations do not have to keep minutes or file annual reports with the state. States such as Delaware and California impose a franchise tax on corporations, but sole proprietors and partnerships are not required to pay franchise taxes. A non-corporation does not have to prepare financial statements, while corporations must prepare a balance sheet, income statement, statement of shareholders’ equity and statement of cash flows.
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A corporation is different from a non-corporation in terms of continuity. Corporations can last forever and continue to operate despite changes in ownership, but a non-corporation might automatically terminate if an owner dies or withdraws from the business. Also, owners of a corporation have limited liability protection against company debts and obligations. Sole proprietors and partnerships have a personal obligation to pay debts and obligations during the life of the business.