Business Entity: Corporations

Ok, we tackled about the first two business entities already: Sole Proprietorship and Partnership. Like most of all of you know, the third business entity is Corporation.

A third and very different choice of business form is the corporation. Unlike the sole proprietorship and the partnership, the corporation is an entity completely separate from you, the person incorporating it. Your company is now an “Inc,”, an Incorporated and with that designation comes some additional paperwork and compliance issues based on the laws of incorporation in which you choose to incorporate. However, the corporation provides a level of protection for you. Because it is a separate entity, it should provide protection for your personal assets from creditors of the corporation. Although you may want to do some of this legwork yourself, you should use a lawyer for much of it.

There are basic steps in creating a corporation. Here in the Philippines, you will file articles of incorporation and by-laws in Securities and Exchange Commission (SEC). The document should contain the shareholders of the company, their addresses, how many shares they hold, and other details. Here is a sample articles of incorporation form from SEC.

Once you incorporate, there are certain rules and formalities that must be observed. For instance, for publicly listed companies, they are required to hold shareholders’ meetings and keep updated business records such as financial statements. If not, your corporation could be dissolved and you might end up paying a fine. There are consultants who specialize in assisting companies with compliance requirements. A consultant will make sure all necessary meetings are held and documented, and that all incorporation paperwork is filed. Check with your legal counsel, who may provide this service or direct you to a consultant in your area.

On the bright side, remember that the corporation owns its own assets and pays its own debts. This is the secret of the rich. If, on paper at least, you don’t own anything, then you can’t lose it. If a party claims injury from your business and sues, your personal assets should be protected.

Is Corporation for you?
Here are a few questions to ask before you decide to form a corporation. The more yes answers you come up with, the more applicable a corporation is to your business.

• Is your business growing so rapidly that you can no longer handle it alone?
• Do you need to raise more capital?
• Do you want less risk personally?
• Can you visualize sharing control of your business with another?
• Has your business outgrown your goals?
• Would the business benefit from managerial and creative skills that you lack?
• Do you want to offer fringe benefits that are only available through a corporation?

As an end, I would like to leave another Rich Dad Tip:

“This is a secret  of the rich: The corporation owns its own assets and pays its own debts.”

Source: Robert Kiyosaki’s Coaching Program