Corporations are legal entities. They separate a company from its owners and provide rules for taxation. Corporations are able to utilize most of the rights and responsibilities that individuals possess such as entering contracts, borrowing money, suing, hiring employees, and paying taxes.
Despite this, the way that they are taxed, and the way they are formed, differ from sole-proprietorships and partnerships. Most of the time, corporations have shareholders that own the company. These shares can be held privately by a few owners, or publicly to many.
Starting a corporation is defined as the process of "incorporating". This is somewhat difficult, but there are a few documents that need to be prepared and filed.
Corporate executives are one level below the board, and they run the formation of stock structures. This also runs the results of double taxation for both the business and its shareholders on the same profits.
As compared to starting an LLC, a corporation is somewhat more complicated. You will need to appoint directors and a registered agent, create bylaws, issue stock, file articles of incorporation, as well as IRS forms. This is why it is generally preferable to seek assistance by hiring an agent.
There are various reasons why you may want to start a corporation.
The most commonly formed corporation is a C Corporation. These are typically formed by businesses, and contain all of the typical aspects of a corporation. Owners are given profits and are taxed at the individual level. At the same time, the corporation is taxed as a business entity.
S Corporations are formed similarly to C Corporations but with different options to how they are taxed. When corporations elect to be taxed as an S corporation, the profits are taxed only when they are passed down to shareholders. These shareholders are then required to pay taxes on their own personal tax returns.
There are some limitations when it comes to S corporations versus C corporations:
When a charitable, educational, or religious organization operates without generating profits it is considered to be a non-profit corporation. These corporations are exempt from taxation. This means that all contributions, donations, or revenue are not taxed, and available for the entity to spend on operations, expansion, or future plans.
Because corporations are separate legal entities, they provide limited liability protection to their owners. These owners, called shareholders, will not be personally responsible for the debts and liabilities of the business. This means that in the event that creditors come to collect from the company, they cannot pursue the personal assets of the shareholders in order to pay off the business debts.
There are many tax advantages for corporations, such as deductions. This includes not paying taxes on the cost of health insurance premiums paid to employees. Corporations also save on self-employment taxes, because corporate income is not subject to social security, workers compensation, or medicare taxes.
If you are looking to establish funding or obtain a loan, incorporating can provide your business credibility. You may also be able to establish that credibility with potential customers, employees, as well as vendors.
The life of a corporation succeeds its owner. This means that even if the owners die, or want to sell their portion of the business, the corporation will continue to do business.
When corporations are publicly held, they can be transferred without approval from other shareholders.
As compared to an LLC, both formation and maintenance are difficult with a C-Corporation. Not only must the articles of incorporation be filed with the state, but there are many ongoing state fees that are required t o be paid with a corporation. Although they may not be hugely expensive, they can be more expensive than for a sole proprietorship or LLC.
Corporations have one huge downfall, and that is double taxation. Double taxation occurs when a corporation is taxed on its profits, followed by the owners of the corporation being taxed on their personal profits (known as dividends). On top of that, corporations are not permitted to claim a deduction for any dividends passed on to owners. This can be avoided by electing S corporation tax status with the IRS.
Corporations must follow different tasks and record keeping. This includes holding and documenting meetings, as well as maintaining bylaws. Other entities do not need to abide by these formalities imposed on corporations.
Whether you are going public, or simply want to protect your assets, incorporating is a great idea for any business. Corporations are able to separate themselves from their owners. If you want to avoid liability, incorporating allows you to do so.