When starting a business, you will have several types of business entities to choose from. A corporation is the most common business entity. A corporation is a separate legal entity from the business owners themselves. The corporate structure offers its owner's legal protections and benefits that other business entities, such as sole proprietorships and partnerships, do not. Because a corporation is considered a separate legal entity from its owners, the corporation may acquire its own debts and is required to pay it’s owns taxes. A corporation may enter into contracts, and be subject to the same legal liability as an individual. Most importantly, the personal liabilities of the individuals who form the corporation can be protected from the debts and liabilities of the corporation itself.
While there are several different types of corporations, the most common are the C corporation and the S corporation. Choosing the type of corporate entity that is right for your business will depend heavily on your business needs. The biggest difference between the C corporation and the S corporation is the way that each entity is taxed.
All corporations generally start as C corporations when formed. C corporations are taxed as separate entities. This means that the corporation pays taxes on any profits over the fiscal year, or writes off any losses incurred. The owners are only taxed on their income made from the corporation, and if they collect the profits in the form of dividends, the owners must pay taxes on these monies as well. Because both the corporation and its owners must pay taxes on the business, this form of taxation is called double taxation. If the owners want to bypass the double taxation required of C corporations, they may change their tax status with the IRS to form an S corporation.
All the profits of an S corporation "pass-through" the corporate entity, and fall onto the owners who must include the profits or losses on their personal income taxes. For owners who expect to be collecting the corporation’s profits as dividends, this method of taxation is beneficial. However, if the owners of the corporation want to keep the profits within the corporate entity, they may want to stick with the C corporation, since the corporate entity gets a lower tax rate than the individuals do.
While C and S corporations differ in taxation methods, both types of corporate entities share many of the same benefits. One of the best benefits of forming a corporation, is that the owners are able to protect their personal assets. For example, suppose there is a slip-and-fall accident on the grounds of the business, and a civil suit is brought against the business and the business owners. If the business entity was set up as a sole proprietorship or a partnership, the owner's personal assets are at risk in this lawsuit. This means that if there are not enough funds in the business to pay the lawsuit, the owners may lose their homes or anything else of value. However, if the business is set up as a corporation, the corporate entity will shield its owners from assuming personal responsibility for the liabilities of the business. Each owner or shareholder is only liable for their personal investment in the corporation, and their other personal assets are protected.
The corporate structure is also the most conducive business entity for raising large amounts of capital, as it allows its owners to sell shares to investors. While the S corporation limits its amount of shareholders to 75, the amount of shareholders allowed in a C corporation are limitless. Forming your business as a corporate structure also makes it more attractive to outside investors. Because maintaining a corporation requires rigid formalities, investors may be more comfortable with investing in a business entity that offers this structure.
A corporation is the most difficult business entity to create. You should contact a business attorney for assistance with forming a corporation. Further, in order to maintain your limited liability, you will have to comply will the many formalities and regulations required by your state. Non-compliance can leave you open to personal liability for corporate debts.