Corporations are business entities originally designed to separate the owners from the actual business. The benefit was that any liability incurred from running the business stayed with the business. This protected the owners’ personal assets from creditors or lawsuits. Corporations, however, are subject to two layers of taxes. The first is a corporate tax based on profits of the corporation. The corporation pays these taxes. Then, the corporation gives “distributions” (share of profits) to the shareholders who are the owners of the corporation. The shareholder than reports this as income on their individual tax returns and that money is taxed again as personal tax. The shareholder pays this tax. This kind of corporation is generally called a C Corporation, and IBM and General Electric fall under this category.
There are many benefits and reasons why business owners would set up a C Corporation. However, it’s not the best kind of business entity for most small, closely held businesses. This is due to the fact that for most small businesses, almost all corporate profits come out as personal income to the few owners and they would be taxed twice. And currently, most of the other benefits of a corporation are available to other business structures. We rarely set up corporations for our clients. But, there are a few occasion. We go over these occasions with our clients if need be.
Business owners can avoid the “double taxation” on a corporation by doing an “S-Election” on the company. This makes the corporation a “pass-through” entity and eliminates the corporate taxes. All taxes are paid by the owners of the company. You also do this “S-Election” on LLCs.
The corporate structure was also the standard business entity for setting up non-profit companies. But lately, many non-profits are actually LLCs.
ALL CORPORATIONS REQUIRE NUMEROUS DOCUMENTS IN ORDER TO BE VALIDLY RUN AND MAINTAIN THEIR LIABILITY PROTECTION. SIMPLY FILING ARTICLES OF INCORPORATION WITH THE STATE DOES NOT PROVIDE ALL THESE DOCUMENTS. PLEASE CONSULT WITH OUR OFFICE BEFORE FILING ARTICLES.
THIS INFORMATION IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL ADVICE. PLEASE CONSULT AN ATTORNEY BEFORE FORMING ANY BUSINESS ENTITY.