What is a Corporation?

A Corporation is also referred to as a standard corporation. It is also called a C-Corporation or a Regular Corporation. A Corporation is a legal form of organization of persons and material resources, chartered by the state, for the purpose of conducting business and may have an unlimited number of shareholders, which may include shareholders who are foreign citizens. A Corporation may be public - one in which shares is offered for sale to the public or privately held - one in which shares is not sold to the public. Usually shares are held by the founders, by board members and by private investors, such as venture capitalists, who may or may not sit on the board of directors.

Shareholders are protected from the corporation's liabilities. "Double taxation" frequently occurs, because the corporation is taxed on its profits, and shareholders are also taxed on the distributions they receive, such as profit sharing payments or dividends

The most common type of incorporation is the C Corporation, which is a for-profit, state-incorporated business. A company registration is done with state authorities and must abide by corporate laws in the state where it is incorporated.

To incorporate or register company, you will need to register your business name, file a certificate of incorporation or articles of incorporation and pay a fee. You will also need to draft corporate bylaws and hold a board of director's meeting.

Why should I Incorporate?

Incorporating is one of the best ways a business owner can protect his or her personal assets. Most people choose to incorporate solely for this reason, but there are other advantages as well. For example, the corporate business structure saves you money in taxes, provides greater business flexibility, avoids audit chances, better itemization and lets you more easily raise capital.

There are many advantages to incorporate your business. Liability protection of your personal assets is one of the primary reasons why a small business will form a corporation. Incorporating helps to separate your personal assets from that of your business. A corporation is a legal entity that exists separately from its owners or shareholders. Typically, shareholders are not liable for the debts and obligations of the corporation or from any litigation where the corporation is the defendant in most cases. In a partnership or sole proprietorship, the creditors can go after the owner's personal assets if the company assets are not enough to settle a claim in most cases.

In company registration or corporation formation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions for federal income tax purposes; a Corporation is recognized as a separate taxpaying entity. Corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

The profit of a Corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

Advantages of Incorporating

Reduces Personal Liability: In most cases owners are not personally liable for the company's losses or debts. Their investments in the registered company are their only financial risk Incorporating helps separate an individual's identity from that of his or her business. Insurance may still be necessary, but incorporation contributes an added layer of protection. 

Tax Savings: There are a number of tax benefits for doing business under incorporation. Depending on your business income, incorporating a Corporation could lower your tax rate. Careful planning of entity type can result in lower overall tax rates. Even if your small business is quite profitable, a corporation is entitled to so many deductions. For example, as the owner of a corporation, your salary and those of your employees are tax-deductible for the business. 

Reduces Likelihood of an IRS Examination: IRS Form 1040 and Schedule C (Profit or Loss from a Business), particularly of higher gross income levels, is the target of many IRS Audits. Incorporated businesses have a much lower audit rate, even if they have high income levels. 

Anonymity: A Corporation can be established in such a way that shareholders/owners remain anonymous. Often this same anonymity can be accomplished for officers and directors. 

Adds Credibility: A corporate structure communicates permanence and credibility. Even a company with only one stockholder and employee may incorporate. 

Easier Access to Capital Funding : With a corporation, investors are easier to attract through the sale of stock. 

Easier Transfer of Ownership: Through the sale of stock, ownership of a corporation may be transferred without substantially disrupting operations. The need for complex legal documentation is also reduced. 

Shareholders: Your registered company will include shareholders, and you can take the company public. You can also issue stock or stock options to employees. The shareholders have ownership in the incorporated company, the Board of Directors governs the business, and elected officers manage the day-to-day activities. Registered company must adhere to corporate tax laws and file corporate taxes regularly. 

Longevity: The board carries on the corporation, not the owner. That means that a corporation formation can last longer than an owner-based company such as an LLC. 

C-Corporation VS S-Corporation VS LLC

If you're incorporating your small business you may have heard that you should "form corporation" or "C-Corporation."

In a C-Corporation, the corporation pays income tax on profits of the corporation. If the corporation pays a dividend to the shareholders, this money is taxed again as income to the shareholders. It may not be as bad as it sounds, though. If you are working for your corporation you should be paid a salary. This salary is deducted from the income of the corporation before taxes, so it will only be taxed once. Depending on the business, salaries may use up most or all of the profit. As long as the salary is not unreasonably high, the IRS should not challenge it. Fringe benefits for employees such as health insurance may also be deducted by a C-Corporation, but not by an S-Corporation. For a profitable and growing company it may be better to be a C-Corporation. In a C-Corporation profits beyond salaries and other deductible expenses can be used by the company for growth rather than being distributed to the shareholders and creating taxable income for them.

An S-Corporation does not have the double level of taxation, corporate and individual, that a C-Corporation has. Instead, profits and losses are distributed among shareholders who report that income or loss on their own federal income taxes. This is the main advantage to electing S-Corporation status.

CLICK HERE TO READ MORE ABOUT S-CORPORATION

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