According to entrepreneur.com the definition of a corporation is:
A form of business operation that declares the business as a separate, legal entity guided by a group of officers known as the board of directors.
The biggest reason people form corporations is to protect the owners from debts and liabilities that the business occurs. Unlike a sole proprietor or partnerships where the owners can be held personally responsible for the debts and liabilities. Thus creditors, or lawsuits can take personal assets of the owners like bank accounts, houses, property or other held items of value.
The structure of a corporation is broken down into shareholders, directors, and officers of the board. Shareholders have certain liability protections and are not generally held responsible for business debts or other liabilities. Shareholders elect the board of directors. (Which can be your family or business partners).
The director and members of the board oversee the day-to-day business affairs. They create the business mission, vision and values of the company. The board is responsible for putting operations and procedures into place.
To create a corporation, you must file certain documents in the state that the business is located and will do business. The corporation is governed by the state laws in which they are created.
A corporation can be either a C-Corp or an S-Corp. This designation is a tax determination and it will determine on how your report profits and losses from the company. Which way you choose will dependent on what is more advantageous to your business and ultimately the you and the owners.
An S-Corp is much like an LLC, which allows a pass-through of profit and losses to individual shareholders with certain restrictions. S-corps have other restrictions like.
- S-Corps are limited to 100 shareholders or less
- Once a year tax filing
- Perpetual existence, meaning the business exists even if an owner leaves or dies.
- Investment opportunities, allows for the business to sell stocks in the company
- Most small to medium companies chose to incorporate as an S-Corp
- Eliminates double taxation income is only taxed once as opposed to a C-Corporation which is tax twice.
- One class of stock
A C-Corp is often called “a double tax business” as it’s taxed at the corporate level and the dividends are taxed at the personal level. C-Corps also allow for an unlimited number of shareholders. Larger companies usually opt for forming as a C-Corp.
- Statistically IRS less adults
- The first $50,000 tax rate is less than that for an individual
- Can have different types of stock
- Can have investors
- Files quarterly taxes
Before you select any type of business structure review through each business status, speak to the professionals like a CPA, Accountant, Bookkeeper or Financial Planner and then select the structure which makes the best sense for you.
When we started hiring on Associates (pre-licensed) and licensed staff we decided to become a corporation to help protect us from the higher risk of liability. Once you become a corporation then you must elect to become a S-Corp by filing an IRS Form 2553.
Let’s review the Pros and cons of forming a corporation.
PROS
- The most protection for owners from liability.
- Formal business structure with duties or owners.
- Ability to attract investors.
- Company can continue if an owner dies or leaves.
- Independent legal entity.
- Can elect to become a S-Corp (IRS designation), eliminating double taxations.
CONS
- Costlier to start up.
- More time to set up.
- Must have a board of directors, articles of incorporation and annual meetings; more formal and need written notes.
- Any shareholder that works for the company must pay themselves reasonable compensation.
- Stricter operational processes.
- More paperwork & Some double taxing.
For more information about business structures; please visit SBA.gov.
Check out also my video on Corporation.
If you need more information on this or other topics, please go to my website therapistbox.com.