What is a Corporation?
THE BASICS
- COMPLEX WITH SIGNIFICANT BENEFITS
 
- A CORPORATION IS ITS OWN "LEGAL PERSON", SEPARATE FROM ITS OWNERS 

- OWNERS (SHAREHOLDERS) USUALLY DO NOT ACTIVELY MANAGE THE CORPORATION,
  BUT APPOINT A BOARD OF DIRECTORS TO DO SO. 
 
- A CORPORATION CAN BE SUED, NOT ITS OWNERS.
  ONLY ASSETS OWNED BY THE CORPORATION ARE AT RISK DURING A LAWSUIT. 
 
- THERE IS A GREATER OPPORTUNITY FOR FINANCIAL FUNDING AS OWNERSHIP IS BASED ON       THE NUMBER OF SHARES PURCHASED. 
    
- GENERALLY HAS A MORE COMPLEX TAX STRUCTURE

- TAXED ONCE ON TOTAL PROFITS AND AGAIN WHEN 
  DISTRIBUTING PROFITS TO SHAREHOLDERS                        
 
- MORE LEGAL FORMALTIES & FEES THAN OTHER BUSINESS STRUCTURES
KEY FEATURES
  • A corporation is its own legal entity, owned and operated by multiple individuals known as shareholders. Being a separate legal entity (essentially its own person) means that a corporation can enter into contracts, own property, sue and be sued, and is required to pay its own taxes.
  • A corporation's leadership structure can be more complex that other business types. Shareholders own the corporation and elect a board of directors who manage the company, while officers (such as a Vice President or CFO) oversee the daily operations.

           NOTE: This structure is common, but not required as one person            can fulfill the role of shareholder, director and officer (this rule may        vary by state).
ADVANTAGES
  • Limited Liability – Since a corporation is technically its own “person”, it can be sued, and only the corporation’s business assets are at risk. Unless you knowingly commit a crime (such as fraud), your personal assets are safe from lawsuits. Owners are also not personally liable for the actions of the other owners.
  • Easier to Raise Money – Corporations are the best business structure for raising capital. An individual who buys stock then becomes a shareholder and owns part of the business.
  • Perpetual Existence and Flexible Ownership - Since ownership of a corporation is based on the number of shares, a corporation's lifespan is not dependent on the life- span of a shareholder. Ownership can be easily transferred simply by buying and selling shares. 
DISADVANTAGES
  • More Complexity, More Expensive  - Corporations have more legal formalities upon set up, as well as more regulations during operation (ex: record keeping requirements). These various administrative fees generally make corporations more expensive to set up and maintain.
TAXATION
  • Double Taxation - Corporations are taxed on their profits and then taxed again when distributing dividends (the profits paid to shareholders). 

    THINK OF IT THIS WAY: You bought a pie, and were taxed when you bought it. Then when you served the pie, each person with a slice also had to pay a tax.
  • S Corporation - After meeting a few extra requirements with the IRS, a corporation can actually be classified as an S Corporations. S Corps avoid the "double taxation" as they are taxed the same as partnerships. Profits are divided among the owners and reported on each of their personal taxes.

    NOTE: While an S Corporation can avoid double taxation, that does not necessarily make it a "better" business structure. Tax benefits are very situational, and depend greatly on how a business operates. 
    Call us to determine if an S Corporation is right for your business.    
All that we do is submitted and performed with the understanding that we are not engaged in rendering legal, accounting or other professional service.
If legal advice or other expert assistance is required, the services of a professional should be sought.
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