|Forming a S & C corporations Photo by:echiner1|
To start a corporation means to start a business that is considered legally a special entity separate from its owners. Corporations are seen as an entity that can be legally sued, responsible for tax obligations and other obligations as a sole proprietor would. The biggest difference between corporations and general partnerships (GP) is the business structure. GP's are usual in charge of the day to day business activities and make all the necessary business decisions but corporations are run by elected board of directors who oversee the major operations for the shareholders (owners). Another difference between corporations and partnerships is the vitality of the business depends heavily on the longevity of the partnership wherefore corporations continue to move on even after ownership change.
Trying to figure out if a corporation is the best entity for you and your business, use the below advantages and disadvantages to help you decide.
The advantages of corporations
- Limited Liability- Risk usually is limited to the shareholders investment in the business (there are exceptions see www.irs.gov for more).
- If the corporation is a stock-corporation then capital can be raised through selling of company stock
- Tax deductions for employee benefits
- Depending on the type of corporation may be able to do pass thorough taxes.
- Assistance with start-up cost
The disadvantages of corporations
- Long and costly set up
- Heavily regulated
- Depending on what type of corporation can be double taxed
- Possible higher taxes
- No longer complete control over business
- Shared profits
How to start a corporation?
Business Name Check
You have to make sure that the business name that you have isn't already being used by another corporation and that your corporation name is in compliance with your state corporation rules.
Appointment of Directors
The Board of Directors is the decision makers who possess the creative control to guide the business during financial decisions including the disbursement of stock and the appointment of corporate officers. Check with your state rules to see if it is necessary to list the initial directors in your filing. Some corporations use their first meeting to decide on directors.
You will need to complete the necessary paperwork usually titled Articles of Incorporation with your secretary of state and pay the requested filing fee. The filing fee also varies by state and ranges from $55 to $400. Check with your secretary of state website to get the state specific requirements and the necessary paperwork.
Have your first meeting with the board of directors where you can discuss the necessary things to begin your corporation. This may be the time that many corporations chose to pick the board of directors and corporate officers.
The issuing of stock to shareholders detailing their ownership shares in the corporation.
Starting a corporation can be very time consuming and strenuous on your pockets. Knowing which corporation you want to start can take some of the headache out of the battle.
There are different types of corporations that you can start. Two of the most popular are S corporation and C Corporation. S and C corporations originate from the corporation govern subchapters of the Internal Revenue Code. Both types are corporations but with different governing rules and tax implications. Each is seen as separate identities from its owner and both offer limited liability protection to its owner. Outside the tax implications both corporations are governed by the same rules, so now let’s look at what makes them different.
S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. (IRS, April 2010)
The great thing about S corp. is the fact they are allowed the special tax privilege pass-through treatment.
Pass-through tax treatment allow for business owners to report their gains/losses on their personal income tax which eliminates the possibility of double taxation.
Qualifications for S corporation status:
- Be a domestic corporation
- Have only allowable shareholder (Including individuals, certain trust, and estates and may not include partnerships, corporations or non-resident alien shareholders)
- Have no more than 100 shareholders
- Have one class of stock
- Must be an eligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
A business structured and entity as recognized and authorized under law. (IRS 04/13/10)
All publicly owned businesses are C corporations because unlike S corp.'s., C corp.'s can have unlimited owners. As a C corporation you also benefit from the dividends received deduction (DRD) which make dividend payments tax deductable. Which protects C corporations from being triple taxed; Corporation taxed, corporate shareholder then individual shareholder taxed but DRD protects the C Corporation from triple taxation.
The major differences between S & C corps
- Most C corp.'s are publicly owned business and that’s the biggest difference between S and C corporations. S corporations are not allowed to have more than 100 owners but a C corporation can have unlimited number of owners.
- Corporations, partnerships, LLC's can become a C corp. because C corp. is not limited to possible owners (shareholders).
- Shareholders and C corporations are taxed subjecting C corporations to double taxation, but S corporation are given pass through tax treatment.
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