The corporation is the most complex and structured of all of the legal business structures available, but it also offers the owners and shareholders the most opportunities for growth. The corporation is legally a separate entity from the owners, and as a separate entity, it functions as its own permanent being and can make income and suffer losses. Corporations also have rights and responsibilities, just like individuals; therefore, a corporation can sue other parties when its rights have been violated, and it can be sued by other companies or individuals. Corporations can exist indefinitely even if a shareholder or owner leaves, becomes disabled, dies, or sells off their shares.
Corporations come in two different forms -- the C corporation and the S corporation. Although the limited liability company (LLC) has many of the characteristics of a corporation, it is not subject to the many rules and compliance regulations assigned to a corporation. The most common reason business owners establish a corporation is for the liability protection it offers.
Because the corporation is a separate entity from the owners and shareholders, owners and shareholders cannot be held responsible for any of the corporation’s debts or any lawsuits brought against the corporation. Their personal assets are protected from the actions of the corporation. Also, if you’re hoping to raise capital through investors, a corporation allows you to sell stock or shares. With a C corporation, there’s no limit to the number of shareholders; however, with an S corporation, you are limited to 100 shareholders.
In the case of a C corporation, profits and losses are retained for the corporation. Unless you or the shareholders receive dividends, you won’t be taxed on the company’s income, and business expenses like employee benefits are deductible. If you do receive dividends, you’ll need to pay taxes on that income (this is called double taxation). In an S corporation, profits and losses are passed through to shareholders, and taxes are only paid once (single taxation). Not all states recognize S corporations, and some states will tax these businesses as a regular C corporation.
In addition to the protection they offer, corporations bring with them lots of regulation and extensive paperwork. Corporations pay a number of state and federal filing fees and are required to file documents including Articles of Incorporation, corporate bylaws, corporate minutes, and certificates of good standing. If you have shareholders, you must hold annual meetings, keep meeting minutes, and more. Check with your state for specific requirements.