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Corporation (Inc)

There are several formats that one can use when planning a business, but the largest companies use the corporation format due to the increased freedom it provides to upper management and shareholders. How is one to know whether to form a corporation over a proprietorship or an LLC, and what is the difference between the two types of corporation, the S corporation and the C corporation?

What is the reason why business owners form corporations and LLCs?

It reduces the company’s liability if a lawsuit happens. Organizing as a corporation or LLC removes the owners’ personal assets from the property of the company. Corporations also have the ability to quickly transfer ownership and raise money for the business through the sale of stock, and have several tax advantages over the other business formats.

Who is the owner of a corporation?

The shareholders are the owners. Often, the founder of the business holds a majority of the shares so that he or she has the ability to make decisions about the business without another shareholder interfering, but that is not always the case, especially for very large companies. Being a corporation provides the owner the opportunity to quickly sell shares of the company to investors to raise funds for the company’s operations.

What is the difference between an S corporation and a C corporation?

Among other differences, the primary one is the way they are taxed. Owners of an S corporation can report their taxes on their personal tax returns, while the C corporation is considered its own taxable entity. C corporations also have the ability to set the beginning and the end of their fiscal year to which ever day is most beneficial, possibly reducing the tax burden more. C corporations file tax form 1120 with the IRS, and face the possibility of double taxation if they distribute dividends to shareholders. S corporations file form 1120S, and the owners pay taxes at the individual level. S corporations can have no more than 100 shareholders, for C corporations there is no restriction on the amount of owners.

How do I set up my business as a corporation?

File Form 2553 with the IRS and file articles of incorporation. Choose a business name and appoint and notate a board of directors.

My investors are from abroad. Which type of corporation is the better choice for international companies?

The C corporation enables the company to operate based partially or fully on foreign capital, the S corporation does not.

Does forming a corporation offer any substantial benefits to my employees?

It does. You can pay for your employees’ health care in any business structure, but only in a corporation are the payments tax-deductible. Corporations offer the most tax benefits when it comes to business deductions. Consult with an attorney or CPA for more information on the benefits that the corporate business structure might offer your employees.

Are there other benefits to forming a corporation?

Simply forming a corporation lends credibility to your business. Consumers respect the letters “Inc” after your business because they know you have put in the time and effort to create the most complex business structure there is (the C corporation), and there might be foreign money invested in the company. Every state has its own laws that govern the formation of a corporation, and one must look at the local laws surrounding the business formation in a state.

Does being incorporated give my business the right to operate in any state of the 50 US states?

No. You and your company must consider the specific laws within each state that you operate. Even if you have representation by a lawyer, lawsuits are expensive and it is best to avoid them whenever possible.

Are there other licenses I need and documents to sign?

There may be. Each state has its own laws that refer to starting a new business, and it depends what sort of business one is starting. Consulting with a CPA or attorney in the local area is a vital step at that point. There are also likely to be papers the owner must file on an annual basis with the Secretary of State or other government entities to keep the business active, and with the submission of those documents there is often a filing fee.