Frequently Asked Questions About Corporations
What are the advantages and disadvantages of forming a corporation?
A corporation is an artificial legal entity that exists separately from the people that run it. A corporation can make contracts, pay taxes and is liable for debts. Corporations exist only because state law allows them to exist. Stocks evidence ownership interest.
The main advantage of a corporation is that it limits liability to the amount invested in the business. Generally, stockholders are not personally liable for claims against the corporation. However, the advantage of limited liability is oftentimes not available to a corporation. If an officer signs a personal guarantee, or if the corporation is thinly capitalized, then the court can hold the corporation directly liable to shareholders. Usually contracts between banks and corporations will require a personal guarantee. The limited liability feature is still very important for personal liabilities for debts, such as accounts payable to suppliers and others who sell goods or services to the corporation on credit, subject to limitation of that feature if personal damages not covered by a corporation’s liability insurance policies.
What are the fees for Incorporating?
The fees for incorporating generally run between $400.00 and $500.00.
What is an S-corporation?
An S-corporation is simply a regular corporation that meets certain requirements, which is elected to be treated somewhat like a partnership for federal income tax purposes.
Shareholders will generally report their share of taxable income or loss on their individual tax return. That is the corporation’s profits and losses “pass through” the shareholders in proportion to their stockholdings in the corporation, much like a partnership. The S-corporation usually does not pay tax on any income. The S-corporation has various requirements, but for small business owners it makes more sense than regular corporations, which are called C-corporations.
What is a C-corporation?
A C-corporation or regular corporation has the problem of potential double taxation of earnings on the corporation. This problem arises because a C-corporation has to pay corporate income taxes on its taxable income. The after-tax earnings may be subject to a second tax on either the individual stockholders, if earnings are distributed as dividends, or as a corporate penalty tax if earnings are not distributed as dividends. Practically speaking, few small incorporated businesses I have encountered are subject to double taxation. It makes more sense to make small business owners a Chapter S-corporation if they qualify.