A corporation is a legally distinct legal entity from its owners, known as shareholders, and governed by a board of directors. Corporations provide limited liability protection, with the assets of the owners safeguarded in the case of a court action or a commercial debt.
Table of Contents
Topics:
Meaning and Definition of Corporation
Should I Establish a Corporation?
How to Create a Corporation
Corporate Income Taxes
How to Begin a Business
FAQs for Corporations
Meaning of Corporation
A corporation is a legal body governed by a board of directors and owned by shareholders.
Corporations have many of the same rights as people. They have the ability to own property, engage into contracts, borrow and lend money, and sue and be sued.
Enterprises are a common business structure for major corporations as well as some smaller businesses interested in the benefits corporations provide. The term “corporation” usually refers to a C corporation unless otherwise indicated (C corp).
However, there are various different sorts of companies, each with its own distinct characteristics.
C Corporation: C corporations are independent corporate entities that are owned by shareholders.
S Corporation (S Corp): An S corporation is a tax categorization for a firm, not a corporate structure in and of itself. C corporations and limited liability companies (LLCs) may both elect to be taxed as S corporations.
Nonprofit Company: A nonprofit corporation exists to help the general public or a specific organisation rather than to enrich its owners. Charitable, religious, and political groups are examples of nonprofits.
A benefit corporation (B Corp) is a for-profit business with a mission to help the community or the environment.
Should I Establish a Corporation?
One of the most crucial choices you will make is selecting a company structure. Each structure has benefits and drawbacks, and the optimal option will be determined by your company’s specific circumstances and goals.
Understanding the benefits and drawbacks of a corporation is the first step in determining whether it is the proper structure for you.
The Benefits of a Corporation
Corporations may provide the following possible benefits:
Personal limited liability protection: When you form a corporation, your personal assets are safeguarded if your company is sued or defaults on a loan.
Tax advantages: Corporations may benefit from a number of tax advantages, including the ability to be taxed as a S corporation and advantages linked to retained profits and employee pay expenditures.
Corporations are ideally suited for expanding businesses because they provide limited liability protection and are more appealing to investors.
Customers and investors may see a corporation as more reputable than alternative company formats.
Corporation’s Disadvantages
Corporations may also have certain disadvantages:
More costly to establish and manage: Unlike other company arrangements, corporations are often more expensive to organise and maintain. Aside from filing expenses for formation paperwork, the intricacy of companies often necessitates the appointment of an attorney to help with the formation process.
More paperwork and complexity: Corporations have more paperwork than other company arrangements, both during incorporation and thereafter. There are also additional restrictions surrounding meetings and documentation.
Double taxation: C corporations pay a corporate tax on earnings, and shareholders must pay taxes on dividends received from the corporation. This is sometimes referred to as double taxation.
How to Create a Corporation
You may form a company by submitting incorporation paperwork with your state’s relevant government agency. The Articles of Incorporation are another name for this document.
The specific stages to incorporate a company vary by state, however they often involve the following:
Name your company:
Select a registered agent: A registered agent is a human or legal organisation that receives tax and legal paperwork on your behalf.
Hold an organisational meeting: During your organisational meeting, you may, among other things, write bylaws, choose initial directors, and decide on a share structure.
File the following formation documents: You must submit the Articles of Incorporation (or the equivalent paperwork in your state) with the relevant state government agency.
Obtain an EIN: Corporations are required by the Internal Revenue Service to obtain an Employee Identification Number (EIN) (IRS).
Create separate business checking and credit accounts: In order to retain your corporate veil and personal limited liability protection, you must open separate business checking and credit accounts.
Corporate Income Taxes
C corporations are required to file a corporate tax return and pay the 21% corporate tax rate on all taxable earnings. If a company owes taxes, it must estimate the amount owed for the year and make quarterly payments to the IRS.
Dividends to shareholders are subject to individual income taxes in addition to the company tax, meaning that any money paid out as dividends is taxed twice. This is generally known as double taxation.
However, profits maintained by the corporation for purposes such as acquiring equipment or making other business expenditures, known as retained earnings, are only taxed once at the corporate level.
Corporations may also elect to be taxed as S corporations if they meet certain criteria, which significantly alters their tax structure.
How to Begin a Business
Once you’ve studied about the benefits and drawbacks of corporations and determined if they’re the correct business structure for you, you’ll need to create and establish the company. Whether you choose to organise a corporation or another structure, there are a few more steps to follow before you may offer your goods or services.
These are covered in more depth in our state-by-state How to Start a Business guides, but here is a short summary of the fundamental processes after creating your business:
Fill out a tax return
Establish corporate banking and credit accounts.
Create an accounting system.
Obtain all necessary permissions and licences.
Obtain insurance.
Create a web presence
FAQs for Corporations
What are the benefits of forming a corporation?
A company provides limited liability protection, some tax benefits, higher expansion possibilities, and increased credibility.
What are the different sorts of corporations?
C companies (C corps), nonprofit corporations, and benefit corporations are the most common forms of corporations (B corps). S corporations (S corps) are a sort of corporate structure rather than a tax categorization for a firm.
What exactly is a C corporation?
The most frequent kind of company is a C corporation (C corp). It is a legally distinct company entity whose only aim is to enrich its owners, known as shareholders.
What exactly is a S corporation?
An S corporation (S corp) is a tax category that LLCs and corporations may use. Pass-through taxation will apply to a company that elects to be taxed as a S corp.
What exactly is a non-profit corporation?
A nonprofit company is intended to help the general public or a specific group rather than profit its owners.
What exactly is a B corporation?
A benefit corporation (B corp) is a for-profit company with a mission to help the community or the environment.
Who are the shareholders in a corporation?
Shareholders are the owners of a C corporation.
How much does incorporation cost?
Depending on your state, the cost of incorporating (filing formation papers such as the Articles of Incorporation, a Certificate of Formation, and so on) ranges from $45 and $300. However, there may be significant attorney’s costs and a registered agent charge, among other things.
What is the rate of corporation taxation?
The federal corporation tax rate in the United States is 21%. Corporations may also be required to pay extra state corporation taxes depending on the states in which they conduct business.