Becoming a Corporation
All businesses must be organized and defined by certain outlines according to law. Many business-men and -women like corporation organization because of the liability and tax benefits it provides.
A “C corporation” as a legal entity (an artificial person, for tax and legal purposes) is completely separate from its stockholders, or owners. Its name comes from the fact that it is taxed under Subchapter C of the Internal Revenue Code. As a legal entity, such a corporation must pay taxes on all of its taxable income before it makes any dividend distributions to stockholders. It is allowed to issue multiple types of stock and can have an unlimited amount of stockholders.
The finances of a C corporation are maintained and kept separately from those of its owners. One or more officers or employees of the corporation are authorized to conduct business on behalf of the corporation in accordance with its bylaws. Typically, this is done through a resolution at a stockholders’ meeting, which usually permits the authorized individuals to borrow and repay funds for the corporation as necessary for business operations. If the company is small, newly formed, or has a limited history of credit use, lenders may require signatures and liability from stockholders before approving a credit application.
The corporate charter includes information on the corporation’s purpose and life, and its bylaws explain the “rules” under which it will conduct business. The costs involved with a corporation include one-time fees for establishment and annual expenses stockholders’ meetings, tax return preparation, and other reports and operations. Public notice of a corporation’s formation and operation is required and can be accomplished by filing with the Secretary of State’s Office.
Advantages of Incorporation
Organizing a business as a C corporation provides many advantages to business owners. First and foremost, liability of the owners is limited to their capital investments in the company. The gifting, sale, and purchase of stock make it easy for ownership to change without disturbing business operations. Insurance, certain expenses and other benefits to employees can be a tax-deductible expense for the corporation. Corporations can also live on even if one or more stockholders die or become incapacitated.
Disadvantages of Corporation Structure
The most frequently cited disadvantage of corporation tax laws is that income can be taxed twice; first as the company’s income, and second when stockholders must report it as their own income in the form of dividends. Other disadvantages include the personal guarantees sometimes required by lenders, conflicts or disagreements among groups of stockholders, the expenses incurred by corporations in paying for employee benefits, and the loss of limited liability of formal rules are not followed or company assets are used as personal assets.
If you are looking into setting up your own business, the C corporation structure may be a good choice for tax purposes. Depending on what kind of business it is, how you plan to conduct business, and who the potential stockholders are, this format can make your business profitable while keeping your personal finances secure.
There are many ways to learn more about incorporating and many services that can show how to take action. Bizfilings.com, for example, provides thorough explanations of the procedures and costs involved and can help you get started.
By Kristin Cleveland