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Why and How to Form a Corporation


Incorporation is a necessary step on the modern road to corporate success. You may run your firm more efficiently and with more self-respect and credibility if you incorporate. By becoming a legal corporation, you show that you mean business and are dedicated to meeting the needs of your market. Establishing your business as a corporation will lend credibility to your brand and pave the way for future expansion. Financial backers prefer dealing with corporations rather than private citizens when making investments or loans.

Also significant in today’s litigious world is the liability protection a corporation can provide for its owners and their assets. In addition, businesses can take advantage of tax breaks, and having a corporate structure can help you avoid an IRS audit.

There Are Three Options for Businesses

C-Corporations, S-Corporations, and Limited Liability Companies (LLCs) are the three most common types of corporations in use today.

The Small Business Advisors will guide you through the process of forming the most appropriate legal structure for your business.

The three fundamental categories of entities are:

• S-Corporation, sometimes known as a “S-Corp.”
Two common business structures are the “C-Corp.” and the “LLC.”

Internal Revenue Code sections correspond to the letters S and C in S-Corp and C-Corp, respectively. Now that you know the terminology, we can dive deeper into each kind of thing.

A corporation with a “C” Schema.

C-Corporations are the standard legal structure for businesses that participate in regulated stock markets. A C-Corporation is owned by its stockholders, and there is no cap on the total number of stockholders it can have. Investors in Microsoft, for instance, enjoy high liquidity since they may quickly and easily buy and sell shares of stock in the company. A corporation can borrow funds without the loan’s terms directly affecting the company’s shareholders. The value of a shareholder’s investment might be reduced if the company experiences a loss. A C-Corporation is treated as a “separate person” under the law and for tax reasons. Because of this, shareholders are usually shielded from legal responsibility for corporate wrongdoing.

The C-Corporation enjoys indefinite longevity, regardless of the health or mortality of its shareholders. That is to say, the Corporation will continue to exist even after the death of its founders or a large or dominant shareholder.

Like any other thing, C-Corporations have their share of drawbacks. The primary one is called “Double Taxation.” This means that the company pays taxes on its profits (revenue from sales minus expenses) and then distributes those profits to its shareholders as dividends. The company does not get a tax break for the dividends it declares, but shareholders typically have to pay income taxes on the dividends they receive. Double taxation occurs when a company’s profits are taxed at both the corporate and shareholder levels. Also, unlike certain other business structures, C-Corps are subject to more stringent record-keeping requirements.

Short for “S” Corporation.

An S-Corporation is a type of corporation that has limited personal liability protection for its shareholders and is treated as a “pass-through entity” for federal income tax purposes. The profits of an S-Corporation are passed through to the company’s shareholders rather than being subject to corporate income tax. On their personal tax returns, shareholders must account for their proportionate part of the S-Corp.

There can only be a set number of stockholders in an S-Corporation (usually 75, but this number varies by state). Stock in an S-Corporation is freely tradable and can be sold to generate cash flow, provided the transaction complies with IRS regulations. The S-Corporation, like the C-Corporation, is indestructible and survives the illness or death of its shareholders.

The key benefits of an S-Corporation are that its owners are not personally responsible for the business’s obligations and that the profits are not taxed at the corporate level but rather at the individual taxpayer level. Form 1120S and K-1 are informational tax returns that are filed by S-Corporations on behalf of their shareholders. If there are ten shareholders in XYZ S-Corp., and the company achieves a profit of $1,000,000 this year, then each shareholder will receive a Form K-1 allocating $10,000 (1% of $1,000,000) of that profit to him or her. Some business expenses may be deductible for the S-Corp. owners on their personal tax returns.

One of the main drawbacks of being an S-Corporation is that its profits must be distributed to its shareholders in proportion to their percentage of ownership. In most cases, an LLC is easier to manage and maintain than an S-Corporation, although the reverse is not always true.

LLC stands for “Limited Liability Company.”

While Limited Liability Companies (LLCs) and S-Corporations (C-Corps) share many similarities, LLCs enjoy greater freedom and are subject to fewer restrictions. Profits accruing to an LLC are taxed to its members (owners) at their respective marginal tax rates. This makes the LLC a “pass-through entity,” the tax treatment of which is analogous to that of an S-Corp.

The Secretary of State in the state where an LLC is formed must be provided with a copy of the LLC’s operating agreement. The operating agreement details the organization’s structure and policies. Capitalization, share sales, and transfers are all governed by the operating agreement. various states have various laws, thus it’s important to consult experts.

Instead of issuing stock to its members, a limited liability company (LLC) issues units or interests to its members. Similar to C-Corporations and S-Corporations, LLC owners enjoy limited personal liability for business debts. When a company is sued, only its assets are at stake, not the individuals’ individual possessions. Members are free to sell or transfer their shares, subject to the operating agreement’s provisions limiting such actions.

The primary benefit of forming an LLC is that members’ personal assets are shielded from the company’s obligations. There is no corporate tax, so no money is being taxed twice. In most cases, there is no cap on the total number of people who can form a limited liability company. Compared to S-Corporations and C-Corporations, LLCs are less bureaucratic and simpler to run. LLCs allow for a great deal of maneuverability in organizational structure and management.

The transfer of ownership in an LLC might be trickier than in an S-Corporation or C-Corporation, which is one of the disadvantages of the LLC structure. In addition, the LLC is the most recent form of corporate organization, therefore there are fewer regulations governing its formation, operation, and maintenance.

There are many valid considerations to take into account when choosing a corporate structure, but once you’ve made the decision to begin a firm, it’s usually a good idea to incorporate. Numerous advantages and possibilities present themselves after incorporation, such as enhanced visibility and access to funding. And, of course, limited liability is there to protect you and your loved ones from harm.

Call The Small Business Advisors at any time to speak with our team of Incorporation Experts. We’re excited to put our more than 35 years of business and corporate experience to work for you as you begin your company.

Business assistance has been available through Small Business Advisors, Inc.’s Vice President of Administration, Arthur Van Dam, since 1974. Incorporation service and www.smallbusinessadvice.com are great resources for those interested in learning more and signing up for free small business advice, respectively.

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