What is a Corporation?
A corporation (Corp) is a type of business entity that is used primarily for liability protection from business debts, as well as in some cases tax reduction and the ability to go public.
How is a Corporation Set Up?
A Corporation is a company that is created by filing articles with the secretary of state. Most states allows this filing online, but some states require you to mail your articles to the state for filing. The filing process can be instantaneous or can take 6-8 weeks depending on the state.
Who owns and operates a Corporation?
A Corporation is owned by Stockholders. The stockholders appoint directors, and the directors are the body that creates the directives and goals of the company. The directors then elect the officers of the company which normally include the President, Vice President, Secretary, and Treasurer. There are many other officer designations that can be elected, but the officers previously mentioned are most prevalent. The officers job is to make the directives and goals of the directors become a reality.
Most states require that corporations have a meeting once a year at which they appoint directors and elect officers, and updated the individuals with the secretary of state. This is normally called the annual filing.
How are Corporations treated from a tax perspective?
Corporations can be taxed two different ways: "C" Corporations & "S" Corporations.
Corporations are naturally "C" elected entities, which means that if you file a corporation it will be "C" elected if you don't specifically file for a different taxation. "C" elected means that the entity has its own separate tax bracket from you, and it files its own separate tax return (form 1120). The tax rate applied to a "C" corporation is a flat 21% federal tax plus potentially a state corporate tax. There may be a state corporate tax that could also apply depending on the state.
Corporations can change their taxation type from a "C" to an "S" election by filing form 2553. "S" elected taxation is different from "C" election taxation in the fact that the income is no longer taxed on a separate tax return at a flat rate. The profit or loss actually flows through the company and is taxed on your tax return at your personal tax rate. One note to make about "S" elected profit distributions is that they are considered passive income to the owner and therefore are not subject to the 15.3% self employment tax.
"C" Elected Taxation - Flat 21%
"S" Elected Taxation - Taxed at Owners Tax Rate
Who would benefit from a Corporation?
Protection for YOU from high liability activities:
If you are engaged in business activities that are high liability, operating out of a Corporation can shield you personally from that liability. For example, a business coach who operates their business with a corporation is sued by one of their clients. If the client wins the lawsuit, the client will only have the ability to take the assets directly owned by the corporation, and not the business owner. This means that all of the business coaches personal assets are safe from the lawsuit, which includes: residence, bank accounts, cars, stocks, jewelry etc. *The rules are different for a licensed professional, and you can read more about licensed professionals below. This is called personal liability protection.
Licensed Professionals (operating companies):
Some states restrict the type of company that can be used by a licensed professional. Many states do not allow certain types of licensed professionals to operate their business out of an LLC, and instead licensed professionals are required to use a corporation. Read More About Licensed Professionals
If you are Going Public:
If you are planning to go public with your company there is a very likely chance that you will want to structure your business as a "C" Corporation. The reason why you will want to structure the business as a "C" Corporation is so that you can offer your stock to many potential investors on the open market, and not have a cap on the number of investors you can solicit or any other stock restrictions imposed on other entities and taxation's. Make sure that you have all correct public offering documents filed before you bring on investors.