Corporation 2018-03-16T20:14:06+00:00

Corporation

A corporation is an independent legal entity separate from its owners. As such, it requires complying with a lot more regulations and tax requirements than any other business structure.

How To Incorporate

You must first contact the Secretary of State of the state for which the business will be formed. You then must complete and file all necessary forms, complete the fee schedules on business incorporation, and prepare all corporate documents.

Advantages

  • A corporation’s debt is not considered that of its owners, so you are not risking any personal assets should any legal claims be filed against the business or to satisfy any debts.
  • Corporations can retain some of its profits without the individual owner(s) paying tax on them.
  • Corporation can sell stock, either common or preferred, to raise funds.
  • Corporations can continue indefinitely, even after a shareholder sells his or her shares, becomes disabled or dies.
  • Any earnings paid as reasonable compensation, such as owner and shareholder salaries, is not taxed and may be deducted as a business expense (though keep in mind, the IRS has limits on what it believes to be reasonable compensation).

Disadvantages

  • Formation costs are much higher.
  • Corporations are formed under the laws of each state with their own individual set of regulations.
  • Corporations require more accounting and tax preparation services.
  • Owners pay a double tax on all business earnings. Corporations are subject to corporate income tax at both the federal and state levels, and at the same time, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on the shareholder’s personal income tax returns.

The S Corporation

If you want to incorporate, but aren’t sure you’re ready for the massive undertaking forming a corporation entails, you may want to start out as an S corporation.

Owners still receive complete liability protection, but there are some appealing tax benefits — profits and losses are passed through to shareholders and are included on their individual tax returns (which means you are never double taxed). It should also be noted that if the S corporation does not have inventory, they can use the cash method of accounting, which is much simpler than the accrual method.

However, S Corporations are subject to many of the same requirements as corporations, so there are still very high legal and tax service costs associated with this type of structure. And though the S corporation can sell stock, they are limited to issuing common stocks only.

At King Law Firm Attorneys at Law, Inc., we’re here to help you incorporate so that you are in compliance with all federal and state regulations. Contact us to discuss whether a corporation is right for you.

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