Running a business, whether online or offline, requires adequate planning and research. If you’ve already established a business plan, make sure you add “what business entity to pick?” to your checklist. Every business entity has its own unique characteristics as they relate to ownership rules, personal liability, tax treatment and documents needed for formation. Incorporating will not only provide you with a better level of protection not available as a sole proprietor, but it will also give you some tax benefits as well.

Definition of a Corporation

A simple definition of a corporation is “a separate legal entity, independent from the business owner(s)”. Since a corporation is an entity on its own, it can open a bank account, operate as a business, and own property all under its own name. As a corporation, the business establishes a separate legal standing from its business owners. This separate entity protects the owners from personal liability, in the event of a lawsuit. This level of protection is often referred to as the “corporate veil”.

A corporation is managed by a board of directors, which makes major business decision and has the responsibility of making sure things run smoothly with the business. Appointed by the board of directors are the officers, which are responsible for the daily operations of the business. A president, chief financial officer, and a secretary all fall under the umbrella definition of “officers”. It is possible, for a one person within a corporation to hold all three titles.

Why Incorporate?

Long before corporations where formed, an investor risked losing everything if the business went belly-up. Consequently, if the business lost money, the business partners would find themselves in a bind, and would need to make up the difference in order to pay off their creditors. As corporations became the norm, finding investors was less risky, as they would be shielded from this type of liability.

Types of Corporations

There are two types of corporations; a C-Corporation and an S-Corporation.

C-Corporation Characteristics:

• No limit on stock class
• Unlimited number of shareholders
• C-Corporation has double taxation
• Corporate tax and shareholders tax on distributed dividends
• Generally no personal liability on shareholders

S-Corporation Characteristics:

• Up to 100 shareholders
• Only one class of stock allowed
• Option for pass through entity tax
• Generally no personal liability on shareholder
• Option to be taxed as a partnership or sole proprietor

Conclusion

There’s are a lot more involved when it comes to incorporating your business that’s beyond the scope of this post. The whole purpose was to give you a quick overview and brief understanding of what a corporation is. However, if you’re considering incorporating, download this free report, Choice of Entity Secrets Revealed to find out if incorporating is right for you.

Recommended Resources

LegalZoom.com
NVINC.com

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!