Incorporated

A corporation is a legal entity that is separate from its owners, the shareholders. It is formed by filing certain documents with the Secretary of State and taking other actions required by the Code. A corporation may have perpetual existence, meaning that it continues to exist regardless of the status of the individual shareholders.

Control

A corporation is composed of three different "players": the shareholders, directors and officers. It is critical to understand that these players have different responsibilities, obligations and authorities. The shareholders own the corporation and elect the directors. The directors govern the general affairs of the corporation and appoint officers who conduct the day to day business of the corporation. It is typical in smaller corporations for an individual to hold two or three "player" positions. In fact, one person can be the sole shareholder, director and officer.

Liability

Limited liability is the most important reason to incorporate. The debts incurred by the corporation cannot generally be collected from the officers, directors or shareholders of the corporation. This allows one to protect his or her personal assets from the debts and obligations of the corporation. However, oftentimes shareholders are called upon to guaranty payment of the debts of the corporation. It is important to keep personal and business dealings separate from the corporation's business in order to ensure that one cannot be personally liable for obligations of the corporation.

Taxation

"For profit" corporations (other than S corporations, which are discussed below) are subject to what is know as "double taxation." This means that the corporation pays tax on the income earned by the corporation and its shareholders pay tax on dividends received from the corporation. An S corporation is not subject to double taxation. Rather, for tax purposes, it is known as a "pass-through" entity (as is a partnership). The term "pass-through" means that there is no tax on the corporation, but that the income and losses of the S corporation are passed through to the shareholders in proportion to their ownership interests whether or not they record a distribution. A corporation can be an S corporation merely by meeting certain eligibility requirements and making a special election with the IRS. These eligibility requirements include having no more than 75 shareholders who must be individuals or certain trusts or estates. Further, the shareholders may not be non-resident aliens and the S corporation can only have one class of stock. From a legal standpoint, an S corporation is no different than any other corporation. It is organized and operated like other corporations and has all of the characteristics of a corporation described above. From a tax perspective, however, they are very different. A tax professional should be consulted to determine whether the shareholders will benefit from causing a corporation to make an S election.

Administrative

The corporate form of doing business does have some disadvantages. Since the corporation is a separate entity, it must file tax returns and pay taxes on its income. A corporation must maintain certain records in order to ensure that its corporate status is maintained. This means additional accounting and legal costs associated with using the corporate form of doing business.