The corporation is one of the more complex legal structures for a business, but it also offers the most stability. If you have dreams of turning your small business into a national or international company, incorporating is typically the right move. Corporations have been around for hundreds of years, and the law involving them is well-settled. One of the most important aspects of the law that involves corporations is the tax code. The U.S. Internal Revenue Code, or IRC, creates two categories of corporations: C corporations and S corporations.
A Corporation Is Independent from Its Shareholders
Legally, a corporation is an independent entity. Shareholders own shares of stock in the corporation, but the law creates a boundary between the owners and the company so that the owners are not usually personally responsible for corporate actions. A corporation has most of the same rights as a person. It can own property, enter into contracts, and employ people under its own name. It can also exist forever. Even if its shareholders change, the corporation can stay in business.
Corporations Are Formed Under State Law
You form a corporation by picking a state in which to incorporate and filing start-up paperwork, typically called articles of incorporation, with the state business registration office. Each state has its own laws that control the corporations in that state. Because corporate law has been standardized, state statutes are very similar.
Corporations Pay Their Own Taxes
Corporations also pay their own taxes. Ordinarily, a corporation files a tax return every year and pays taxes on its income. It can then choose to distribute excess income to shareholders as dividends. Dividends are also taxed on each shareholder’s individual tax return. This double taxation of corporate income is one of the main features of a corporation.
S Corporations Choose to Be Taxed Differently
Under the IRC, a small corporation with 100 shareholders or fewer can choose to be taxed so that double taxation is not a factor. The requirements for making this choice are outlined in Subchapter S of the IRC. The corporations that qualify are called S corporations, while all other corporations are called C corporations because they pay taxes according the regular rules of Subchapter C. S corporation income is not taxed at the corporate level. Instead, business income and losses are passed through to shareholders, who must pay taxes on these amounts at the individual tax rate. S corporations have the same legal standing as C corporations; they are just taxed differently.
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