FAQS About Corporations
A corporation is a business that has been formed and registered in accordance with state law. A properly formed and organized corporation is considered to be a separate entity with the same status and privileges in the eyes of the law as a human being. What are the different types of corporation?
A "C" corporation is a company with shareholders who are individuals or other companies that is formed under state law. It pays income taxes. The shareholders are not held personally liable for the debts of the company. A shareholder has at risk only the amount of money equal to the value of the shares held. The employees are paid a salary and the share holders are paid dividends or income at the end of the year on the profits made by the company during the previous year in a amount equal to the pro rata share of stock ownership of the shareholders. A C corporation is managed by a board of directors and the board elects officers who actually run the company.
Sub S Corporations
A Sub S Corporation is also a company formed under state law. And just as with a C corporation. The shareholders are not held personally liable for the debts of the company. But there is a restriction on the number of shareholders and there can be no corporate shareholders. Also shareholders are restricted as to where they can live or reside relative to the State of incorporation of the company. A Sub S corporation does not pay income taxes. The shareholders are taxed individually in an amount equal to the income each receives at the end of the year. An S corporation is a pass through entity. There is no corporate level income tax. Instead, a pro rata portion of the annual profit or loss of the S corporation is included on the personal tax return of each shareholder. If IRS Form 2553 is filed within 75 days after incorporation, the corporation will be treated as an S corporation for tax purposes. Many start-up businesses benefit by making the election to be taxed as an S corporation.
- Corporate Law Related FAQs
Why should a business incorporate?
Incorporation provides many benefits. By incorporating you can limit your personal liability as a business owner. Creditors of your corporation must satisfy their claims by seizing the assets of the corporation rather than your personal assets. In contrast, as a sole proprietor or partner in a general partnership you are financially responsible for all liabilities of the business, and your personal assets are subject to seizure or lien by creditors. Other benefits of incorporation can include greater tax deductions for health insurance and medical expenses, lower payments for social security tax and medical tax, and greater opportunity to raise capital for the business through the issuance of stock.
In which state should I incorporate?
Generally, you should incorporate in the state where your office is physically located. If you incorporate in another state such as Delaware, you may need to submit an application to qualify as a foreign corporation in the state where your office is physically located. BKKT can assist you with the foreign qualification application. Most states have revised their corporate laws based on the laws of Delaware. For companies that are privately owned (not publicly traded), generally there are no substantive differences any more between the corporate laws of Delaware and those of other states. If you incorporate for the purpose of owning and operating a business, the general rule is that you should incorporate in the state where your main business office is located.