A corporation is a legal entity formed by a group of people and/or property to engage in commercial activity under the protection of state law. Business operations are overseen by elected officers and directed by the Board of Directors, but the corporation itself is owned by its shareholders. The company must adhere to corporate tax regulations and file corporate taxes consistently.
A Corporation, often referred to as Standard Corporation, C Corporation, or Regular Corporation, may have an infinite number of shareholders, including foreign citizens, may be public (when shares are offered for sale to the public) or privately held (when shares are not sold to the public) (when shares are not sold to the public). Members of the founding team, current board members, and private investors (including venture capitalists) who may or may not have voting rights on the board of directors are the most common shareholders.
The C Corporation structure is the most widely used for new companies. C Corporation is regarded to be a for-profit, state-incorporated firm. Incorporation requires formal paperwork with state agencies and a promise to follow that state’s corporate laws.
The term “limited liability” refers to the shield that a corporation places between its shareholders and the company’s debts. Nevertheless, C Corporations also face what is called “double taxation” – first, the corporation is taxed on its income, and then shareholders are taxed on the distributions they receive, such as profit-sharing payments or dividends.
To incorporate, you will need to register your business name, file a certificate of incorporation or articles of incorporation, and pay a fee. You will also need to establish corporation bylaws and hold a board of directors meeting.
Why Should I Incorporate?
Incorporating is one of the finest ways to protect your personal assets while doing business. Most people opt to incorporate purely for this reason, yet it’s not the only advantage of incorporation.
Owning a company has many advantages, including the potential for tax savings, increased business flexibility, decreased risk of audit, improved itemization tools, and simplified capital-raising processes.
The Benefits of Forming a Corporation
• Limited Liability
A corporation is a legal body that operates separately from its owners or shareholders. As a general rule, shareholders are shielded from personal responsibility for the corporation’s debts and obligations and from personal liability in lawsuits in which the business is named as a defendant. Some types of insurance may still be essential, although incorporation offers an added layer of protection (sometimes termed “corporate veil”) (also called “corporate veil”).
• Tax Savings
Careful budgeting of your business expenses can result in lower overall tax rates. Depending on the level of business income, incorporating your company can provide significant tax advantages. Assuming your startup becomes profitable quickly, becoming a corporation will allow you to take advantage of a number of tax breaks that you would not be able to take advantage of as an individual. Salaries paid to both you and your staff qualify as an example of tax-deductible business expenses.
• Reduces The likelihood of an IRS examination (audit)
It is higher for unincorporated enterprises, especially those with a high gross income. Even when considering enterprises with a high income, audit rates for those that are formally organized are significantly lower.
While forming a corporation, you can opt to incorporate in a state that allows the incorporators and shareholders to remain anonymous. Officers and directors can typically enjoy the same degree of privacy.
The credibility of a business is enhanced by the professional appearance of a corporation. Even if there’s just one shareholder and worker, a firm can exist.
• Easy Capital Funding
A corporation makes it simpler to raise money from investors by selling shares of stock.
• Easier Transfer of Ownership
Ownership of a corporation may be transferred without major disruption of operations through the sale of stock. Legal paperwork can be kept simple in this way.
• Flexibility of Share Ownership
Owning shares allows you the freedom needed, among other things, to properly fund your business or to retain important workers. A successful C Corporation may go public through an Initial Public Offering (IPO) in order to raise additional funds for the company (IPO). To “tie” key personnel to the company and ensure their continued service, you can provide their stock or stock options (common in the hi-tech industry, among others).
Since it is the board of directors rather than the owner that ensures the company’s continued existence. So, a corporation can be in existence for a longer period of time than an LLC or other form of ownership-based business.
Major Drawbacks of the C-Corp Structure.
The advantages of an S-Corporation outweigh the downsides of a C Corporation. The primary drawback is that a C Corporation must pay tax on its profits at the time they are made, and the corporation does not receive a tax break when it pays out dividends to its shareholders. In addition, stockholders face a second round of taxation when dividends are paid out. The term “double taxation” describes this situation.
The shareholders of a C Corporation are not permitted to deduct the company’s losses from their own income.
Which Is Better, a C-Corp, an S-Corp, or an LLC?
The S-Corporation and the Limited Liability Company are two further types of commercial corporations. An in-depth examination of the differences between the various business structures and the typical C Corporation is beyond the scope of this article.