By incorporating your business, you create an entity that is separate and distinct from you as an individual. Special laws and taxes apply to any corporation. A C corporation (the standard type) may not be the best structure for a small business, especially one in start-up phase. The formalities are many, and the tax consequences may leave less money in your pocket. Note that the liability protection you might be seeking in a C corporation can also be found in a limited liability company or a subchapter-S corporation. However, if your business is growing large and you want to raise money through the sale of stock, a C corporation may be the way to go.
To incorporate, you must file articles of incorporation, create corporate bylaws, and fulfil other state requirements. Stock must be issued, even if you’re the sole shareholder. If you commingle personal and corporate assets or otherwise fail to conduct the corporation as a separate and distinct entity, you may lose your right to limited liability—which is a primary reason for forming a corporation.
The business must report income on a corporate tax return, separate from shareholders’ returns. Also, regardless of profitability, many states have minimum taxes that are owed by corporations. Shareholders will be taxed for dividends received, and, of course, any salaries from your corporation will be taxed at individual rates. Corporate tax returns are more complicated than individual returns, which generally means higher fees paid to a tax professional. On the other hand, corporations are usually taxed at a slightly lower rate than individuals—34 percent maximum versus 39.6 percent.
Limited liability for shareholders is a vital benefit. Under normal circumstances, a corporate owner’s liability is limited to funds invested in the stock. Stockholders cannot be held personally liable for corporate actions, and creditors are limited to corporate assets when seeking to collect monies owed.
Corporations have a method of raising money not available to other types of business structures. They sell stock to the public. Furthermore, with a standard C corporation, there are no limits as to who can own stock or to the number of shareholders, thereby maximizing the potential access to capital.
Once formed, a corporation continues in existence until formally shut down. Thus, if a key player in the corporation dies, formal action is not required by the corporation to deal with the problem. The ownership of the deceased will simply pass to the heirs. Also, under most circumstances, stockholders can sell their stock whenever and to whomever they please.