What is a Corporation?

A corporation is a legal entity that is created under the laws of a state designed to establish the entity as a separate legal entity having its own privileges and liabilities distinct from those of its members [Wikipedia]

You’ve likely heard of the term “corporation”, but do you really know what a corporation is? Despite the commonality of the term, most people do not fully understand the details of the corporation business entity. Because we get asked “what is a corporation” quite often, we have broken this page down into the most commonly asked questions regarding the complexities behind choosing a corporation as your business entity. The standard corporation, also known as a C-Corporation or C-Corp, is one of the most common business structures. Similar to an S-Corp or Limited Liability Company (LLC), a C-Corp is its own legal entity. Unlike a Limited Liability Company (LLC) (which is owned by its members), however, the C-Corp is owned by shareholders instead of members. As you can imagine, adding shareholders to the equation makes a corporation a much more complicated business structure.

Registering a Corporation

For your business to form a C-Corp or S-Corp or LLC, you must register your business in either your home state or a state that allows for non-resident registration, such as Delaware. We suggest Delaware simply because they are considered the most business-friendly state in the country, and both national and international U.S. corporations are registered there. If you do decide to register your C-Corp in a non-resident state, you must have a Registered Agent in that state to receive important legal documents for you. Before registering your corporation, it is wise to do a business entity name search before taking any additional steps. If you neglect to do a business entity search, you may wait weeks to hear from the Secretary of State about your Corporation’s approval only to find out that your business entity name is taken and you have to start all over again. Avoid the hassle, and make sure your business entity name is available by doing a free Business Entity Search.

Corporation Liability

The beauty of incorporating, that is, forming a C-Corp or S-Corp, is the limited liability that you face once your corporation is formed. C-Corps are owned by shareholders, but generally the shareholders (the owners) cannot be held personally liable for the C-Corp’s debts or obligations. If creditors come knocking and your C-Corp business cannot pay them, they have no legal standing to come after your personal assets. Whereas a business operating as a Sole Proprietorship or Partnership is not afforded this type of liability protection.

Corporation Taxes

Similar to S-Corps or LLCs, C-Corps are considered to be separate legal entities by the IRS, and taxes must be paid on your C-Corp’s profits. Following this profit taxation, the IRS may also tax any monies that are distributed to your shareholders (the owners). This is what is known as “double taxation” of C-Corps. In other words, the IRS taxes your business at the corporate level (tax on profits) and again on the individual level (tax on shareholders’ income). The only exception to the “double taxation” rule is if you or any shareholder is an employee of the corporation. In that case, as long as the employee is receiving a “fair market value” salary in the eyes of IRS, the salary will not be taxed. In other words, if you employed a Customer Service Representative for $30,000.00 per year the IRS would likely consider this a fair market salary. If, instead, you paid this same position a $100,000.00 salary, it would likely raise some flags at the IRS and may be seen as a way for you to avoid the double taxation of a C-Corp. If you would like to form a corporation, but would like to rid your business of this “double taxation” problem altogether, consider forming an S-Corporation or Limited Liability Company (LLC) instead.

Summary

Forming a C-Corp can protect you and your company’s shareholders from liability, but do require somewhat complicated tax handling. Capital can easily be raised by selling stock in the corporation, unlike an LLC which has members instead of have shareholders. Another benefit of a corporation is that certain expenses are tax deductible, but on the flip side they are also more expensive to run and require much more paperwork than an LLC. If you think your company has potential to grow, you plan on needing loans for capital, or plan on going public in the future, a C-Corp may be the best choice for you.