What is a Corporation?
A corporation is a separate and distinct legal entity that is recognized and authorized by a government to conduct business and/or provide business services. A corporation, under its own name, has its own rights, privileges and liabilities that are separate from its owners and managers. For instance, a corporation can open a bank account, buy and sell real estate, sue or be sued or go bankrupt. One of the primary advantages to incorporating is that a corporation's owners (or shareholders) and managers cannot be held personally liable for a corporation's liabilities. Other reasons include, but are not limited to, tax savings, and distribution of shares of stocks for capital and increased credibility and visibility to the public.
What are the requirements for incorporation?
A corporation must be formed according to the laws and governance of the state of incorporation. This usually requires filing Articles of Incorporation with the appropriate state agencies, usually the Secretary of State, and payment of the required state fees and taxes.
A corporation is also required to create and to maintain a board of directors, corporate officers, annual shareholder meetings and separate records. Many states, however, allow corporations that have only one shareholder to have that shareholder act as director and hold all officer positions.
How is a corporation taxed?
A traditional corporation, also known as a "C-corporation," is subject to double taxation. What this means is that a C-corporation pays a corporate tax on its corporate income. After this first tax, the C-corporation distributes its profits to its shareholders, who then pay income tax on those dividends. A way to avoid double taxation is to elect to be taxed as a pass-through entity, like a sole proprietorship. A corporation electing this type of taxation is known as an "S-corporation." The corporate profits of an S-corporation pass through to the owners, who then pay taxes on the dividends at their individual tax rates. Therefore, maintaining the tax records and books of a corporation are of utmost importance.