A corporation is a legal entity considered to be a person under Indiana and Illinois law, meaning it can sue or be sued by another party. Corporations also have rights and obligations. Corporations are separate from their owners or shareholders, and as such, have many different advantages and disadvantages. A corporation is not the best business structure for all businesses, but for many businesses, this type of structure offers a balance that other types of business entities do not offer.
Marcia at MFP LAW LLC will help you identify the best business structure for your company or help you transition from a sole proprietorship or another structure into a corporation. Marcia will discuss all the factors that go into forming and operating a business. Contact Marcia at 219-356-2610 to schedule a free consultation and to learn more about corporations and your business idea.
What is a Corporation?
A corporation is a business entity with a separate legal identity from its owners (called shareholders). As a separate legal entity, a corporation can sue and be sued, enter into contracts, own assets, take out loans, and pay taxes. Corporations often use the designation “Inc.” after the business name.
Shareholders own an interest in a corporation and receive its profits, usually in the form of dividends. However, they typically aren't involved with the day-to-day management of the business. Instead, the shareholders elect a board of directors who oversee the business and hire senior management.
An important feature of a corporation is its limited liability. Shareholders are not personally liable for debts of the business. Their liability is limited to their interest in the corporation.
Corporations can be for-profit (both privately owned or publicly traded) and non-profit.
Corporations are created by Incorporating
The specific steps for incorporating a business vary between states. Generally, the process involves the following four steps.
- Filing articles of incorporation with the relevant state government office. One or more of the shareholders file the articles of incorporation. The articles usually include information such as the corporation's primary purpose and shareholder structure.
- Creating corporate bylaws. Typically created at the first shareholders' meeting, the bylaws set out the basic rules around how the corporation will operate and address things like regular and special meetings, voting rights, and corporate officers.
- Issuing stock. Stock is issued to shareholders via stock certificates.
- Electing a board of directors. The shareholders elect a board of directors at a general meeting. This election is very important because board members can play strategic roles in the corporation.
Before incorporating, you should weigh the pros and cons of the business structure to decide whether it's right for your business.
Advantages of a Corporation
Corporations offer many advantages, some of which are listed below.
- Limited personal liability. As a corporation is a separate legal entity, shareholders' are generally protected from the corporation's creditors. Any liability is limited to their individual investment in the business. This means that if a corporation is sued or goes bankrupt, shareholders' personal assets are protected.
- Easy transfer of ownership. Shares in a corporation can easily be transferred. While the corporate bylaws will set out the specific rules for buying and selling shares, a shareholder can leave a corporation simply by selling their shares. This flexibility of ownership also ensures a business continues to operate through ownership changes.
- Quick capital raising. A publicly-traded corporation can quickly raise additional capital by issuing more stock in the business.
These advantages should be balanced against the potential disadvantages of incorporation.
Disadvantages of a Corporation
The disadvantages of a corporation are less numerous but they can be significant.
- More costly and complex to set up and run. Incorporation incurs more costs and takes more time than setting up a sole proprietorship or partnership. Once it's up and running, a corporation is also subject to a stricter regulatory framework. This includes ongoing documentation and filing requirements, such as filing annual reports, keeping minutes at shareholder meetings, maintaining detailed financial records, and opening a separate corporate bank account.
- Potential double taxation. In some circumstances, the profits of a corporation are taxed twice, both at an entity level and at a shareholder level.
As you can see, these advantages and disadvantages may benefit or work against you – it all depends on the business and your goals. Marcia at MFP LAW LLC can discuss these things with you, helping you narrow down exactly what business structure will work best.
Fortunately, when it comes to corporations, there are tax options available to meet your needs.
Tax Options for Corporations
Aside from being incorporated as a corporation, you may want to consider how you want your corporation to be taxed. Below are brief descriptions of different tax codes that can be elected by your corporation to specify how it will be taxed.
IRS Subchapter C (referred to as C-Corporations for tax purposes)
A corporation that is taxed under IRS Subchapter C is commonly referred to as a C corporation. In a C corporation, or C corp, shareholders are taxed on their income from the corporation, and the corporation is also taxed at the entity level. There's no limit to the number of shareholders a C corp can have, making it an ideal structure for businesses requiring significant capital.
IRS Subchapter S (referred to as S-Corporations for tax purposes)
A corporation that is taxed under IRS Subchapter S is commonly referred to as an S corporation. An S corporation, or S corp, is a corporation with special tax status. An S corporation is taxed like a partnership and does not pay federal corporate tax. Instead, the corporation's profits and losses are passed on to shareholders who are taxed pursuant to the personal tax rate.
There are strict eligibility rules a corporation must meet to elect S corp status. The number of shareholders is limited to 100, and specific rules exist to determine shareholder eligibility.
Non-Profit Corporations
Corporations can also be used to establish non-profit ventures such as charities, educational institutions, and religious organizations. Rather than going to shareholders, profits are reinvested in the business, so non-profit corporations are typically exempt from paying taxes. Marcia has significant experience working with and advising non-profit corporations and can help establish and maintain an organization's tax-exempt status at the local, state, and federal level.
Factors to Consider before Incorporating
Before you incorporate, you may want to consider the below six factors.
- Complexity. What type of business do you have and how complex is its structure or management of it?
- Liability. How much does personal liability matter to you?
- Number of Owners. Is it just you, and do you want to maintain sole ownership or will ownership be divided among others?
- Capital. Do you need to raise capital, and if so, how much?
- Taxation. Double taxation is a hallmark of corporations, and as such, how does this affect the business?
- Survivorship. If something happens to you (e.g., you become incapacitated in some way or die), do you want the company to survive?
Marcia at MFP LAW LLC can help you considering and weigh these factors and help you identify if a corporation is right for your business.
Contact Marcia at MFP LAW LLC Today
If you need to incorporate a business, do it strategically and smartly. Marcia at MFP LAW LLC helps clients form corporations and plan for their futures. Contact Marcia either by completing the online form or by calling her at 219-356-2610, and we will schedule a free consultation to discuss your business venture.
