A corporation is a business entity that is separate and independent of its owners. The owners, or stockholders, elect a board of directors who manage the corporation. The board of directors is responsible for appointing the officers who run the corporation’s daily business. There are different types of corporations such as the Subchapter C corporation, (“C corporation”), the Subchapter S corporation, (“S corporation”), and the personal services corporation. Not all states recognize the various types of corporations. For tax purposes, the IRS treats all corporations as either C corporations or S corporations.
Subchapter C Corporation
A C corporation is the traditional form used by large businesses. In order to create a C corporation, a state filing is required. A C corporation may exist in perpetuity, meaning it survives the death of its owners. The corporation must hold annual meetings and maintain extensive records.
Advantages and Disadvantages
A primary advantage of a corporation is that the owners are not personally liable for the business’s debts and liabilities. For example, if a C corporation was sued because it did not pay its bills, the creditors could not seek satisfaction of those debts from the owners. Another advantage is that is relatively easy to raise starting capital for a new business through the sale of the corporation’s shares, and these shares are easily transferable.
Generally speaking, the highest corporate tax rate is lower than that of the highest personal tax rate. However, the threat of “double taxation” exists. This means that the corporation is taxed on its income and its owners are likewise taxed when profits are distributed to the owners in the form of dividends. While a corporation may deduct the costs of providing benefits to its employees and officers from income, its owners are not allowed to deduct business losses from their income.
A disadvantage to this form of business is that extensive state and federal regulations apply and it is generally more expensive to form and operate a corporation that other types of businesses.
Subchapter S Corporation
An S corporation is similar to a C corporation in that corporate recordkeeping and procedures are required and the owners enjoy protection from personal liability for the business debts. However, an S corporation differs in that the maximum number of shareholders is limited to no more than 100 and an S corporation is not taxed. Owners of