There are several different existing ways to structure a business, and every small business must be structured in one of these ways. It is an important decision. Business owners need to take tax methods, laws, and many other aspects into consideration when deciding how to structure their business. One option is to form your business as a small business corporation. While corporations do have some stricter requirements, there are several benefits that they enjoy. The following guide answers some of the most common questions aspiring business owners may have about this business structure.
1. Question: How is a corporation defined?
The defining feature of small business corporations is that they are a separate entity. Legally, the business is completely separate from its owners and operators. In many ways, you can think of the corporation as a person. It is capable of signing contracts, paying taxes, building debt, earn profits, and will exist after the owners leave the corporation or die. It is important to note that it is not the owner who is doing any of these actions “on behalf” of the corporation, but rather the corporation itself. Those who choose to create a corporation are usually doing so because they find this separation between the owners and the business appealing.
2. Question: What is limited liability?
One of the biggest benefits that corporations offer is limited liability. Essentially, limited liability means that, legally, the corporation owner is not personally responsible for the debt or other liabilities of the business. This means if there is a lawsuit against the corporation, compensation cannot be sought from the owner’s assets. In a business sense, the people responsible for a corporation’s success are still responsible for ensuring debts get paid, but it is not their personal resources that are on the line; rather, the corporation’s resources will pay fees and debts. To qualify as an official small business corporation, there are many formalities, qualifications, and requirements that must be met. If you are interested in creating a corporation exclusively for the limited liability benefits, you may be better suited establishing a limited liability company (LLC), which also offer limited liability, but with lower qualifications and with less work.
3. Question: How are corporations taxed?
As its own legal entity, a corporation is usually taxed separately from its owners. However, business owners can choose to categorize their business as an S-type corporation. This means the owner has elected to pay the corporation’s taxes as if it were a sole proprietorship or partnership. In this case, owners file the corporation’s taxes at the same time as their own personal taxes, because all the corporation’s profits are passed directly to the owners.
Most corporations are A-type corporations, which are independent for tax consideration. The corporation itself must pay taxes on the profits, but the owner will still pay taxes for salaries, bonuses, and dividends. If you choose to form a LLC instead of a corporation, remember that owners of LLCs personally pay their business’s taxes as well.
Finally, it is important to realize that any money an A-type corporation pays to the owners in the form of a dividend will be taxed on both the corporate and the owner’s taxes. There is commonly fear of double taxation for corporation owners, but this is the only money that can be taxed twice.
4. Question: How is a corporation established?
The process of making your small business incorporated varies with each state, but you will typically file your articles of incorporation with whichever branch of your state government that deals with corporations. There will be a filing fee between $100 and $800. The application will include the name of the corporation, the address, and the corporation’s registered agent and owners. It is also required that you establish your business’ by-laws and hold a meeting distributing stock to each of the directors and owners.
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