Because corporations must pay a variety of taxes, and may earn different types of incomes, these companies typically must handle a tremendous volume of paperwork which would not be required with another business entity. Americans have been forming businesses at record high rates since 2020, and this trend has continued through 2023. A  Sole Proprietorship or Partnership, by contrast, the company owners are personally liable for all business obligations. They’d have to come up with the money, even if it means using personal savings or selling an asset, such as a house or car. A closed corporation — also known as a private company, family corporation or incorporated partnership — is a privately held company owned by a few shareholders. Shares for these corporations are not publicly traded, which can make raising capital difficult; however, the owners still have the benefit of limited personal liability.

State Taxes

Corporations are subject to more formalities and regulations compared to other business structures. They must comply with certain administrative requirements, such as holding annual shareholder meetings and maintaining proper corporate records. Failure to meet these obligations can lead to legal consequences or the loss of limited liability protection. When it comes to raising capital, corporations have an advantage over other business structures. This makes it easier for corporations to attract investors and potential shareholders, as ownership can be easily transferred through the buying and selling of shares. Access to capital is crucial for companies looking to expand operations, invest in new technologies, or take advantage of growth opportunities.

Draft Corporate Bylaws

You will likely have to go through extensive paperwork to properly determine and document the details of the organization and its ownership. For example, Sweeney said you need to draft and maintain corporate bylaws, appoint a board of directors, create a shareholders ownership change agreement, issue stock certificates, and take minutes during meetings. If you are a business owner, you’ve probably explored the advantages of forming a C Corporation or a variety of other business structures to protect your company and its assets. The C Corporation is a business entity that offers a unique set of benefits we’ll dive into below.

Access to capital

Paying corporate taxes can be more advantageous for owners than paying additional individual income tax, as non-incorporated business owners must do if they generate a profit. There also are opportunities to shield income from taxes through a 401k plan (or other retirement mechanism), a healthcare plan, life insurance, and charitable contributions. While some of these mechanisms have parallels in non-incorporated structures, a corporation has the advantage of structuring benefits through standard organizational plans. For true asset protection and to avoid personal liability, it’s advisable for most business owners to incorporate a business. There are several types of corporations, including C corporations, S corporations, B corporations, closed corporations and nonprofit corporations. Some alternatives to corporations are sole proprietorships, partnerships, LLCs and cooperatives.

• Failure to meet these obligations can lead to legal consequences or the loss of limited liability protection.
• A  Sole Proprietorship or Partnership, by contrast, the company owners are personally liable for all business obligations.
• Check with your state or consult with a lawyer for more information regarding the specific requirements to remain compliant.
• Some states and many localities require all businesses to have a general business license.
• If you need help with the required incorporation paperwork, you may want to hire an attorney.

Ability to Build Credit and Raise Capital

The requirements of an S-corporation include being based in the U.S., issuing not more than one type of stock and maintaining shareholder requirements that include a shareholder count maximum of 100. Shareholders can be individuals, certain trusts and estates, but cannot be nonresident aliens, corporations or partnerships. For most small business owners, a C corporation is not always the most advantageous business structure. In fact, more often than not, it makes more sense to form an S corp. This is an invisible line of separation between the assets of the business and the owner(s).

• Corporations attract investors because of its stock structure, perpetual existence, ownership transferability, and limited liability.
• Officers are hired by the board of directors and are charged with managing the corporation’s day-to-day operations and carrying out the strategies developed by the board of directors.
• Individuals cannot personally own a corporation, as these entities are separate from their owners.
• The board of directors is required by law to act in the best interests of the corporation and its shareholders.
• Some employers may attempt to deceive you into believing you’re completely ineligible because you don’t have a W-2, but that might not be the case.
• Once you reach 100 shareholders, you are legally obligated to evolve the business from an S corporation to a C corporation.

Some entrepreneurs interested in forming a corporation decide to file their own paperwork. Although this is certainly possible and can save you a great deal of money, you need to schedule at least one consultation with an experienced business attorney. During this consultation, your attorney can tell you about some of the potential pitfalls of forming a corporation and may give you a few tips that will make the process of incorporation much simpler.

Reasons to Incorporate

Attracting more investors allows a corporation to raise more capital or equity to manage and expand their operations. For example, one of the tax benefits available to C corporations is that shareholders can be given a salary, even if they are not part of running its day-to-day business operations. These salaries can be written off as a business expense, which is a tax advantage that will reduce the corporate income tax the company needs to pay. This type of tax advantage—where the advantages of forming a corporation for an employee may be shareholders, not just employees, can be put on the payroll—is not available to an LLC or even an S corporation. A corporation may be preferrable to other types of business entities if a client’s business goals include attracting investors. A corporation may also be the preferred choice when a business intends to attract talent by offering employee benefits such as incentive stock options, as this type of compensation cannot be offered by an LLC or LP.

• This is because the dividend income received by the shareholders (natural persons) is also taxed on their personal income tax returns.
• There’s a chance you might qualify, and the best way to find out is to speak with an expert on the topic and gauge their opinion.
• Comparing the corporation structure with other business structures like sole proprietorships, partnerships, and LLCs can help you make an informed decision.
• It determines how ownership will be managed if a shareholder dies, retires, becomes disabled or leaves the company.