Corporations

C Corporation

A C corporation can have an unlimited number of shareholders, but it is possible for one individual to start and own 100 percent of a C corporation. To start a corporation, you will have to comply with your stateís laws and file articles of incorporation. The corporation will also need bylaws that include rules for stockholder meetings, director meetings, the number of officers in the corporation, and the responsibilities of each. These requirements generally make a corporation more expensive to form and operate than a sole proprietorship or a partnership.

The owners of the C corporation have complete control over the corporation based on stock ownership. They can elect a board of directors which, in turn, selects the officers to run the business.

Liability
A corporation is a separate legal entity. This means that creditors of the business may only look to the corporation for payment. Individual shareholders are not personally liable for business losses; their only risk is the amount of their investment.

However, there are cases in which shareholders may be liable for corporate obligations. For instance, if you do not follow state requirements for running the corporation or fail to keep corporate assets separate from your personal accounts, you could be liable for business losses. Also, if you personally guarantee an obligation of the business, you are legally responsible for that obligation. And if you, as a shareholder, make a loan to the corporation and the business fails, you may be paid only after other creditors are paid.

Continuity
A corporation, as a separate legal entity, will not cease to exist if one of its owners dies, becomes disabled, or declares bankruptcy. Its life is unlimited and will last as long as its shareholders decide it should.

Transferring ownership
You may transfer your ownership by selling your stock in the corporation. Criteria can be established that limit ownership to a small group of shareholders that all work in the business.

Taxes
A corporation will have to file its own corporate income tax returns and pay taxes on its profits. Dividends are paid to shareholders after corporate income taxes are paid on the corporationís income. Shareholders are then individually taxed on their dividends; thus, the term "double taxation" for corporations.

C corporations receive greater income tax deductions for owner benefits, such as insurance, medical expenses, travel, and retirement plan contributions, than do other forms of businesses. And they frequently have a greater opportunity to raise capital by issuing stock and borrowing money.

Other reasons to consider a C corporation are if you:

Subchapter S Corporation

From the liability and continuity standpoints, a Subchapter S corporation is similar to a C corporation. But there are some important differences between the two. You may elect Subchapter S status for your small business corporation if it meets all of the following requirements:

Transferring ownership
Free transferability of stock is restricted to qualified shareholders.

Taxes
Subchapter S corporations have a special tax status in that they do not pay corporate income taxes on profits and thus avoid the double-taxation of C corporations. Instead, the profits or losses are passed through to the individual shareholders and reported on their personal income tax returns.

The tax disadvantage over a C corporation is the less favorable tax deductions. Fringe benefit payments to stockholders owning greater than two percent of the corporation are not deductible to the corporation and are taxable income to the recipient.

Many owners of start-up businesses who want corporate protection from liabilities, along with the ability to avoid double-taxation of corporate profits, elect to establish S corporations.

Personal Service Corporation

A Personal Service Corporation (PSC) is very similar to a C corporation but with its own tax rate. It is for individuals and professionals who provide personal services instead of selling products or non-personal services. Businesses that could consider a PSC form include:

Taxes
The income tax rate for a PSC is a flat 35 percent. This means that the PSC cannot take advantage of the graduated income tax rates of 15 percent to 35 percent available to most corporations. But, if your individual income tax rate is higher than the top corporate rate, the PSC might be an attractive alternative to a sole proprietorship.

The PSC form will let you deduct employee benefits, such as insurance and retirement plan contributions. However, you should note that the IRS has been known to challenge the PSC and try to reclassify income as paid to the individual rather than to the corporation.

To take advantage of a PSC business form, the IRS requires that 95 percent or more of your time spent at the business must be spent performing the personal services.

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