A corporation is a business entity that provides two important benefits to its owners: pass-through taxation (for S-corporations) and limited liability.
Benefit 1: Pass-Through Taxation for S-corporations
There are two main types of corporations: C-corporations and S-corporations. For a C-corporation, the federal government imposes taxes both at the business level and on any profits or income paid to the corporation’s owner. As a a result, the shareholder of a corporation is taxed twice (this is called double taxation).
By comparison, shareholders of S-corporations (also known as closely held corporations) report their business profits or losses only on their personal income tax returns. With this pass-through taxation, the shareholder of a S-corporation is only taxed once, just like the owners of a sole proprietorship or partnership. (Notes: a S-corporation is created after an election is made after the formation of a corporation and only certain corporations qualify for this election.)
Benefit 2: Limited Liability
Like members of a limited liability company (LLC), a shareholder of a corporation and those who govern a corporation (the board) are protected from personal liability for business debts and claims. This feature is known as limited liability.
What does this mean? If the corporation owes money or faces a lawsuit, the creditor or plaintiff can only go after the assets of the corporation itself. They usually cannot go after the personal assets of the board member or shareholder, such as a house or car. (Note: this is assuming that the plaintiff does not try to pierce the corporate veil.)
Comparison of Corporations and LLCs
As compared to an LLC, which can adhere to less formalities to keep its structure, states impose more stringent requirements for the formation and management of a corporation. In general, the corporate structure is very attractive to companies that eventually seek to funding from many people.
If you have questions about corporations or entity formation, contact us here.
