A corporation is a separate legal entity from the business owners, also known as the stockholders or shareholders, and is created by filing incorporation papers with the appropriate state official.
Although each state has its own laws regarding the formation of corporations, many follow the Model Business Corporation Act. A state may also have laws governing procedures for businesses incorporated in other states, referred to as foreign corporations, to follow if they wish to conduct business within its borders. While corporations are more complex than sole proprietorships and partnerships, they also offer several benefits. If you would like to learn more about forming a corporation, call today to schedule a consultation with an attorney at SODEN & STEINBERGER, APLC in SAN DIEGO, CA.
The primary benefit of a corporation is that its owners are not liable for debts or other liabilities of the corporation. For example, if a corporation is sued, creditors cannot seek the personal assets of any of the shareholders to satisfy the judgment. Even if the business assets do not cover the amount of the judgment, creditors still cannot pursue the personal assets of the shareholders. On the other hand, if a partnership or sole proprietorship is liable to creditors, the creditors can the assets of the business and the personal assets of the sole proprietor or general partners to satisfy any liabilities.
The shareholders typically elect a board of directors to make the major business decisions and oversee the general operations of the corporation. The directors then appoint officers to manage the day-to-day operations of the corporation.
Unlike a sole proprietorship or partnership, a corporation has a continuous life. The corporation does not end with the death of its owners, directors or officers. A corporation can also be easily transferred to new owners. In a sole proprietorship or partnership, each asset, permit and license must be sold and changed. Since the corporation is a separate legal entity from its owners, the paperwork, permits and licenses are in the name of the corporation, not the owners, and therefore, do not have to be transferred.
C corporations, S corporations and statutory close corporations
The traditional or regular corporation is known as a C Corporation because it is taxed under subchapter C of the Internal Revenue Code. The C Corporation is subject to two levels of taxation. The corporation itself pays taxes, and then the stockholders personally pay taxes on the income that is passed on to them by the corporation.
An S Corporation is a small business corporation that has elected to be taxed under subchapter S rather than subchapter C of the Internal Revenue Code. Similar to a partnership, an S corporation’s income is not taxed at the corporate level and shareholders account for all income, gains, losses, deductions and credits. The S Corporation has restrictions to which a regular C corporation is not subject. In order to be classified as an S corporation, all shareholders must agree to be so classified, and the corporation must meet the definition of a “small business corporation.” A corporation is a small business corporation if it has fewer than 100 shareholders (all of which are individuals, estates or certain qualifying trusts and none of which are nonresident aliens) and only one class of stock. 26 U.S.C. § 1361(b).
Some states provide for statutory close corporations. Though the requirements for a statutory close corporation vary from state to state, statutes generally require that the corporation has a limited number of shareholders and that its shares are subject to various transfer restrictions. Statutory close corporations are created under specific statutes and are different from “closely held” or “close” corporations, which are corporations whose shares are generally not publicly traded.
Advantages and disadvantages of the corporate form
In sum, the following are advantages of the corporate form:
- Shareholders are not liable for the debts or liabilities of the corporation
- Continuous life — the corporation does not end with the death of a shareholder
- Increased ability to raise revenue by selling shares
Corporations also have the following disadvantages:
- Extensive work and expense involved in forming and maintaining
- Double tax — corporate profits and stock dividends are both taxed unless the shareholders elect to form an S Corporation
- Inability to deduct operating losses — both LLCs and S Corporations can deduct operating losses; C Corporations cannot
- Corporations are governed by many rules and regulations, making them a more complicated business structure to operate
Speak to a business law attorney
The corporate business structure is a popular, but sometimes complicated, model to form and operate. If not formed and operated properly, the business can run into problems. Because of the complexity of corporations, schedule a consultation with a lawyer at SODEN & STEINBERGER, APLC in SAN DIEGO, CA, to discuss the formation and operation of your business.
