Sunday, February 8, 2009

Business Basics 101-Corporations


Corporations are the most formal way of conducting business. A corporation chartered by the state in which it is headquartered is considered by law to be a unique entity, separate and apart from those who own it. A corporation can be taxed, it can be sued, and it can enter into contractual agreements. The owners of a corporation are its shareholders. The shareholders elect a board of directors to oversee the major policies and decisions. The corporation has a life of its own and does not dissolve when ownership changes. The two most common types of coporations are "C" and "S" corporations. A major difference is how they are taxed.

A "C" corporation pays a corporate income tax and the owners also pay their personal taxes on salaries and dividends. An "S" corporation does not pay corporate income tax; instead, all profits are allocated to the stockholders and are taxed at each stockholder's personal tax rate whether or not cash is paid out as salary.

Many small businesses consider creating a corporation to protect personal assets such as home, cars, etc. from the courts in the event of bankruptcy or a jury awards a settlement more than the limits of your insurance.

We'll look at "S" Corporations and "LLC's" in the future!

Remember, as always, I advise you to consult with a qualified accountant or lawyer to give you the best advice for your situation!

Advantages of a Corporation

  • Shareholders have limited liability for the corporation's debts or judgments against the corporations.
  • Generally, shareholders can only be held accountable for their investment in stock of the company. (Note however, that officers can be held personally liable for their actions, such as the failure to withhold and pay employment taxes.)
  • Corporations can raise additional funds through the sale of stock.
  • A corporation may deduct the cost of benefits it provides to officers and employees.
  • Can elect S corporation status if certain requirements are met. This election enables company to be taxed similar to a partnership.

Disadvantages of a Corporation

  • The process of incorporation requires more time and money than other forms of organization.
  • Corporations are monitored by federal, state and some local agencies, and as a result may have more paperwork to comply with regulations.
  • Incorporating may result in higher overall taxes. Dividends paid to shareholders are not deductible from business income; thus it can be taxed twice.
  • Federal Tax Forms for Regular or "C" Corporations (only a partial list and some may not apply) Form 1120 or 1120-A: Corporation Income Tax Return Form 1120-W Estimated Tax for Corporation Form 8109-B Deposit Coupon Form 4625 Depreciation Employment Tax Forms Other forms as needed for capital gains, sale of assets, alternative minimum tax, etc.

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