Corporations are legal entities that exist independently from their owners. They assume a separate legal and tax life distinct from their shareholders. Corporations generally fall into the "C-Corporation and the "S-Corporation" category. The "C-Corporation" designation refers to a standard, general-for-profit, state-formed corporation. To be formed, an Incorporator must file Articles of Incorporation and pay the requisite state fees and prepaid taxes with the appropriate state agency (usually, the Secretary of State -- Corporations Division).
Generally, a corporation's management and control is vested in the board of directors who are elected by the shareholders of the corporation, even though the corporation is owned by the shareholders. Shareholders, however, may influence corporate decisions by indirect actions such as electing and removing directors, approving or disapproving amendments to the articles of incorporation and voting on important corporate decisions. Members of the Board of Directors usually make only major business decisions, however they supervise and appoint officers who make the day-to-day business decisions of the corporation. Corporate officers are usually consist of the President, Vice-President, Secretary and Treasurer.
A shareholder is permitted to serve on the Board of Directors and simultaneously be an officer of the corporation.
Corporations are generally formed because of the advantages they provide to the shareholders. The most important advantage of incorporation is that it gives its shareholders limited liability. Since the corporation is a separate legal entity, its shareholders are protected from the debts and liabilities of the corporation. Another advantage is that a corporation may have a perpetual lifetime. The assets and structure of the corporation exist beyond the lifetime of any of its shareholders, officers or directors. This allows for stability of capital, which thus becomes available for investment in projects of a larger size and over a longer term than if the corporate assets remained subject to dissolution and distribution.
Corporations, do however have disadvantages. For instance, double taxation may occur. Generally, the corporation is taxed for its own profits; then, any profits paid out in the form of dividends are taxed again to the recipient as dividend income and the individual shareholder's tax rate. While, reasonable business expenses such as salaries and other operating expenses are deductions against corporate income which can minimize double taxation, double taxation may be eliminated by making an S Corporation election. S Corporations only pay taxes one time at the tax rate of the shareholder and S Corporations can deduct the same expenses as a C corporation.
The S-Corporation initially starts out as a C-Corporation. As discussed above, it's a standard, general-for-profit, state-formed corporation. However, after the corporation has been formed, it may elect "S Corporation Status" by submitting the appropriate IRS form to the Internal Revenue Service. This election provides special tax status. Once the filing is complete, the special tax status permits the income of the S-corporation to be taxed like a partnership or sole proprietorship rather than as a separate entity. Thus, the income is "passed-through" to the shareholders for purposes of computing tax liability. Therefore, a shareholder's individual tax returns will report the income or loss generated by an S corporation. Double taxation is avoided.
It must be noted that a Corporation must qualify for "S-Corporation" status and must do so within the appropriate time frame. For more information or to form a corporation kindly contact Kokolakis & Associates, P.C.