{"id":4872,"date":"2016-04-04T10:47:45","date_gmt":"2016-04-04T15:47:45","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/incorporation-and-legal-structures\/small-business-corporation-faq.html"},"modified":"2024-05-22T23:52:20","modified_gmt":"2024-05-23T04:52:20","slug":"small-business-corporation-faq","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/incorporation-and-legal-structures\/small-business-corporation-faq.html","title":{"rendered":"Small Business Corporation FAQ"},"content":{"rendered":"\n
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Small Business Corporation FAQ<\/h1>\n
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\n By Jade Yeban, Esq.<\/a> | Legally reviewed by Aviana Cooper, Esq.<\/a>\n | Last updated\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

Starting a new business can be thrilling, but it also comes with a myriad of questions. From determining your business type to understanding the intricacies of federal tax, small business owners often seek answers to their most pressing queries. This article will explore some of the most frequently asked questions to guide those venturing into the world of business.<\/p>\r\n

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What exactly is a corporation?<\/h2>\r\n

A corporation is a distinct business entity separate from its owners. Unlike many other types of business structures, a corporation stands by itself as its own legal entity. This means that a corporation is separate, legally, from its owners and the other decision-makers. To put it in different terms, both corporate and tax laws view a corporation<\/a> as its own "person" that can form contracts, incur debt, and pay its own taxes.<\/p>\r\n

Because a corporation<\/a> is its own legal entity, it does not dissolve if the original owners or shareholders die. Also, the owners of a corporation enjoy limited liability. This means their personal assets are shielded from the liabilities of the small business corporation.<\/p>\r\n

This unique status means that the Internal Revenue Service (IRS) sees corporations<\/a> as separate taxpayers. The board of directors, elected by the shareholders, makes the big decisions, while the day-to-day business operations are often managed by executives.<\/p>\r\n

What’s limited liability, and why is it important?<\/h2>\r\n

Limited liability is crucial for many business owners. It means that, typically, the personal assets of the shareholders are not at risk for the corporation’s debts. For instance, if someone sues a corporation, only the business assets are on the line. This makes the corporation an attractive business type for those wary of personal financial risks.<\/p>\r\n

The creditor cannot "reach through" the corporation to touch the personal assets of the owners of the corporation. These personal assets include bank accounts and homes. To maintain this limited liability, the owners of the corporation must ensure that the business complies with certain corporate formalities. In addition, the owners must provide adequate funding for the corporation. The owners cannot use the corporation merely as an extension of their own persona.<\/p>\r\n

Are corporations different from partnerships, sole proprietorships, or LLCs?<\/h2>\r\n

Yes, corporations differ significantly. Sole proprietorships<\/a> are the simplest form, where the business owner and the business are one. Partnerships<\/a> involve many people doing business together. General partnerships are typically liable for the business’s debts. LLCs, or limited liability companies<\/a>, combine some features of corporations and partnerships. They offer limited liability like corporations but often have simpler tax structures.<\/p>\r\n

The way that corporations are unique and different from other business structures is in the way that the corporations pay taxes. Corporations are their own legal entities and pay taxes accordingly. The corporation calculates taxable corporate income by subtracting salaries and bonuses. Overhead and other expenses are also subtracted from its profits.<\/p>\r\n

Unlike corporations, the profits from LLCs, partnerships, and sole proprietorships pass through to the owners. As such, those businesses are not separately taxed. Instead, the owners of LLCs, partnerships, and sole proprietorships are personally taxed on their own respective shares of the business profits.<\/p>\r\n

Who would benefit from forming a corporation?<\/h2>\r\n

Anyone conducting business activities that come with potential liabilities might benefit from incorporating. This can include product manufacturers, retail store owners, and even some service providers. Those looking to raise capital through selling shares or those planning to do business in multiple states might also opt for a corporation.<\/p>\r\n

If your sole reason for forming a corporation is to gain the limited liability that comes with it, you may want to consider forming an LLC<\/a> instead. However, here are some situations in which forming a small business corporation could benefit both you and your small business:<\/p>\r\n