What Is a Corporation?

A corporation is a legal entity formed by a business owner. If you’re considering starting up a business, you might be wondering what type of business entity is right for you. Forming a corporation is one option that can provide some benefits with taxes and personal liability.

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• Key Takeaways:

  • Owners of a corporation have limited liability protection for their personal assets from business debts and liabilities.

  • The type of business entity determines how you file income tax returns.

  • You will need to file articles of incorporation and draft bylaws to form a corporation.

  Understanding Corporations

  Different types of business structures have distinct advantages. One advantage of forming a corporation is limited liability. Limited liability means that your personal assets are protected from the business’s debts and liabilities. A person who sues the business cannot take personal assets if you have limited liability. Another advantage is the ability to issue stock to raise capital for your business. However, corporations have some requirements under state corporate laws such as holding annual meetings. A corporation also has perpetual existence and can be sold or transferred to other business owners.

  Forming a limited liability company (LLC) also provides limited liability protection. There are fewer formalities with an LLC. However, you cannot sell shares of stock to raise money.

  A sole proprietorship or partnership does not provide limited liability protection.

  Read this article for a more in-depth analysis of the key differences between corporations and LLCs.

  Corporate Tax Rates and Personal Income Tax

  You may want to know how the type of business structure you have will affect your taxes. A corporation’s default status is a C-corporation. A business owner pays corporate income taxes on corporate profits. Then when the owner receives a corporate dividend, they are taxed again resulting in double taxation. However, a business owner may elect for S-corporation status to allow the business owner to report their share of corporate profits on their personal tax return to avoid double taxation.

  Forming a Corporation

  There are many steps to forming a corporation. One step to forming a corporation is filing articles of incorporation with the Secretary of State (or other agency).

  The articles of incorporation should include the business name, business address, and name and address of the registered agent. You will also need corporate bylaws. These documents may include the process for creating a board of directors.

  There are other duties after you form a corporation. There is a corporate structure, and you must have annual meetings and file annual or biennial reports with the Secretary of State.

  Commonly Asked Questions

  Does It Cost Money to Form a Corporation?

  Yes. There is a filing fee for the articles of incorporation. The filing fee is different from state to state. You may have other costs, too. For example, you might decide to hire a service to be your registered agent, or you might need to file a DBA name. There are separate fees for such services.

  Does a Small Business Need To Be Incorporated?

  You’re probably concerned about costs if you are starting up a small business. Is forming a corporation worth the expense? Consider the risk of personal liability that you may have and what your objectives are such a having stockholders in your business.

  A local business attorney can help you determine what type of corporation or business entity is right for you. Looking to start your own business? Use our trusted partner, LegalZoom to get a legal business entity set up in minutes.

  Related Resources

  • Pros and Cons: Why Form a Corporation

  • Small Business Corporation FAQ

  • Learn More About Corporations