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 protection for their personal assets.
• The type of business entity that you have affects the taxes on profits.
• You will need to file articles of incorporation and make 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 creditors. A person who sues the business cannot take personal assets if you have limited liability.

Forming a limited liability company (LLC) would also protect your personal assets. However, starting a corporation might be a better choice if you want to issue stock. Limited liability is not a feature of a sole proprietorship or partnership.

Corporate Tax Rates and Personal Income Tax

You may want to know how the type of business structure you have will affect your taxes. With a corporation, the Internal Revenue Service (IRS) taxes the business itself. Double taxation can happen if an owner gets a dividend, which is also taxed. However, there is a type of corporation that can solve the problem of double taxation. The IRS can tax a corporation as an S-corporation (S-corp). People who do not work for the corporation can use the S-corp status to avoid double taxation.

In a sole proprietorship or LLC, the IRS does not tax the business itself. Owners of a sole proprietorship or LLC have profits on their personal tax returns.

Forming a Corporation

You're interested in forming a corporation, but you want to know what you will have to do. 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 show the business name, address, and name 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 meetings each year and report on what is decided in those meetings.

Commonly Asked Questions

Does It Cost Money to Form a Corporation?

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 with other types of business entities. A corporation is a separate legal entity and offers you protection. Also, consider if you want to be able to have stockholders in your business.

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Related Resources

• Pros and Cons: Why Form a Corporation
• Small Business Corporation FAQ
• Learn More About Corporations