5 Important Things to Know about Setting up Your Corporation
Business owners of all types need to familiarize themselves with the concept of incorporating. No matter what kind of business you undertake or the service you provide, there are several significant benefits to becoming a corporation. Let’s look at some of the important things to know about setting up a corporation.
Exactly What is a Corporation
A corporation is a business structure. When the owners of a company incorporate, they are establishing their business as a separate legal entity. The act of incorporation gives the owner significant personal legal protection. This is because once incorporated, a company enjoys the distinction of “corporate personhood.” The corporation is the entity that subsequently enters into contracts, borrows money, and goes to court. As such, the owners cannot be personally held liable for the corporation’s liabilities and debts.
Business Structure of Corporations
There is a two-level structure to most corporations:
Ownership level: shareholders are the owners of the corporation, whether private or public.
Active management level: the shareholders usually elect a board of directors, who in turn are responsible for the selection of corporate officers, which would include titles such as:
- Chief Executive Officer (CEO)
- Chief Financial Officer (CFO)
In smaller corporations, shareholders often take on the roles of corporate officers; this is usually not the case with larger corporations.
The Two Most Common Types of Corporation
Although there are several types of corporation designations, by far the two most common are:
C Corporation: this is the most basic form of corporation. C corporations can have an unlimited number of shareholders, and shares can be traded publicly, although this is not mandatory. They can also be privately held, with the shareholders being the owners.
S Corporation: rather than a business structure, an S Corp is a form of tax status. The main advantage is that the owners can pass through the income the business generates onto their personal tax return. This allows them to avoid double taxation, a significant benefit.
Other Types of Business Entities
Apart from C Corporations and S Corporations, there are other entity types that may apply to certain types of businesses. These include:
- Professional corporation
- Limited liability company
- Non-profit corporation
- Public benefit corporation
A lawyer will tell you if any of these types of entities apply in your specific situation and the advantages of being set up in a particular way.
Benefits of Incorporating Your Business
Probably the single greatest benefit to forming a corporation is that it limits your personal liability. Having the distinction of corporate personhood means that in the event of any issues down the road, the shareholders are not personally liable for any debts (their personal assets cannot be seized, for example).
There are also potentially significant tax advantages to incorporating your company. The aforementioned pass-through taxation feature for S corporations is just one of them. There are also tax deductions available to corporations that do not apply to business entities such as sole proprietorships and partnerships.
We’d be happy to answer any questions you may have about forming a corporation. Contact our team to learn more.