Corporations

A corporation also requires a formal business structure. A corporation is formed by filing articles of incorporation with the Department of State in the state where the business is located. The form identifies the name of the business, its address, its purpose, and the person or persons forming the business.

The individual or individuals that form a corporation are called shareholders; they own stock in the business. A corporation is required to have bylaws, which describe how the business will be run, how decisions will be made, how profits and losses will be shared, and how shareholders could be removed from the business.

A corporation provides the most liability protection; shareholders’ liability is limited to the assets of the corporation. Their personal assets are not at risk unless they act inappropriately (for example, by intentionally deceiving a customer). A corporation will still want to have business liability insurance to defend itself and pay claims—if the assets of the corporation are needed to settle a claim, the business may not be able to continue, and, while the personal assets are protected, the business (and, thus, the shareholders’ livelihood) would no longer exist.

A corporation is subject to a two-tier tax structure, which occasionally makes it an unpopular business option. The corporation itself files a tax return and is taxed on its profits. Then, when the profits are passed on to the shareholders as income, they are again taxed (this time personally to each shareholder).

The kind of corporation we have described so far is known as a C corporation. An S corporation results from a corporation electing to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code. An S corporation works in a similar manner as a C corporation, but an S corporation must meet the following requirements:

• It must either be a domestic corporation or limited liability company.
• It must have only one class of stock (whereas a C corporation can have more than one).
• It must not have more than 100 shareholders. 
• Profits and losses must be allocated to shareholders proportionately to their interest in the business.

S corporations bypass the double taxation of C corporations by reporting the entire corporation income on the shareholders' personal tax returns. Thus, like a partnership, an S corporation issues Schedule K-1 forms to the shareholders to report profits or losses.

The level of danger inherent in a business's purpose would determine which form it should take. For example, a dress maker may not need a lot of liability protection because the most likely issue he or she would face is a customer unhappy with the dress; the dress maker can remake the garment or offer a discount and likely work out the issue. However, if you were in the construction business and building homes, there would be greater liability if the structure were bad or you used low-quality materials. There could be large losses or larger claims made against your business, so you would want to choose a form that offers the most liability protection. C corporations are less popular because of their double taxation, but if your business grew to a point where you  could go public and issue stock, you might register as a C corporation so that you could issue different classes of stock for the general public and for those who started the business. (This would affect each group's right to have a say in how the business is run.)