Forming your business as a corporation (or “incorporating”) is a common practice for large and small businesses alike. The term comes from the Latin corpus, meaning “body.” In this context, it more specifically refers to a “body of people.” Therefore, a corporation is essentially a body (or group) of people who act together as a single entity.
The corporation is legally recognized as distinct from its owners. This provides many advantages to the business owners, the most important of which is limited liability. The owners are generally not held liable for the debts and obligations of the business. Other advantages of the corporate structure include
- If you also work in the business, you can receive certain fringe benefits with tax advantages, such as health insurance or pension plans.
- The corporation can maintain a continued existence as its own entity, if you decide to sell the business.
- The corporate structure makes it easier to raise capital to grow your business.
Incorporating your business also presents a more professional image. This is especially important as your business grows and expands.
“C Corporation” vs. “S Corporation”
Two common types of corporations are C Corporations and S Corporations (“C” and “S” refer to the respective subchapter of the section where they are found in the IRS code). Corporations are generally formed by default as C Corporations. To become an S Corporation, you must elect S status by filling out an additional form when you file.
Each type is similar in many respects. The main difference between the two is how they are treated for tax purposes. C Corporations are subject to what is known as “double taxation.” This means that the corporation is first taxed on profits at the corporate level. Then, when the shareholders receive dividends, they are taxed again on this income on their personal income taxes. S Corporation are “pass through” entities. The income is not taxed at the corporate level, but instead passes through to the shareholders and taxed as their personal income.
S Corporations also have limitations on the type and number of shareholders. For this reason, S status is often more appropriate for smaller businesses.
Certain types of professionals are not allowed to form a LLC or a Corporation. However, the Moscone-Knox Professional Corporation Act allows the formation of professional corporations by these licensed professional to provide their services. The list of authorized businesses allowed to incorporate in this way includes doctors, dentists, lawyers, acupuncturists, chiropractors, pharmacists, and accountants, among many others.
Professional corporations have different rules, such as only allowing other licensed professionals in the particular field to be shareholders. A professional corporation offers some limited liability protection (not from malpractice) and the ability to elect S Corporation status.
Helix Law Firm can help you incorporate your business
If you're thinking about forming a corporation, Helix Law Firm can help you make sure that's the right decision and get your corporation set up and ready for business.