What is a corporation?
There are two types of corporations: C-Corporation (C Corp) and an S-Corporation (S Corp). We’ll discuss each of these in a minute, but first let’s outline the characteristics of corporations in general. Forming a corporation shields your personal assets from business liabilities as there is a complete separation between the two finances. It is allowable in all 50 states. There are international corporations as well with their own set of rules.
Corporations are owned by a group on individuals who work together to generate a profit. Each owner controls a percentage of the corporation based on the number of shares they own. If you intend on growing and adding outside investors, you need to form a corporation. There is great deal of paperwork required to incorporate, but the advantages as far as taxes, protection and growth opportunities may be worth it.
There are several types of corporate entities, but there are two that focus on profit. C-Corp or an S-Corp are the most common choices when setting up your business. It is important to do your homework or consult with an attorney or tax consultant in order to choose the best business formation structure for you.
Why use an online business formation service to start a corporation?
Online business formation service providers offer a fast and cost-effective solution to forming a business. These filing services and industry experts offer all the services you would need to start and run your business, such as preparation and filing of LLCs and corporations, business licenses, legal documents, compliance, EIN, and registered agent services, all in one place for an affordable price.
With the right online business filing service, forming your business is a quick, straightforward, and smooth process. All you need to do to get started is select one of the top business formation services above which will take you to their website. Then pick the business entity you are interested in, whether it be an LLC, s-corporation, or c-corporation, and enter the state you wish to register your business in. You will then be prompted to enter your desired business name, select the type of business package you want to proceed with and you’re all set.
Incorporating a business is no longer a complicated, lengthy, and expensive process when you leave it to these industry professionals to do the work for you.
C-Corporation
C-Corporation is great for businesses that sell products, have a storefront or have employees. If you ever want to go public in the future, this is the entity you should choose in order to have unlimited shareholders. Tax implications are key in choosing this entity. Businesses must pay a corporate income tax, and dividends are distributed at the individual level. Owners pay personal income tax on profits and healthcare premiums for your employees can be written off.
S-Corporation
S-Corporations are generally designed for smaller business entities. It works very similar to an LLC in protecting your personal assets, but you are able to pay yourself a salary from the company. Owners pay personal income tax on the profits and business income and loss is passed to the owners on tax returns. There can be no more than 100 shareholders so the entity will stay on the smaller side and have different management structure than a C-Corporation. Shareholders must also be US citizens or resident aliens.
Where should I file?
While you can file a corporation in any state you wish, bear in mind the extra fees and paperwork required when you file outside the state that you do business. You should consider picking the state where you live or have the most connection – where you own a house, where you have your driver’s license, or where you pay your state taxes. If your business is more complicated and you have offices in two states then you should consult on the right structure for your business.
Why incorporate?
We’ve mentioned some of the reasons to incorporate already, but let’s recap. All of the entities above shield you from levels of personal liability to a varying degree. LLC offers different levels of protection depending on whether you form as a partnership or corporation. Corporations offer a very high level of protection.
Corporations offer a perpetual existence and transfer of ownership. Many businesses are passed down to family members. If one of the owners dies, the corporation lives on.
Corporations have a certain level of prestige and credibility. Your customers might trust you more with an Inc or LLC after your name. Banks might more easily lend money according to your business structure as well. In addition, corporations have a clearer management structure and larger companies are obligated to report actions to a Board of Directors or shareholders which holds them more accountable for their decisions.
Tax implications
Taxes are paid where money is made. It doesn’t matter if you file your Corporation in Delaware or Texas, if you are doing business in your home state then taxes and state fees will be paid in in your home state. You also still need to pay fees in the state in which you filed your corporation as that is where you originally filed your paperwork.
If you decide that the right structure for you is LLC (Limited Liability Company) then check out our top picks for ‘Best LLC formation services‘.
Decision time
Deciding on your business structure is not a light decision. The purpose of your business, where you see it in the future and how many people you envision in the management structure, and where you do business are key considerations. For most businesses, starting and LLC or corporation in your home state is the right way to go. Even the best partnerships could use the protection of a management structure. Consulting a tax attorney or a business consultant is a great idea. Using a professional service to file all the necessary paperwork will ensure you complying with all federal, state and local regulations.