Do you have a business, or have you been working on a business idea? Do you think it’s time to take the next step? Is it time to go corporate?If you are thinking about going corporate make sure you understand what you are creating. A corporation is different from a sole proprietorship, general partnership, and even an LLC. What makes it special?
That’s what makes it special. See when you create a corporation you create a new entity. A new person in many respects. It can grow bigger than you. It must pay it’s own taxes and debts. It is judged and looked at separately from it’s creator. In fact federal and state laws considers a corporation a “legal person”. Which sounds a little odd but if you think about it, it makes a lot of sense. It has it’s own bank accounts, it’s own credit score, it’s own tax id number, and even it’s own belongings.
By being it’s own entity it creates a huge benefit for the owners or shareholders. This benefit is called the corporate veil or shield.
The Corporate Veil – Shielded from Company Debt and Liabilities
A big reason why entrepreneurs chose to start a corporation or LLC is because of the personal liability protection they get from corporate form of company. This stands in contrast to owning a sole proprietorship or general partnership. This implies that creditors can’t go after the creator, owners, nor shareholder for company debts they are owed
To be exact there are actually two types of corporations as far as taxes are concerned there is the “C” corp and there is the “S” corp. The “S” corp is much like an LLC in many ways and is a one person corp typically with pass through taxes and all. Thats not want I want to focus on here. I want to focus on the big “C” corp.
The Birth of a Corporation
To create a corporation you must file originatinating papers typically called the “Articles of Incorporation” and pay the corporate prep fees to the state. Once this is complete a corporation is born and starts an independent life, separate from its creators and owners.
Technically one person can usually start a corporation on their lonesome. However that person will have many hats because corporations need directors and officers.
Necessary Corporate Positions
- President – CEO
The corporation also needs at least one shareholder.
Corporate Tax Benefits to Owners
One of the great advantages that a corporation has over other forms of businesses such as a sole proprietor or general partnership is that the owner is only taxed on the income paid to him from the corporation. This is in contrast to a sole proprietor utilizing the pass through method. He is taxed on all company income whether it remains in the company checking or savings account or if its paid to him. In contrast a corporation owner won’t be personally taxed on money that stays in the business. This also means that two separate tax rates are applied. The corporation has it’s tax rate and the shareholder has their personal tax rate. So it can be smart to keep money in the business because the corporate tax rate is often smaller than the tax rate of a wealthy individual.
Managing a corporate entity is a little bit more involved than say an LLC or a Sole proprietorship. To start a corporation is managed by directors and officers and owned by shareholders. Documented meeting called minutes must be held every year, this is the law. A corporation must follow the states particular guidelines. This involves preparing formal records documenting decisions and actions of the corporation. The Board of directors typically must appoint a CEO, treasurer, and secretary at the very least. However in theory the board of directors, and appointed officers could all be the same person. So it can get a bit silly.
Capital Structure – Understanding Stock
Ownership of a corporation manifests through shares or stock of the company. Shares can be sold to raise money, paid as compensation, and used in big purchases such as an “all stock take over” where a corporation outright buys another company by issuing shares to the sellers of the said company. If you think about it, some of the biggest purchases this earth has ever seen was paid for with nothing more then spread sheet money. Many companies such as “Google” use new company shares as a major portion of their employee offerings and compensation package. It’s important to keep in mind that each new share issued makes every other share go down in value proportionally.
Employee Corporate Benefits
Corporations are able to do some things that other business entities are not able to do such as offering group term life and medical reimbursement plans, discounted stock purchases, and stock options. These can be great incentive programs and are often received by employees tax free and then expensed by the company. Not a bad deal.