Corporation

A Corporation is a formal legal business structure that exists entirely separate from its owners. Because the law views a corporation as a distinct “person,” the corporation itself can enter into contracts, loan and borrow money, sue and be sued, hire employees, and pay taxes.

This strict legal separation provides the highest level of personal liability protection for its owners (called shareholders). If the corporation faces a lawsuit or accrues debt, the shareholders’ personal assets are generally protected.

How a Corporation is Structured

Unlike an LLC, which offers flexible management, a corporation is required by law to follow a rigid corporate structure:

1. Shareholders: The individuals or entities that own the company by holding shares of stock.
2. Board of Directors: Elected by the shareholders, the board makes high-level, strategic decisions and oversees the overall direction of the company.
3. Corporate Officers: Appointed by the board of directors, officers (like the CEO, President, or Treasurer) manage the day-to-day operations of the business.

Corporations must also adhere to strict record-keeping rules, including holding annual shareholder meetings, keeping detailed corporate minutes, and issuing stock certificates.

C-Corporation vs. S-Corporation

When you form a corporation at the state level, it is automatically classified as a C-Corporation by the IRS for tax purposes. However, eligible corporations can choose to apply for S-Corporation tax status.

The C-Corporation (C-Corp)

The C-Corp is the standard corporate tax structure. It is subject to “double taxation.” First, the corporation pays a flat federal corporate income tax on its net profit. Then, when the remaining profits are distributed to shareholders as dividends, the shareholders pay personal income tax on that money. C-Corps have no limit on the number or type of shareholders, making them the required structure for publicly traded companies or businesses seeking venture capital.

The S-Corporation (S-Corp)

An S-Corp is a tax election designed to avoid double taxation. Under S-Corp status, the corporation itself does not pay federal income tax. Instead, the profits and losses “pass through” directly to the shareholders’ personal tax returns. However, S-Corps face strict IRS limitations: they cannot have more than 100 shareholders, all shareholders must be U.S. citizens or residents, and they can only issue one class of stock.

Why Choose a Corporation?

Entrepreneurs typically choose the corporate structure when they plan to raise significant capital from outside investors, plan to issue equity (stock options) to employees, or have long-term goals of taking the company public (IPO).