C-corp shareholders are also taxed on the dividends they receive from the company, and they receive personal liability protection from business debts and litigation. Ownership for this type of corporation is divided based on stocks, which can be easily bought or sold. A C-corp can raise capital by selling shares of stock, making this a common business entity type for large companies. The advantages and disadvantages of a corporation must be considered before you incorporate your business.

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• If you plan on doing business under a name other than your corporation’s official name, you will also need to register a DBA name.
• Although some corporations, like C corporations (C-corps), are subject to double taxation, other corporation structures, such as S corporations (S-corps), may give you tax benefits depending on how their income is distributed.
• The shares of ownership or interest of a corporation can be transferred from one owner to another owner.
• In the Commonwealth of Massachusetts, the formation document is known as the “Articles of Organization”.
• They’d have to come up with the money, even if it means using personal savings or selling an asset, such as a house or car.
• The right structure will protect you from liability, ensure maximum tax advantages, and position you for success.

An S corp is a pass through entity where the business profits go to your personal tax return, which helps you avoid paying the 21 percent corporate tax rate on top of your personal income tax. Additionally, an S corp allows you to put yourself on the company payroll, which in turn means you only need to pay self employment tax on the portion of your business income that you claim as personal wages. For business owners running a brick-and-mortar business, like a restaurant or retail venue—or even someone offering consulting services, an S corp makes excellent sense. As a result, many sole proprietors may decide to incorporate as another entity formation, like an S Corp, to ensure peace of mind in knowing they have liability protection.

File Articles of Incorporation

In return, you’ll be able to operate and present your business as an actual corporation, which can go a long way in terms of building confidence with consumers, investors, and  B2B relationships. You cannot dissolve a corporation with this structure until it is intentionally liquidated. Even the sale of shares in the company does not trigger a corporate dissolution; it just means that the ownership has been transferred. A private corporation has a centralized group of investors that have limited options for transferring or selling their shares.

• For business owners running a brick-and-mortar business, like a restaurant or retail venue—or even someone offering consulting services, an S corp makes excellent sense.
• The drawback of this is that filing fees can vary from state to state, so forming your corporation in certain states may be more expensive than in others.
• The advantages and disadvantages of a corporation must be considered before you incorporate your business.
• However, there is an important caveat to consider when forming an S Corp.
• It is formed by filing articles of incorporation with the appropriate state authority.

What Tax Form Does an S Corp Fill Out?

An S-corp is a specific tax designation governed by the tax code’s subchapter “S”—where it gets its name. An LLC or a corporation may elect “S” status if it meets the requirements laid out in the subchapter, the majority of which the advantages of forming a corporation for an employee may be deal with limits on shareholders and stock. The defining feature of an S-corp is its “pass-through” tax structure. Instead, corporate income, losses, deductions and credits pass through to shareholders for federal tax purposes.

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One of the key advantages of forming a corporation is the ability to raise capital by issuing stocks or bonds. This allows corporations to attract investment from a wide range of sources, including individual investors, institutional investors, and venture capitalists. Additionally, corporations have perpetual existence, meaning that the business can continue to operate even if the original owners or shareholders leave or pass away.

How do corporations work?

• Another possibility to consider is that a business can experience a change of ownership, either fractionally or entirely.
• You must have unanimous shareholder consent and meet the corporation and shareholder requirements outlined above to become an S-corporation.
• A corporation is a separate legal business entity created under state laws by an owner or group of owners who become initial shareholders.
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• However, a sole proprietorship offers simplicity and flexibility, as there are fewer formalities and regulations to follow.
• For most small business owners, a C corporation is not always the most advantageous business structure.

For example, if an owner wants to leave a company, they can simply sell off their stocks. Similarly, if an owner dies, their ownership stocks can easily transfer to someone else. Unlike a sole proprietorship, where the death of the owner proprietor ceases its existence, the death of a shareholder will not terminate the corporation. The shares of ownership or interest of a corporation can be transferred from one owner to another owner.

What Is a Domestic Liability Company and How Does It Work?

Unless you are a tax expert or an accountant, you may be banging your head into your desk after the first few pages. You can elect S-corp status by filing Form 2553 with the IRS as well as filing any forms required by your state or jurisdiction. You must have unanimous shareholder consent and meet the corporation and shareholder requirements outlined above to become an S-corporation. For instance, imagine a computer programmer and a web designer have teamed up to create an app that allows small businesses to issue rewards to customers. They have tested their app in a few cities, and they want to roll it out across the country. It’s time for this partnership to create a C corp to raise the money they need to get this done; especially if they’re already tapped out on angel investors.

Corporation ownership is based on the percentage of stock ownership, which offers much more flexibility than other entity types in terms of transferring ownership and perpetuating the business for the long term. The IRS offers all the fine print on eligibility in its Instructions for Form 2553. Before making any moves, business owners should seek out all relevant details about eligibility requirements and see how these stack up with the specifics of their businesses. If you think the advantages of an S-corp are worth it compared to an LLC but you are a small business with limited experience in navigating the complexities of corporate tax law, you should consider hiring a tax professional. The current version of Form 1120S, which you are required to file with the IRS, is 47 pages long.

Draft a Shareholders’ Agreement

A company incorporated as an S Corporation will not pay income taxes. Instead, income, deductions, credits, and losses pass through to the owners. Subsequently, the owners will be responsible for reporting the taxable activity of the company.