• by Susan MacDowell

• Although there are several forms of corporations, when most people use the word "corporation" they are referring to a C corporation. The term comes from the chapter of the IRS code (Title 26, Subtitle 1, Article A, Subchapter C) that describes the treatment of corporate distributions.Cornell University: Subchapter C — Corporate Distributions and Adjustments The C corporation is a separate legal entity from its owners.Cool Lawyer: C Corporation Unless the owners elect subchapter S status, a corporation will be considered a C corporation for tax purposes.Cornell University: Section 1361: S Corporation Defined

• A corporation is a business entity whose owners, referred to as shareholders, have contributed money or property in exchange for shares of ownership (capital stock).IRS: Corporations

1. The corporation is an independent legal "person" separate from its shareholders, and has the ability to enter into contracts, sue and be sued, and be taxed.SBA: Choose a Structure
2. A corporation conducts business, realizes income or loss and pays taxes.IRS: Corporations
3. When profits are distributed to shareholders, the shareholders pay taxes again on those profits.IRS: Corporations

• For tax purposes, corporations are treated as C corporations unless they elect to be treated as S corporations. The S corporation election enables the company to be taxed the same way a partnership or sole proprietorship is taxed, with profits and losses flowing through to the tax returns of the owners, without being subject to tax at the corporate level.Small Business Administration: Choose a Structure

• There are both advantages and disadvantages to this form of business ownership. A professional advisor can help you determine if a C corporation is the right structure for your business.

• As a legal entity separate from its owners, a C corporation has a number of advantages.

1. Continuity
   • Unlike a sole proprietorship or a partnership, a corporation survives its owners. Shares can be sold or exchanged without dissolving the company.Small Business Administration: Choose a Structure
2. Limited liability
   1. Shareholders who are not officers or directors only risk their investment in the company. Their personal assets cannot be seized or attached to satisfy corporate debts.Small Business Administration: Choose a Structure Expert Law: The Corporation (August 2004)
   2. Shareholders who are officers or directors can be held liable for certain actions, such as the failure to withhold employment taxes when required.Small Business Administration: Choose a Structure
3. Ability to raise capital through issuance of shares
   1. Corporations are not limited to debt financing; they can raise additional funds through the sale of stock.Small Business Administration: Choose a Structure
   2. Shares can be issued privately, or the company can become a public corporation with its shares being offered in the stock market.Expert Law: The Corporation(August 2004)
4. Tax benefits
   1. A corporation can take the same deductions as a sole proprietorship, and is also entitled to deduct certain additional expenses, such as the cost of benefits that are provided to owners who are also employees.IRS: Corporations Expert Law: The Corporation (August 2004) Small Business Administration: Choose a Structure
   2. A C corporation can carry corporate losses forward to future tax years.Expert Law: The Corporation(August 2004)
   3. Depending on personal circumstances, the corporate tax rate may be lower than an owner's personal tax rate.Expert Law: The Corporation(August 2004)
5. Ownership
   1. The restrictions on ownership that an S corporation is subject to do not apply to a C corp.Expert Law: The Corporation(August 2004)
   2. There is no limit on the number of shareholders the corporation may have.Expert Law: The Corporation(August 2004)
   3. There is no U.S. citizenship or residency requirement for shareholders.Expert Law: The Corporation(August 2004)

• While there are a number of advantages to a C corporation, it's not the right form of ownership for every business.

1. Tax disadvantages
   1. When profits are distributed to shareholders, the shareholders pay taxes on dividends. Since the profits were previously taxed in the year they were earned by the corporation, and the corporation does not receive a tax deduction from the dividend payment, it is said that these profits are subject to double taxation.IRS: Corporations Small Business Administration: Choose a Structure Expert Law: The Corporation(August 2004)
   2. Losses from a sole proprietorship, an LLC, or an S corporation can provide a tax benefit to the owner in the year they occur; losses incurred by a C corporation cannot be deducted by shareholders.IRS: Corporations Expert Law: The Corporation(August 2004)
2. Cost to create
   • A corporation is the most expensive and time-consuming business entity to establish.Small Business Administration: Choose a Structure
3. Government regulation
   • Corporations generally must endure more annual filing requirements, and are subject to more regulations than other forms of business.Small Business Administration: Choose a Structure

• Corporations are chartered by individual states, so the first step in the incorporation process is selecting the state in which to incorporate.Small Business Administration: Choose a Structure

1. For most businesses, it is best to incorporate in the state where the owner lives, as that is usually where most of the business will be done.Find Law: State Guide: Corporations Offices FindLaw: Forming a Corporation: Where to Incorporate
2. If you do business outside of the state where the business is incorporated, you'll need to register as a "foreign corporation" in those states.Find Law: State Guide: Corporations Offices FindLaw: Forming a Corporation: Where to Incorporate
   • This generally entails filing a Certificate of Authority for Foreign Corporation form with the secretary of state of each state you do business in; filing fees usually apply.FindLaw: Forming a Corporation: Where to Incorporate

• Delaware has a reputation as a business-friendly state with low costs of incorporation, few information disclosure laws, and low tax rates for businesses operating within the state. As a result, many large public companies with operations in many states, including half of the companies registered on the New York Stock Exchange, have chosen to incorporate in Delaware.FindLaw: Forming a Corporation: Where to Incorporate Business Week: Does It Matter Where You Incorporate?

Delaware may not be the best option for smaller companies whose operations are based outside of the state, however:

1. You'll need to register as a foreign corporation with any state in which you do business. If your headquarters is not in Delaware, this means you'll need to register as a foreign corporation in your home state.FindLaw: Forming a Corporation: Where to Incorporate
2. Delaware tax benefits only apply to the portion of your business that relates to Delaware.FindLaw: Forming a Corporation: Where to Incorporate

• Incorporating is generally a matter of filing articles of incorporation with the secretary of state in the jurisdiction you'll be incorporating in. Each state has specific policies, procedures, and requirements that need to be complied with when filing. These can generally be obtained from the secretary of state in the state you're interested in.FindLaw: Forming a Corporation: Where to Incorporate

However, regardless of where you choose to incorporate, there are some common elements you'll need to address when setting up your company.

1. Hire an accountant and/or attorney.
   • While not required, retaining the services of a professional accountant or attorney will help ensure you make the right decisions as you work through the process of incorporation.
2. Select a corporate name.Business Week: Once You've Decided to Incorporate
   1. The name should be original, and not already on file with any of the states you'll be doing business in.
   2. You may also wish to check with your county clerk's office to see if a sole proprietor is using the name. While this would not preclude you from using the name for your corporation, you might want to consider selecting an alternate to avoid confusion.University of Nevada Small Business Development Center: FAQs
   3. The U.S. Patent and Trademark Office has a searchable database you can use to determine if the name you've selected has been trademarked by someone else.U.S. Patent and Trademark Office: Search Trademarks Now University of Nevada Small Business Development Center: FAQs
3. Decide on the amount of the initial capital investment and issue stock to the shareholders.Business Week: Once You've Decided to Incorporate
4. Appoint directors and officers.Business Week: Once You've Decided to Incorporate
   1. Officers are appointed by the directors, who represent the shareholders.
   2. Officers are responsible for the day-to-day operations of the company, while directors set long-term strategies and policies.Small Business Administration: Choose a Structure
   3. A small business may have one shareholder who is also the only officer and the only director. Larger companies may have several corporate officers and a board of directors.FindLaw: Directors to Shareholders
   4. The first action of the directors should be to adopt board resolutions regarding corporate organization.Business Week: Once You've Decided to Incorporate
   5. Appoint a representative for formal service of legal documents.Business Week: Once You've Decided to Incorporate This may be an officer, board member, attorney, or other agent who has agreed to accept service.
5. Make any necessary tax filings and elections.
   1. Once you've incorporated, you'll need to obtain a Tax ID number from the IRS.IRS: Employer ID Numbers (EINs)
   2. Your tax advisor can advise you of any additional filings that are required in your specific circumstances.
6. Establish a corporate bank account and apply for required local licenses and permits using the registered name of the organization.Business Week: Once You've Decided to Incorporate

• After you've completed the process of setting up your company, you'll want to make sure it stays in good standing with all of the jurisdictions it operates in. Keep good records, hold regular shareholder meetings, and file all required reports on a timely basis.