The regular, or “C” corporation is the most complex of the business structures. It is a distinct legal entity apart from the shareholders who own it. Formed under the requirements of the state in which it will do business, a corporation limits its owners’ liability to their investment in the company. While personal assets are generally not at risk, the corporate form doesn’t provide complete protection where personal services are involved. A doctor, for example, cannot avoid malpractice liability simply by incorporating. Nor is liability limited to a shareholder’s investment if the shareholder personally guarantees a corporate debt as is often the case in a closely held corporation.
Ownership interest in a corporation is easy to transfer via the sale or transfer of stock, and the corporation has relative stability and permanence. A business operating in the corporate form may find it easier to raise capital because it can do so by issuing stock and selling bonds.
If you set up a corporation and are employed by it, the corporation must withhold and pay payroll taxes on your wages.
A corporation files its own tax return (Form 1120) and pays its own income tax. Therein lies the major drawback to the corporate form, often referred to as double taxation. Business profits may be taxed twice: once at the corporate level and again at the shareholder level when profits after tax are paid out as dividends or a liquidating distribution.
The corporate form allows for more fringe benefits, deductible by the corporation and tax-free to employees (including shareholder employees).
Corporations often find it advantageous to set up:
- Pension Plan
- Profit-Sharing Plan
A major drawback to the corporate form is complexity of rules and regulations governing corporate operations and the tax laws.