A corporation is a legal entity that is separate from its owners. This means that the corporation can own property, enter into contracts, and sue and be sued in its own name. The owners of a corporation are called shareholders, and they have limited liability. This means that they are not personally liable for the debts and obligations of the corporation.
Corporations are created by filing articles of incorporation with the state. The articles of incorporation must include the name of the corporation, its purpose, its registered agent, and its initial capitalization. Once the articles of incorporation are filed, the corporation is officially formed.
Corporations can be either C corporations or S corporations. C corporations are taxed separately from their shareholders. This means that the corporation pays taxes on its income, and the shareholders pay taxes on any dividends that they receive from the corporation. S corporations are not taxed separately from their shareholders. This means that the income of the corporation is passed through to the shareholders, and the shareholders pay taxes on the income on their individual tax returns.
Corporations have a number of advantages over other types of businesses, including:
- Limited liability: The owners of a corporation are not personally liable for the debts and obligations of the corporation.
- Perpetual life: A corporation can exist indefinitely, even if the original shareholders die or sell their shares.
- Ability to raise capital: Corporations can raise capital by issuing shares of stock or by borrowing money.
- Flexibility: Corporations can be structured in a variety of ways to meet the needs of the owners.
However, corporations also have some disadvantages, including:
- Double taxation: C corporations are taxed twice, once at the corporate level and again at the shareholder level.
- Complex regulations: Corporations are subject to a number of complex regulations, which can be costly to comply with.
- Difficulty of formation: It can be difficult and time-consuming to form a corporation.
Overall, corporations can be a good choice for businesses that need to raise capital or that need to have limited liability. However, it is important to weigh the advantages and disadvantages of corporations before making a decision.