Business Corporations

Overview

A regular business corporation is a “for-profit” corporation that is a separate entity from its owners for both legal and tax purposes. It is formed at the state level with each state setting the requirements for formation. All business corporations have the same legal structure. The owners are called shareholders or stockholders are have very limited rights in the operation of the business. The shareholders elect the directors who make the broad policy decisions for the corporation and appoint the officers of the corporation. Every corporation must have a president, chief financial officer (or treasurer), and secretary.

In a small business corporation, one or two people often fill all positions as a shareholder, director and officer. All states allow a single person to form a corporation and be the sole shareholder, director and officer.

For tax purposes, a business corporation is classified as a C Corporation or an S Corporation. These designations do not describe a type of business corporation, just how it chooses to be taxed. There is no difference in the structure or limited liability protection between C and S Corporations. In a C Corporation, profits and losses are taxed or treated at the corporation level, while in an S Corporation the profits and losses “pass through” the corporation and are reported on the personal tax returns of the shareholders. A C Corporation is subject to double taxation on its profits, though in a small business corporation this can usually be avoided through the payment of salary or loans to shareholder-employees. C Corporations offer the advantage of providing certain employee benefits that are deductible to the corporation and not taxed to the employee. An S Corporation avoids double taxation and may allow shareholder-employees to reduce their obligation for self-employment (Medicare and Social Security) taxes.


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