Forming a Corporation

Is forming a corporation right for your business? What is a corporation?

A corporation is a separate entity that operates independently from the person/ people who formed it. It even has the same legal rights as a person; it has it’s own social security number, it can own assets and it can sue people as well as be sued, it can even keep operating after you are long gone. Many entrepreneurs are attracted to forming a Corporation because of the benefit of limited liability. Having limited liability means that you only risk the money you put into the business, not your personal money or assets. This means if someone decides to sue your business, you personally will not be liable for any debts encountered assuming you didn‘t conduct any criminal or negligent acts. The money or assets will be taken from your corporation instead. If there’s not enough money and assets in the corporation to cover the costs then that’s too bad for the collector.

There are two types of corporations; C corporation and S Corporations. The main difference between the two is the way they are taxed. C corporations are subject to double taxation which can mean huge cuts in your profits. C corporations are taxed in the corporate level and after being distributed to the shareholders they are taxed again. S corporations are only taxed at the shareholder level.

Advantages

  • You can sell shares to raise money for your business
  • You can easily transfer ownership (by selling shares)
  • Limited Liability
  • Better fringe benefits

Disadvantages

  • Selling stocks means selling a percentage of ownership. For example if you sell 20% of the shares of stocks in your corporation, that stock holder will have 20% ownership of the corporation.
  • C Corporations are subject to double taxation
  • Increased paperwork
  • Forming a corporation is more complicated and expensive
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