Corporation

A corporation is a completely separate legal entity that exists apart from those individual(s) who created it and carry on its operations. In a regular corporation (C corporation), the company itself is taxed on business profits. The owners pay individual income tax only on money they receive from the corporation as salary, bonuses, or dividends. These are the defining attributes of corporations in general and create numerous pros and cons.

S Corporation

Many entrepreneurs have two goals when choosing a structure for their business: protecting their personal assets from business and having business profits taxed on their individual tax returns. Some businesses can achieve these benefits by organizing as S corporations. An S corporation is a regular corporation that has elected “S corporation” tax status. Forming an S corporation lets you enjoy the limited liability of a corporate shareholder but pay income taxes as if you were a sole proprietor or a partner. In an S corporation, all business profits “pass through” to the owners, who report them on their personal tax returns (as in sole proprietorships, partnerships, and LLCs), the S corporation itself does not pay any income tax. However, about half a dozen states tax an S corporation like a regular corporation. The tax division of your state treasury department can tell you how S corporations are taxed in your state.

Advantages

Incorporating creates a distinct unit, allowing the corporation to buy and sell property in its own name, as well as sue and be sued in its own right. Since the corporation is legally separate from the individuals that comprise it, the business can continue to exist despite any changes behind the scenes—so a corporation can be sold or investors can enter/leave and the corporation will still exist. This is opposed to a sole proprietorship that cannot exist beyond its creator, or a partnership that will dissolve due to various general partner circumstances. Also, incorporating establishes a personal liability shield for the corporation’s shareholders, giving them limited responsibility with respect to any debts or obligations of the company. Depending on the type of corporation you become, there are a variety of possible tax advantages as well.

Disadvantages

Corporations have a more formal and costly structure than sole proprietorships or partnerships. This includes filing articles of incorporation with the state, selecting corporate officers, and creating and maintaining corporate records including bylaws, resolutions, and meeting minutes. There are also potential tax disadvantages, including the possibility of double-taxation (profits taxed as both corporate and individual), depending on the corporate format you choose and where you incorporate. However, these potential obstacles are often outweighed by the advantages of incorporating.

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