ELIGIBILITY HOW TO BE A CORPORATION WHY BE A CORPORATION DISADVANTAGES TAX REPORTING & FORMS

A corporation can be operated as a non-profit or profitable organization and may be formed in any state. The corporation does not have to be incorporated in the state in which it plans to do business. A corporation is owned by its shareholders which do not have any control over the day-to-day operations of the business directly. Instead, the shareholders are responsible for electing directors of the corporation that oversee the operation of the corporation and make major corporate decisions, such as appointing the officers of the corporation. The directors meet at least annually to assess the past performance of the corporation and to plan for the future. The officers of the corporation are responsible for the day-to-day operations of the company.

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Forming a corporation is more complicated and more expensive than forming a sole proprietorship or a simple partnership, but is not as difficult as many people perceive it to be. There are several important steps that need to be taken in order to correctly form a corporation.

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1. Earnings can be retained- the corporation can retain its earnings for future investment or dividends.
2. Limited liability- corporate shareholders are generally not responsible for the debts and obligations of the corporation.
3. Ease of formation- forming a corporation is generally a mechanical process dictated by state law.
4. Taxes- corporations are taxed at lower rates on their first $75,000 compared to sole proprietorships, partnerships, limited liability companies, or S corporations.
5. Salaries- not all of the corporate profits will be subject to double taxation. The operators of the corporation may withdraw reasonable salaries which are deductible by the corporation. These salaries are therefore free from tax at the corporate level (though the recipients will have to pay income tax, and both recipients and the business will have to pay FICA tax, on them). In some cases, the entire net profit may be offset by salaries to the owners, so that no corporate income tax is due.
6. Flexibility- corporate structure can make it much easier to obtain investment capital and to pass the business down to the owner's children or other successors upon death or retirement.

The main advantage of a corporation is the liability protection it provides its owners or shareholders. Liability is limited because the corporation is a legal entity that is separate from its shareholder owners. As a separate legal entity, the corporation has a perpetual life. Also, as a separate legal entity, the corporation is liable for its own debts and can only be held liable to the extent of the corporation's assets. The assets of a shareholder are personal assets that cannot be reached by corporate creditors, unless the veil of corporate limited liability is pierced. The corporate veil is pierced when the required corporate formalities, such as having annual directors' and shareholders' meetings are not followed.

Another advantage is that some states allow a type of corporation called a close corporation, which may appeal to small business owners. A close corporation is managed by its shareholders. Directors do not have to be elected and officers do not have to be appointed. In addition, the laws usually streamline some of the other meeting and voting requirements. The intent is to relieve some of the administrative burdens to the small corporation owner. If a close corporation appeals to you, consult an attorney in the state you are incorporating in to determine if a close corporation statute exists.

Protective measures can be taken to insure the shareholders of a corporation with two or more shareholders continued success even if one of the shareholders (corporate officer) withdraws of dies. This type of insurance is called "key man" life insurance and the purchase of it may be necessary to insure the existence of the corporation. The beneficiaries of the policy are the organization or the organization members. The corporate form also allows agreements such as a buy/sell agreement that specifies how the value of a shareholder's interest will be determined if a shareholder wants to leave the corporation.

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1. Formalities required - a corporation must follow certain formalities dictated by law to maintain its corporate status. These formalities include: issuing stock certificates to the shareholders, holding annual meetings, recording the minutes of the meetings in the corporate register, and electing directors or ratifying the status of existing directors.
2. Administration - the administration of a corporation is complicated since certain federal and state tax procedures are necessary and certain accounting methods may not be readily available.
3. Cost - the cost to incorporate an entity can be considerable. Also, the administrative costs of accounting and tax preparation may be expensive due to the complexity of complying with corporate laws.
4. Taxes - a double tax may be due; the corporation may owe a capital gains tax on liquidation and the individual shareholders also must recognize a gain upon the transfer of proceeds from the corporate entity to the individual recipient. Additionally, a corporation is required to pay their federal income tax liability for the year in four installments.

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A corporation is taxed as a separate entity under the tax laws. Income earned by a corporation is normally taxed at the corporate level, and the corporation must file a FORM 1120 each year to report this income. After the corporate income tax is paid on the business income, any distributions made to stockholders are taxed again at the stockholders' tax rates as dividends. The tax rate for a corporation ranges from 15% to 39% depending on the bracket in which the corporation's taxable income falls

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