If the sole proprietor or partnership doesn’t fit your new business, maybe the corporation will. Forming a corporation requires the filing of articles of incorporation in a state, usually with the secretary of state, and making an election with the IRS as to the type corporation you want to use for tax purposes. Corporations provide liability protection for its shareholders. In the eyes of civil law, corporations are entities just like you and I are. Since they are entities, they can be sued and have judgments levied against them. Only corporate assets can be used to satisfy those judgments. Assets of the shareholders are not available to settle corporate judgments. That is the general rule. Now, as Paul Harvey would say, for the rest of the story. If you form a corporation to limit your personal liability, you want to be sure that you function as a corporation. That means that you should do everything that a corporation is expected to do, think IBM, AT&T, and General Motors etc. You need to issue stock, hold board meetings, even if you’re the only member. Hopefully if you’re the only member, you’ll be able to pass whatever resolutions you submit to yourself. If you can’t then this may not the right form of business for you. You should also open a business checking account. Those are some of the things you should do. One thing you shouldn’t do is plan to hold a stockholders meeting in some exotic location and taking the whole family without talking to your tax advisor first. You might have a hard time explaining that one to our friends at the IRS. Even more difficult would be having them buy it. One choice you’ll have to make if you decide to incorporate is whether to elect the C Corp, S Corp or the Personal Corporation (PC.)
The C Corp files a tax return and pays taxes on its profits. It also accumulates and carries forward any losses it may have. The big disadvantage to the C Corp is that if the corporation has a profit and pays the tax on that profit and then distributes it to the shareholders as a dividends, the shareholders have to pay tax on the same income again.
The S Corp files a tax return but usually does not pay any tax on its profits. The profits, or loss, is passed along to the shareholders to report on their individual income tax return. The S Corp cannot
· have more than 100 shareholders.
· a shareholder that is not an individual (some exceptions)
· a shareholder that is a non-resident alien
· more than one class of stock
