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What is a corporation? (New Business Checklist)

The corporation is fundamentally different from other types of businesses. Instead of having a distinct owner, a corporation is owned by at least one shareholder and run by the shareholders and at least one director. Because the corporation itself is considered a legally separate entity from the shareholders, the shareholders generally cannot be held personally responsible for the actions of the corporation. The other big advantage is that the corporate structure generally makes it easier to raise money. However, it is much more expensive and complicated to set up and manage a corporation. The other disadvantage is that corporate profits currently are generally taxed twice: once at the corporate level and once at the personal level (there is currently legislation in Congress that could affect this—check with an accountant for latest laws). Because this type of structure has so many implications, it is strongly recommended you consult an attorney and an accountant before incorporating.

There are two types of corporations, the regular C-Corporation and the S-Corporation. Unlike a C-Corporation where earnings are currently generally taxed at both the corporate and individual levels, earnings at an S-Corporation flow through to the individual and are only taxed at the individual shareholder level. In other words, if, as the owner of the business, you are the only shareholder, all earnings your S-Corporation makes will be taxed at your personal income tax rate. You can avoid being doubly taxed. On the downside, S-Corporations are limited to a smaller number of shareholders. If you want a structure that better supports large numbers of shareholders, you're better off organizing as a C-Corporation. It is strongly recommended that you consult an attorney or tax advisor before organizing an S-Corporation.

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