TYPES OF CORPORATION
General Corporation
A general corporation, also known as a ¿C¿ corporation, is the most common corporate structure. A general corporation may have an unlimited number of stockholders. Consequently, it is usually chosen by those companies planning to have more than 30 stockholders or large public stock offerings. Since a corporation is a separate legal entity, a stockholder's personal liability is usually limited to the amount of investment in the corporation and no more.
Close Corporation
A close corporation is most appropriate for the individual starting a company alone or with a small number of people. There are a few significant differences between a general corporation and a close corporation. A close corporation limits stockholders to a maximum of 30. In addition, many close corporation statutes require that the directors of a close corporation must first offer the shares to existing stockholders before selling to new stockholders. Not all states recognize close corporations.
Subchapter S Corporation
A Subchapter S Corporation is a general corporation that has elected a special tax status with the IRS after the corporation has been formed. Subchapter S corporations are most appropriate for small business owners and entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners. When a general corporation makes a profit, it pays a federal corporate income tax on the profit. If the company also declares a dividend, the stockholders must report the dividend as personal income and pay more taxes. S Corporations avoid this "double taxation" (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the stockholders. For many small businesses, the S Corporation offers the best of both worlds, combining the tax advantages of a sole proprietorship or partnership with the limited liability and enduring life of a corporate structure.
S Corporation Restrictions
To elect S Corporation status, your corporation must meet specific guidelines.
1. All stockholders must be citizens or permanent residents of the United States.
2. The maximum number of stockholders for an S Corporation is 75.
3. If an S Corporation is held by an "electing small business trust," then all beneficiaries of the trust must be individuals, estates or charitable organizations. Interests in the trust cannot be purchased.
4. S Corporations may only issue one class of stock.
5. No more than 25 percent of the gross corporate income may be derived from passive income.
6. Not all domestic general business corporations are eligible for S Corporation Status.
Exclusions:
o a financial institution that is a bank
o an insurance company taxed under Subchapter L
o a Domestic International Sales Corporation (DISC)
o certain affiliated groups of corporations
For more detailed information about these changes and other aspects regarding S Corporation status, contact your accountant, attorney or local IRS office.
How to File as a Subchapter S Corporation
1. Form a general or close corporation in the state of your choice.
2. Obtain the formal consent of the corporation's stockholders and note this consent in your corporation's minutes.
3. Complete Form 2553, Election by a Small Business Corporation. The Company Corporation¿ can provide you with the IRS Form 2553 as part of your incorporation process. See our online order form to receive your IRS Form 2553 as part of the Complete package, or order it a la carte if you prefer.
Limited Liability Company (LLC)
The LLC is not a corporation, but it offers many of the same advantages. Many small business owners and entrepreneurs prefer LLC¿s because they combine the limited liability protection of a corporation with the "pass through"" taxation of a sole proprietorship or partnership.
· General Corporation
A general corporation, also known as a ¿C¿ corporation, is the most common corporate structure. A general corporation may have an unlimited number of stockholders. Consequently, it is usually chosen by those companies planning to have more than 30 stockholders or large public stock offerings. Since a corporation is a separate legal entity, a stockholder's personal liability is usually limited to the amount of investment in the corporation and no more.
Close Corporation
A close corporation is most appropriate for the individual starting a company alone or with a small number of people. There are a few significant differences between a general corporation and a close corporation. A close corporation limits stockholders to a maximum of 30. In addition, many close corporation statutes require that the directors of a close corporation must first offer the shares to existing stockholders before selling to new stockholders. Not all states recognize close corporations.
Subchapter S Corporation
A Subchapter S Corporation is a general corporation that has elected a special tax status with the IRS after the corporation has been formed. Subchapter S corporations are most appropriate for small business owners and entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners. When a general corporation makes a profit, it pays a federal corporate income tax on the profit. If the company also declares a dividend, the stockholders must report the dividend as personal income and pay more taxes. S Corporations avoid this "double taxation" (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the stockholders. For many small businesses, the S Corporation offers the best of both worlds, combining the tax advantages of a sole proprietorship or partnership with the limited liability and enduring life of a corporate structure.
S Corporation Restrictions
To elect S Corporation status, your corporation must meet specific guidelines.
1. All stockholders must be citizens or permanent residents of the United States.
2. The maximum number of stockholders for an S Corporation is 75.
3. If an S Corporation is held by an "electing small business trust," then all beneficiaries of the trust must be individuals, estates or charitable organizations. Interests in the trust cannot be purchased.
4. S Corporations may only issue one class of stock.
5. No more than 25 percent of the gross corporate income may be derived from passive income.
6. Not all domestic general business corporations are eligible for S Corporation Status.
Exclusions:
§ a financial institution that is a bank
§ an insurance company taxed under Subchapter L
§ a Domestic International Sales Corporation (DISC)
§ certain affiliated groups of corporations
For more detailed information about these changes and other aspects regarding S Corporation status, contact your accountant, attorney or local IRS office.
How to File as a Subchapter S Corporation
7. Form a general or close corporation in the state of your choice.
8. Obtain the formal consent of the corporation's stockholders and note this consent in your corporation's minutes.
9. Complete Form 2553, Election by a Small Business Corporation. The Company Corporation¿ can provide you with the IRS Form 2553 as part of your incorporation process. See our online order form to receive your IRS Form 2553 as part of the Complete package, or order it a la carte if you prefer.
Limited Liability Company (LLC)
The LLC is not a corporation, but it offers many of the same advantages. Many small business owners and entrepreneurs prefer LLC¿s because they combine the limited liability protection of a corporation with the "pass through"" taxation of a sole proprietorship or partnership.
o LLC¿s have additional advantages over corporations:
o LLC¿s allow greater flexibility in management and business organization.
o LLC¿s do not have the ownership restrictions of S Corporations, making them ideal business structures for foreign investors.
o LLC¿s accomplish these aims without the IRS' restrictions of an S Corporation.
LLC¿s are now available in all 50 states and Washington, D.C. If you have other questions regarding LLC¿s, be sure to speak with a qualified legal and/or financial advisor.
LLC¿s have additional advantages over corporations:
· LLC¿s allow greater flexibility in management and business organization.
· LLC¿s do not have the ownership restrictions of S Corporations, making them ideal business structures for foreign investors.
· LLC¿s accomplish these aims without the IRS' restrictions of an S Corporation.
LLC¿s are now available in all 50 states and Washington, D.C. If you have other questions regarding LLC¿s, be sure to speak with a qualified legal and/or financial advisor.
Although it has been in existence for 10 years in the USA, the LLC is the newest entity available.. One of the main advantages of the LLC is that it is taxed according to partnership law. LLC's do not pay taxes. LLC's file an information return (Form 1065) and all profits are reported on each member's own personal 1040 Form, according to ownership percentage. Another advantage of LLC's is they can be owned by other entities. Under most circumstances the members involved in the day-to-day running operations must recognize the income as earned income and pay the 15.3% self-employment tax.
The S-Corporation, like the LLC, is taxed like a partnership. S-Corporations file an information return (Form 1120S) and profits are reported on each shareholder's own 1040 Form, based on ownership. The main advantage of the S-Corporation is that a business owner can draw income from the company. Business owners may take a "reasonable " salary and distribute the rest of the profits as stock dividends. Usually, the dividend distribution is exempt from the 15.3% self-employment tax. One major disadvantage of the S-Corporations is that only individuals {not other entities} or certain types of grantor trusts may own stock in the company.
The C-Corporation is the only entity that actually pays taxes. This entity files Form 1120 and is taxed according to a different tax table than individual members. The primary advantage of C-Corporations is their ability to provide tax-deductible benefits. These benefits are usually not entirely deductible in the other entities, but dividends are from 2003.
Another main advantage of the C-Corporation is its lower tax bracket. The first $50,000 that a C-Corporation earns pays only 15 percent in federal income taxes. This can be extremely beneficial to a business owner that has expenses that are not deductible.
The primary disadvantage of the C-Corporation is how dividend distributions are taxed. Because dividends are paid after the corporation has paid taxes on its profits, double taxation occurs since the owner of the stock also pays taxes on the distribution. (This falls away during the 2003 tax year) Another disadvantage of the C-Corporation is that there are few ways to access retained earnings without incurring the double taxations discussed above.
The Limited Partnership, like the LLC and S-Corporation is also taxed like a partnership. It files an information return {Form1065) and all profits are reported by each owner on their individual 1040 Form.
The main advantage of the Limited Partnership is it has two types of owners. The general partners have voting rights and control, while the limited partners do not. This allows the general partners to control the distribution of profits, even though they may have been taxed at the limited partner's tax bracket
A business owner with children over the age of 14 can utilize his/her children's tax brackets as limited partners and not lose control over the entity, even though the children may own a majority.
One disadvantage of the Limited Partnership could be the business owner's ability to access money within the partnership for his or her own purposes.
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