Starting a business is not easy. There are many considerations that go into the process. How will it be managed? Do I need partners? What type of growth do I expect? Your head will likely swim with the possibilities and the work that goes into starting off on the right foot.
Several types of business entities exist. Your business will have to assume one of these forms in order to function. Depending on the form you choose, your obligations to the federal government will change.
One such entity is the “corporation”. When most people think of a corporation, they envision a large brick building that houses hundreds of employees. They see dollar signs, too. If a business can afford a big building and hundreds of workers they must be making a lot of money, right?
Incorporating your business is an ambitious undertaking. Corporations are seen differently by the government. They are anchored in the state where they were chartered. However, this doesn’t mean that the business can’t have branches in other places.
Here are some ways that corporations differ from other business types. There is no “owner” in a corporation in terms of the way we think of ownership. A corporation is owned by the shareholders. These are the people who have a stake in the company. They have each bought a piece of the company.
However, shareholders don’t run the company. They hire a group of people known collectively as the Board of Directors to operate the company on a daily basis. The board tends to executive decisions and major policies that govern the company.
Incorporation can be sticky. It is not an easy process to become a corporation. State and federal agencies monitor corporations to be sure that they are operating within the law. For some it can seem like operating inside a fish bowl.
But, there are benefits to holding corporation status. As a shareholder in the company, you have limited liability for what the corporation does. If the company is sued or assessed for taxes, your part in the debt extends to what you have put into the company in the first place. Depending on the circumstances, the board is more accountable than the company shareholders.
Corporations don’t have to run to banking institutions for money when they need it, like other businesses. They can use their stock as a way to raise the funds that they need. Selling stocks allow them to keep the company from floundering and have adequate cash flow to make it through a crisis situation.
A corporation has choices when it comes to setting up their taxes. Corporations get a break because they can deduct the amount of money they pay for benefits to their employees and company officers. The better the benefits, the more money they get to deduct come tax time.
There is another choice as well. For tax purposes, corporations can file as an S Corporation. This means that any shareholder can file their earnings and profits from the company as distributions on their taxes. Now, shareholders can be employees. As such, the employee must pay themselves from the money they plan to claim as a distribution. The amount has to meet standards for reasonable compensation. The benefit is that the employee pays taxes on only a portion of the money instead of the entire amount.