A corporation is considered a separate legal entity with its own rights, privileges and liabilities separate from its members. Therefore, its shareholders or stockholders (owners) are not personally responsible for the debts of the business. Usually a corporation has more than one shareholder but it can be 100% owned by one person. Shareholders elect a Board of Directors that oversees major policies and decisions, and the directors hire officers to run the company on a day-to-day basis. A corporation can sue and be sued, enter into contracts and own property.
A corporation is more expensive and complex to establish than the other business structures. It is created by filing Articles of Incorporation with SUNBIZ along with the appropriate fee. The corporation will also be responsible for paying an annual fee with with the State of Florida to continue its existence. Once established, a corporation must abide by corporate formalities required by statute to retain corporate status; therefore, corporations are more complex to operate than sole proprietorships and partnerships.
The corporation itself pays taxes at special corporate tax rates on the profits it earns and retains.
Corporations distribute earnings to shareholders (owners) as dividends and the shareholders are taxed on this income. Therefore, it is said that corporate earnings are subject to “double taxation” when they are passed through as stockholder dividends.
Corporations are categorized as “C” corporations. However, after creating your “C” corporation, you might file an election with the IRS to be treated as a subchapter “S” corporation for tax purposes. In order for a corporation to elect to be a subchapter S corporation it must meet certain eligibility requirements including but not limited to having 100 or less shareholders. Subchapter S corporations are formed for tax purposes because generally a subchapter S corporation does not pay taxes on the earnings of the business but instead the income is passed through to the individual shareholders and reported on their income tax returns. This eliminates the corporate “double taxation” described above.
• Easier to raise capital through sale of stock
• Limited liability for business debts – shareholders only risk their investment
• Easy to transfer ownership
• Can elect Subchapter S status with the IRS
• Costly to set up and maintain
• Corporate formalities are complex but must be strictly followed to maintain corporate status and limited liability of shareholders
• Closely regulated by both federal and state government
• Double taxation if not eligible for or fail to elect Subchapter S status with the IRS