Choice of Entity Series Part 3: Corporation

Corporation:

• The corporate form offers simple means for raising additional capital.
• From a legal standpoint, a Corporation is a separate legal entity from its owners, and it can be used to hold property in its own name.
• The owners of a Corporation are shareholders; the extent of their liability is the assets that they contribute to the Corporation, even in the event of the Corporation filing for bankruptcy.
• Requires strict adherence of many corporate formalities, necessitating greater administrative expenses than non-corporate forms.
• Corporations may use a fiscal year instead of the calendar year for tax purposes.
• The Corporation is double taxed, meaning that the Corporation is taxed on corporate earnings, and shareholders are taxed on income from dividends.
• Interest paid from debts is tax deductible.
• Equity capitalization (dividends) are subject to tax at the dividend rate.
• Losses of the corporation are deductible at the corporate tax level, but are not passed through to individual shareholders.
• Corporations may deduct a “reasonable compensation” to shareholders/employees from their income for tax purposes.
• Bottom Line: The corporate form allows for the perpetual operation of business, for multiple, uncomplicated, transfers of ownership, and the issuance of stock options provides incentives for attracting and rewarding employees.