At the most complex of the business structures are corporations. Corporations are entities created by law, thus acquiring their status and authority solely from the government. IBM and Microsoft would be examples of C-corporations. Almost all corporations are created at the individual state level and are subject to the laws of that state. Many people prefer to incorporate in states like Delaware or Nevada, because those states are a little more liberal in their tax treatments. The other states make policy to combat this sort of activity. For instance, Florida treats corporations doing business in their state, but incorporated in another state as a 'foreign' corporation and charges them higher fees to do business in the state to compensate for lost tax revenue. Every government entity wants their piece of the pie, so be sure you do your research when deciding which type of tax treatment and legal protections are best for your type of business.
You will find that most large businesses are created for tax purposes as regular or C-corporations. They get this name because they are subject to Subchapter C of the Internal Revenue Code. The IRS views a C-corporation as a separate legal entity that files its taxes separate from the stockholders who own it. With all other business formats, the net profit or loss pass down to the owner's personal tax return. Bay the taxes on profits left in the C-corporation at the end of its fiscal year are paid by the corporation (normally at higher tax rates).
The corporation may carry over any net operating losses to offset past or future corporate income. A shareholder can only claim a loss when they sell their stock for less than they paid for it.
This can create a potential for double taxation at the corporation and shareholder levels. Profits are taxed to the corporation when the income is earned, and again to the shareholder when that same income is received as dividends. Additional features include limited liability for owners, a flexible capital structure, and ease of transferability by selling shares of stock.
C-Corporation Types
State laws normally provide for corporations in four types:
- Publicly held and closely help corporations in which the stock is either publicly traded or privately held;
- Membership corporations in which ownership is limited to group membership; and
- Professional corporations in which membership is restricted to certain licensed professionals.
- Non-Profit corporations which are set up for charitable purposes.