A corporation is a business entity separate from the business owners. Legally, it has rights similar to a person. This means that lawsuits are directed at the business instead of the people running it, protecting their personal assets. In some cases there are income tax advantages that can be gained through forming a corporation. Corporations are also exempt from paying sales tax on goods they are going to resell.
Paperwork for a corporation needs to be filed with both the IRS and state government's corporation commission. Requirements vary depending on the type of corporation.
There are four types of corporations:
C: The first $75,000 of profit made by a C corporation are taxed according to corporate rules, which are lower than personal income tax. This income can be split between the business and its owners, which can lower total taxes paid.
S: This type of corporation passes all of its income to its owners. These owners then claim profits and losses as part of their personal tax returns. S corporations are limited to 75 or fewer shareholders. They also cannot own shares in other S corporations.
Professional: While the other corporations limit liability as a whole, a professional corporation limits liability to individuals. In other words, if one doctor is sued for malpractice, the other doctors are not held liable.
Limited Liability Company (LLC): An LLC is somewhere between a partnership and a company. It is based on a partnership rather than shareholders, but still offer protection of personal assets. They also don't carry the ownership restrictions of S corporations.
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