There are two main types of corporations: C and S. Both have one major advantage-the corporation assumes the liability of the business rather than you as business owner or partners.
The C corporation can sell and trade shares to others to raise capital, and the company survives the death of individual shareholders. Profits and losses remain in the corporation unless paid out in dividends or capital distributions. However, there are significant overhead costs such as incorporation fees, taxes, legal and accounting fees, and termination costs. Large apparel firms such as Liz Claiborne and VF Jeans are public, C corporations.
The S corporation is designed for small businesses and is a viable option for a start-up. S corporations can sometimes avoid corporate income tax and pass through losses to stockholders. It is possible to begin as an S and move to a C corporation as the business grows and becomes profitable. S corporations require
- domestic ownership,
- no more than 35 shareholders,
- no foreign shareholders,
- only one class of stock, and
- election to the S corporation status on IRS Form 2553.
1. In which legal business formats are personal assets at risk if the business fails or incurs debts or other liabilities?
2. In which legal business formats are ownership shares in the business sold?
3. In which legal business formats are business and personal income taxes filed separately?