Forming a Corporation

Establishing a Corporation: Key Insights

When forming a corporation, prospective shareholders contribute money, property, or a combination of both in exchange for capital stock. Similar to a sole proprietorship, a corporation typically takes the same deductions to determine its taxable income and may also claim special deductions. For federal income tax purposes, a C corporation is viewed as a separate taxpaying entity. A corporation conducts business activities, generates net income or losses, pays taxes, and distributes profits to its shareholders.

Double Taxation

When a corporation earns a profit, it faces taxation at the corporate level. Then, when those profits are distributed as dividends, shareholders are taxed again, leading to double taxation. Additionally, the corporation cannot deduct the dividends distributed to shareholders, and shareholders cannot claim a deduction for any losses incurred by the corporation. While this structure may result in double taxation, it offers notable advantages.

Advantages of Corporate Structure

• Limited Liability Protection: Shareholders enjoy limited liability, meaning their personal assets are generally shielded from the corporation’s debts and obligations. This feature makes investing in a corporation appealing for those looking to minimize their risk exposure.

  Perpetual Existence: Corporations have a continuous existence, which means they remain operational even if ownership or management changes. This stability supports long-term planning and investment.

• Access to Capital Markets: Corporations can raise funds more effectively by issuing stock or bonds, which is critical for growth and expansion.

• Economies of Scale & Professional Management: Corporations can benefit from economies of scale and enhanced operational efficiency. By leveraging their size and resources, they can negotiate favorable terms with suppliers, attract top talent, and invest in research and development.

Despite the challenges associated with double taxation, the corporate structure continues to be a favored choice for businesses looking to grow and succeed in a competitive marketplace. It provides a solid framework for resource pooling, risk management, and pursuing ambitious projects that may be out of reach for smaller business entities. Our office can effectively address any legal questions about forming a corporation. If you have any questions, please fill out the following form below and a Business Lawyer from our office will get back to you.