Business Structure: Corporation

Posted by The Feds on June 21, 2008

A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more accounting tax preparation services than the sole proprietorship or the partnership.

Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns.

The corporation becomes an entity that handles the responsibilities of the organization. Like a person, the corporation can be taxed and can be held legally liable for its actions. If you organize your business as a corporation, you are not personally liable for the debts of the corporation.

When you form a corporation, you create a separate tax-paying entity. Unlike sole proprietors and partnerships, income earned by a corporation is taxed at the corporate level using corporate tax rates. Regular corporations are called C corporations because Subchapter C of Chapter One of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.

A corporation files Form 1120 or 1120-A, U.S. Corporation Income Tax Return. If a shareholder is an employee, he pays income tax on his wages, and the corporation and the employee each pay one half of the social security and Medicare taxes and the corporation can deduct its half. A corporate shareholder pays only income tax for any dividends received.

June 21, 2008 | Filed Under Small Business 

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