Step Two: Corporations

A corporation is a legal entity that is separate from the people who own it. Shareholders govern the corporation indirectly by electing people to manage it.

Forming a corporation is somewhat complicated, and you may want to enlist the assistance of an attorney if you choose to organize your business this way. To form a corporation requires filing Articles of Incorporation and paying filing fees. For information about forming a corporation in North Carolina, click here to download an instruction booklet from the Secretary of State's office. To access a copy of the Articles of Incorporation form, click here.

In addition, a corporation, once formed, must comply with several formalities, such as holding regular meetings and maintaining explicit records.

There are several different types of corporations:

C Corporation

This is the most common form of incorporation for America 's largest companies. The letter "C" simply refers to a subchapter of the IRS for corporate tax purposes. The separate nature of the C Corporation creates advantages and disadvantages.

Since the C Corporation is separate from its owners, also known as shareholders, the owners may be taxed twice for any profits. That is, the corporation pays taxes on its profits. Then the corporation distributes the profits to the shareholders in the form of dividends. The shareholders then pay taxes on these dividends. This is known as double taxation and is considered a disadvantage of forming a business this way. Pending legislation, however, may change this form of double taxation. Be sure to check with your accountant.

An advantage is that the shareholders are only responsible for the company up to the amount of their personal investment. They may lose all of their stock in a corporation if it goes belly-up, but they will not lose their homes or other personal belongings.

S Corporation

The S Corporation, commonly referred to as a small business corporation, shares much in common with the C Corporation. Like the C Corporation, it is owned by shareholders who do not bear personal liability for the losses of the corporation. Also, the same filing requirements and formal rules apply to both types of corporations.

There are, however, several differences between the two types of corporations. A major difference and an advantage of the S Corporation is that its shareholders will not be taxed twice for the company's profits. All profits are passed through to the shareholders' individual income tax statements.

Another difference is that the S Corporation cannot have more than 75 shareholders, while the C Corporation can have an unlimited number of shareholders. For this reason, larger corporations are C Corporations.

S Corporation status is determined by the Federal Government and pertains to tax treatment. To form an S Corporation, you must form a C Corporation with the state, then file IRS Form 2553 (Instructions) to convert the C corporation to an S Corporation. Restrictions for an S corporation are outlined in IRS publication 334, Tax Guide for Small Business. Call the IRS to request forms, 1(800) 829-3676 or download from the IRS website.

Other Types of Corporations

There are several other types of corporations, including: professional corporations (operated by licensed professionals, such as doctors and lawyers), nonprofit corporations, and cooperatives.

Corporation Pros and Cons

Pro. An advantage is that the corporation is a separate legal entity from the individual(s) owning it. This means that if someone sues the corporation, shareholders are only liable for the corporation up to the amount of stock they own. Con. A disadvantage is that it may be more complicated and more expensive to start a business this way. There are ongoing regulations to abide by and fees to maintain when you run a corporation.

For more information on corporations, consult:

Department of the Secretary of State, Corporations Division
PO Box 29622
Raleigh , NC 27626-0622
(919) 807-2225
Toll-free: 1 (888) 246-7636 ( leave message )
www.secretary.state.nc.us/Corporations

Additional web sites offering information on corporations:

http://www.secretary.state.nc.us/Corporations/ThePage.aspx
(Office of the Clerk, State Corporation Commission FAQ)

NOLO Law Centers (Information on Corporations)

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