The term “corporation” is often used to describe a type of business entity. However, there are a wide variety of different types of business entities that may be considered, and some have different tax consequences. When a business holds an initial public offering (or IPO), the corporation becomes a public company. The shareholders of the corporation then elect a C corporation, an S corporation, or an individual person to serve as the company’s board of directors. All three types of business entity filings are equally qualified, and all three result in the same tax implications.
A corporation is a separate legal entity from its owners. This means that all shareholders see the corporation as separate from their own personal assets. This is a very useful feature for many different business uses, not only for initial public offerings. When the company sells shares of stock on the stock market, the proceeds are applied directly to the income of the corporation.
There are many other types of business entity filings.
For instance, partnerships and limited liability companies are frequently used, as are sole proprietorships, LLCs, and corporations organized as partnerships. In many cases, these types of businesses will qualify for business taxes instead of incorporating. Because they are considered “pass-through” income, they do not have to pay corporate tax on their profits, but must pay state taxes on their share of the tax.
However, business owners may also form sole proprietorships, which are treated as pass-through businesses. Even this might not be necessary for some businesses, as sole proprietorships are not subjected to the corporate income tax. If you do not have to incorporate, there are still various types of business entity filings that you should consider, including partnerships, LLCs, and S corporations. The details will vary by state and even by type of business, so you’ll want to consult with a local attorney who specializes in business law.
One issue that most small business owners worry about is incorporating themselves as a C corporation. A corporation has various advantages, but at the same time, it has certain drawbacks that you should be aware of before you incorporate your business. First, a corporation is not considered a valid form of business entity because it does not have any shareholders. At most, there are only one or two people who own a share of the corporation. Second, unlike a sole proprietorship, there is usually only one shareholder.
There are ways around both of these problems, however. A partnership will only have one shareholder, but there will be an overall balance sheet that includes all of the partners together. This makes it much easier to calculate returns and make large-scale business decisions. Also, the partners will probably need to file joint reports if they control a substantial portion of the partnership.