Corporation Definition
A corporation is a registered business treated as a separate legal entity from its owners, also known as shareholders, and guided by a board of directors. Corporations offer limited liability protection, with owners’ assets protected in the event of legal action or business debt.
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Corporation Meaning
A corporation is a legal entity that is owned by shareholders and ran by a board of directors.
Corporations have many of the rights that individuals have. They can own assets, enter into contracts, borrow and lend money, and sue and be sued.
Corporations are a popular business structure for large companies as well as some smaller companies that are interested in the advantages corporations offer. Unless otherwise specified, the word “corporation” typically refers to a C corporation (C corp).
However, there are several different types of corporations, each quite different from the other.
- C Corp: C corps are separate business entities owned by shareholders.
- S Corporation (S Corp): An S corp is a tax designation for a business rather than a business structure itself. Both C corps and LLCs can opt to be taxed as an S corp.
- Nonprofit Corporation: A nonprofit corporation is designed to benefit the public or a particular group rather than earn profit to benefit its owners. Nonprofits include charitable, religious, and political organizations, among others.
- Benefit Corporation (B Corp): A B corp is a for-profit corporation that must have a goal to benefit the community or the environment.
Should I Form a Corporation?
Picking a business structure is one of the most important decisions you will make. Each structure has its own advantages and disadvantages, and the best choice will depend on your business’s unique circumstances and needs.
The first step in deciding if a corporation is the right structure for you is understanding its advantages and disadvantages.
Advantages of a Corporation
Corporations offer the following potential advantages:
- Personal limited liability protection: With a corporation, owners’ personal assets are protected in the event your business is sued or if it defaults on a debt.
- Tax benefits: Corporations have a few potential tax benefits, including the flexibility to be taxed as an S corp and benefits related to retained earnings and employee salary expenses.
- Growth potential: Because corporations offer limited liability protection and are more attractive to investors, they are well suited for growing companies.
- Credibility: A corporation can seem more credible to customers and investors than other business structures.
Disadvantages of a Corporation
Corporations also have some potential disadvantages:
- More expensive to form and maintain: While some other business structures can be formed for little to no money, corporations are generally more expensive. In addition to filing fees for formation documents, the complexity of corporations often requires hiring an attorney to assist with the formation process.
- More paperwork and complexity: Corporations tend to have more paperwork than other business structures, both during the formation process and after while operating. There are also more rules regarding things like meetings and recordkeeping.
- Double taxation: C corps pay a tax at the company level on the business’s profits, and shareholders must then pay taxes on dividends they receive from the company. This is often called double taxation.
How to Form a Corporation
You can start a corporation by filing incorporation documents with the appropriate government office in your state. This document is often called the Articles of Incorporation.
The exact steps to form a corporation can vary a bit state to state, but they generally include the following:
- Name your corporation: Check our How to Name a Business guides for instructions on how to name a business in your state
- Choose a registered agent: A registered agent is an individual or business entity that accepts tax and legal documents on behalf of your business.
- Hold an organizational meeting: During your organizational meeting, you can create bylaws, select initial directors, and decide on a share structure, among other things.
- File the formation documents: You will need to file the Articles of Incorporation (or your state’s equivalent form) with the appropriate state government office.
- Get an EIN: Corporations are required to get an Employee Identification Number (EIN) from the Internal Revenue Service (IRS).
- Open business checking and credit accounts: To maintain your corporate veil and keep your personal limited liability protection, you will need to open separate business checking and credit accounts.
You can read about the steps to start a corporation in your particular state by reading our How to Start a Corporation guide.
Corporation Taxes
C corps must file a corporate tax return and pay the corporate tax rate of 21% on all taxable earnings. If a corporation owes taxes, it must estimate the amount of tax due for the year and make payments to the IRS every quarter.
In addition to the corporate tax, dividends to shareholders are subject to individual income taxes, meaning that any money paid out as dividends is taxed twice. This is commonly referred to as double taxation.
However, earnings kept by the company for things like purchasing equipment or making other investments in the business, called retained earnings, are only taxed the one time at the corporate level.
Corporations also have the option to be taxed as an S corp if they qualify, which changes their tax structure considerably.
How to Start a Business
Once you have learned about the advantages and disadvantages of corporations and decided if it is the right business structure for you, you will need to actually form and set up the business. Whether you choose to form a corporation or some other structure, there are more things to take care of before you are ready to sell your products or services.
You can read these in more detail in our state-by-state How to Start a Business guides, but here is a quick rundown of some basic steps after forming your business:
- Register for taxes
- Create business banking and credit accounts
- Set up accounting
- Obtain permits and licenses
- Get insured
- Establish a web presence
Corporation FAQ
What are the advantages of a corporation?
Some advantages of a corporation include limited liability protection, certain tax benefits, improved growth potential, and increased credibility.
How do you incorporate?
You can start a corporation by filing the applicable formation documents with the appropriate government office in your state. Read detailed steps for incorporating in your state in our How to Start a Corporation guide. If you’d like to hire a professional service to set up a corporation for you, take a look at our Top 7 Business Formation Services review.
What are the types of corporations?
Common types of corporations are C corporations (C corps), nonprofit corporations, and benefit corporations (B corps). There are also S corporations (S corps), which is a tax designation for a company rather than a type of business structure.
What is a C corp?
A C corporation (C corp) is the most common type of corporation. It is a legally separate business entity that’s purpose is to financially benefit its owners, called shareholders.
What is an S corp?
An S corporation (S corp) is a tax designation available to LLCs and corporations. A corporation that elects to be taxed as an S corp will be subject to pass-through taxation.
What is a nonprofit corporation?
A nonprofit corporation is designed to benefit the public or a particular group rather than earn profit to benefit its owners.
What is a B corp?
A benefit corporation (B corp) is a for-profit corporation that must have a goal to benefit the community or the environment.
Who are the owners of a corporation?
Owners of a C corp are called shareholders.
How much does it cost to incorporate?
The cost of incorporating (filing formation documents such as the Articles of Incorporation, a Certificate of Formation, etc.) is between about $45 and $300, depending on your state. However, there may also be substantial attorney’s fees and a registered agent fee, among others.
What is the corporate tax rate?
The US federal corporate tax rate is 21%. Corporations might also have to pay additional state corporate taxes depending on the states they do business in.