The corporation is a much more formal and complex type of business organization than a proprietorship or partnership. Even closely held corporations must have articles on incorporation, bylaws, classes of stock, boards of directors, election of officers, and ample amounts of federally mandated reporting procedures.
Many corporations are in manufacturing and construction. However, many professionals also have formed professional corporations (or "professional associations," as they're called in some states). As other types of businesses grow, they also tend to incorporate.
The most common form of corporation is the "close" or "closely held" corporation, which is owned and operated by a small number of shareholders who often are also the directors or officers of the business. Close corporations do not trade shares on a stock exchange; in fact, the only people who may purchase shares in the business may be the other shareholders.
Characteristics
Unlike unincorporated businesses, corporations are separate legal entities apart from the majority shareholders.
- Typically, states require the filing of detailed articles of incorporation.
- Shareholders receive shares of stock as evidence of their ownership interests.
- Corporate liabilities are separate from the owners' personal assets. Thus, shareholders are not personally liable for business indebtedness; technically, their liability is limited to their investments in the business. However, lenders may require shareholders in small or closely held corporations to provide the security of their personal assets for any business loans.
- Majority shareholders are also employees of the business, which enables them to buy "fringe" benefits for themselves and their families with tax-deductible corporate dollars.
- A corporation is a separate tax-paying entity; corporations have their own federal income tax rates which are lower than individual rates at some income levels. Shareholders pay no tax on corporate income, but they are taxed when the corporation distributes income to them in the form of dividends. This results in double taxation. That is, corporate income is taxed once when it's earned by the corporation, and again when it's distributed to the shareholders as dividends.
- Double taxation may not be much of a problem in small or closely held corporations, however, since most net income can be paid to shareholders in the form of salaries, which are a tax-deductible business expense.
As long as the IRS considers shareholder salaries to be "reasonable compensation" for services rendered, the corporation can deduct these amounts from its income. Thus, shareholders/employees can effectively share in corporate profits through their salaries rather than non-deductible dividend distributions.
Back to Top | Next
Ohio National is not affiliated with, nor does it endorse or sponsor, any particular prospecting, marketing or selling system.
