Protection of Personal Assets The major reason why individuals choose to incorporate their business is to protect their personal assets, such as a home, car or family savings. In the event of a lawsuit or if your business should fail, your personal assets cannot generally be touched. This limited liability feature of corporations is not available in a sole proprietorship or partnership, where the individual or partners are personally liable for all business debts.
Tax Advantages Corporations and Limited Liability Corporations (LLCs) can take advantage of tax savings options that are not available to sole proprietorships or partnerships. For example, corporations can establish pension, profit-sharing and stock ownership plans, which can lower the corporation’s taxable income. Medical, life and disability insurance premiums are also completely tax deductible for corporations. In addition, a corporation can own shares of stock in another corporation and receive 80 percent of the dividends tax-free.
Corporations can raise capital by issuing stock, bonds or other securities.
Corporations and LLCs are the most enduring form of business structure. If a corporation owner dies, their portion of the business can be transferred quickly without interruption of the corporation’s operations.
Estate and family planning is simplified since shares of a corporation can be easily distributed to family members.
Corporations and LLCs often experience a greater ease in doing business. Many stores and banks favor corporate accounts and offer discounts.
There are several different types of corporate structures. Below is chart that delineates the differences between each business type:
Corporation Although the most formal corporate structure, a general business corporation is the most widely used by both small and large businesses and offers the fewest restrictions. A general business corporation may have an unlimited number of stockholders/owners whose personal assets are generally protected in the event of a lawsuit against the corporation or if the business fails. A stockholder’s liability is usually limited to the amount of investment in the business and no more.
Corporate Name Ending:
Your corporate name must include a word or an abbreviation of a word that indicates that the named entity is a corporation or LLC. Examples of a corporate name ending include: Incorporated, Corporation, LLC, Company, or the appropriate abbreviation thereof.
Director Information: A corporation is required to have one or more directors. They are not required to live in the state of Pennsylvania. They are required to be 18 years of age or older. Also, directors are not required to be listed in the Articles of Incorporation.
Officer Information: The officers are not required to be listed in the Articles of Incorporation.
Stock Information: The amount of corporate stock shares does not affect the initial filing fee.
Registered Agent: A corporation must maintain a registered agent at all times to accept any important service of process from the state. The registered agent must be located and available during regular business hours at a legal address within the state. Pennsylvania prohibits the use of a P.O. Box as your registered agent’s address.
S Corporation Many business owners find the S corporation attractive because all earnings or losses are passed directly through to their personal income tax return. This avoids the double taxation aspect of a general business corporation. There are, however, certain requirements that must be met to qualify for S corporation status. To obtain the S corporation tax status, all shareholders of the corporation must sign IRS Form 2553, and it must be filed with the IRS within 75 days of the date of incorporation.
Electing to do business as an S-Corporation allows you to have the limited liability of a corporate shareholder but pay income taxes on the same basis as a sole proprietor or a partnership. This means that as long as you actively participate in the business of the S-Corporation, business losses can be used as an offset against your other income, reducing, or possibly eliminating, your tax burden. The S-Corporation itself doesn’t pay taxes, but files an informational tax return telling what each shareholder’s portion of the corporate income is.
Limited Liability Company (LLC) Limited Liability Companies are a type of business entity. An LLC is a legal entity separate and distinct from its owners, who are called “members.” The rights, duties and obligations of LLC members are governed by an “operating agreement.” The provisions of the operating agreement are extremely important as they can have a direct impact on how both the LLC and its member-owners are taxed for federal income tax purposes. In addition to tax matters, the operating agreement typically deals with issues of management of the LLC by either members or non-members, transfer of interests in an LLC and termination of the LLC.
When properly structured under applicable state statutes, LLC members have the same limited liability protection which is afforded stockholders in “C” or “S” corporations. This means that, absent any specific personal guarantees, the amount at risk for members of an LLC is limited to their investment in the LLC. Thus, the personal assets of members are generally beyond the reach of the creditors of the business. This liability protection is enjoyed by all members, unlike a limited partnership where at least one general partner must remain liable for partnership debts. And, unlike limited partners, LLC members may be active in the management of the LLC without risking their limited liability status.
LLC members may also enjoy the same flow-through tax benefits which are applicable to partners of a partnership. An S Corporation also provides limited liability protection to its investors as well as flow-through tax treatment. Nevertheless, there are distinct differences. First, there is more flexibility in an LLC then in an S Corporation. For example, members of an LLC may include any number of individuals, partnerships, corporations, trusts, nonresident aliens, etc. This is not the case with S Corporations which require that only individuals and certain trusts and estates own stock and which limit the number of shareholders to no more than 75. Moreover, S Corporations have “one class of stock” restrictions. In addition, all distributions and allocations must be the same for each share. Should an S Corporation violate any of these rules, it causes the S election to be revoked. LLCs may (and typically do) base distributions and allocations on the basis of member contributions, rather than on a per capita basis.
Non-Profit Corporation A non-profit corporation is designed for businesses engaged in charitable, religious, educational or scientific activities that benefit society in general. The net income of non-profit corporations must be used to further the not-for-profit goals of the corporation, not to enrich individual officers, members or directors. Most non-profit corporations have either tax-exempt or 501(c)(3) status, which exempts them from paying taxes on their income. To get either of these tax designations, an Application for Recognition must be filed with the IRS and be approved.