Federal and state tax laws regulate the origin and existence of a corporation. To set up a corporation or limited liability company in any state, you must follow the business corporation laws of your state. When a corporation is registered by an individual or multiple partners, both the federal and state governments have determined that a unique situation occurs. In other words, when you file a corporation, it can be treated independently for tax purposes, separate from the people who own, operate, or control the corporation.
What is an Incorporation?
At the basic level, when you incorporate articles are submitted to the state. The articles register your business at the state and associate you with your new business. Incorporating offers tax advantages, reduces risk of running a business, and has other great benefits. After you form a corporation you will have new responsibilities such as different accounting, new taxable issues, as well as annual paperwork.
Advantage of Limited Liability Corporation
A major advantage afforded to the shareholders of a corporation is that of limited liability. Limited liability for a corporation is a privilege and not a guarantee. In many cases, the courts have decided to hold shareholders, directors, employees, or officers accountable for the actions of the corporation. When you form a corporation you must comply with all state and federal requirements if you wish to maintain a good standing for your corporation.
Income Tax Treatment for Corporations
When you incorporate a business, you have the opportunity to take full advantage of corporation-related tax laws. A corporate entity provides its owners with power and flexibility when dealing with taxation issues. The corporationís owners are able to determine their salaries, how much income tax is payable at the corporate level, and how much money will be distributed to employees and shareholders via dividends and salaries. This flexibility in income distribution may create opportunities to decrease the overall tax liability for a corporation and its owners in a given taxable year.
Do you need an S Corporation?
Generally, an S corporation does not pay income tax. However, its income, deductions and credits are passed through to its shareholders. On their tax returns, the shareholders of a S corporation include their share of the corporation's separately-stated items of income, deduction, loss, and credit, and their share of income or loss in the business. A S corporation must file Form 1120-S, the tax return for an S corporation, under the following conditions:
- It elected to be an S corporation by filing Form 2553, Election by a Small Business Corporation
- The IRS accepted the election, and
- The election remains in effect.
Are you ready to setup a corporation?
Need more data?
Still need to know more about how to form a corporation? Incorporating can be challenging and even overwhelming. We have put together some additional information on our Why should I incorporate? page. We recommend learning as much information as possible before forming your corporation. It will help you in the long run.