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By law, Corporations are recognized as separate legal entities from those who control or own it. Members of Corporations are known as “shareholders.” Corporations are treated as distinct, legal entities that can engage in business, have their own corporate bank accounts, commit to legal contracts, have their own separate credit identity, and even own assets and real property. C Corporations are permitted to have an unlimited number of shareholders that are either U.S. or non-U.S. residents. Because Corporations are treated as separate legal entities, the shareholders of Corporations are provided limited liability coverage. They cannot be held personally accountable, and their personal assets are protected from seizure resulting from any corporate liability. Their losses are therefore limited to the amount of capital they have invested in the Corporation.
Advantages of a Corporation
- Separate legal status
- Liability protection for Corporate shareholders
- Privacy for shareholders
- Tax benefits
- Legal benefits
- Guaranteed Perpetual Duration
- Tax-free/tax-deductible pension contributions
- Strengthened credibility
- Improved ability to attract investors
- Ownership transfer through sale of stock
- No minimum/maximum income requirements
Because Corporations are recognized as separate legal entities, there are various resulting benefits.
One of the most desirable benefits of establishing a Corporation is that Corporate shareholders are protected from personal liability if the Corporation is sued. The personal assets of the shareholders, including their homes, cars, savings and checking accounts, retirement plans, etc., are shielded from seizure resulting from any judgments against the Corporation. For example, Steve Jones owns a small medical practice in Long Beach, California. He is concerned about lawsuits stemming from medical malpractice and learns that a Corporation is considered a separate legal entity from the owners of the business, so he forms a Corporation. So when one of Steve’s nurses is careless and administers a medication to a patient that results in a sever allergic reaction, and the patient eventually sues Steve, the liability is limited to the Corporation’s assets. Steve’s personal assets, including his brand new Mercedes 500se, his wife’s Cadillac Escalade, their $2 million dollar home in Belmont Shore, and their extensive investments in Fidelity Mutual Funds are shielded from any settlement or judgment against his medical Corporation. If Steve had been operating his practice in an unincorporated manner, all of those personal assets could be vulnerable to seizure resulting from the lawsuit.
Privacy is another attribute that forming a Corporation provides to its shareholders, directors, officers, and owners of the Corporation. The degree of anonymity is subject to the local regulations of the jurisdiction in which the business is incorporated, but typically this means that a Corporation can allow an individual to own, manage, or run the business without that person’s name appearing on any public record. The names of shareholders to not typically appear in the public records, and nominee officer and director services that provide the name of someone other than the shareholders to appear on the officer list, is also available in many states.
Another advantage to incorporating a business is the potential tax savings that Corporations are eligible for. When filed properly, many Corporations will avoid double taxation at the Corporate and personal levels by qualifying for pass-through tax benefits where the profits of a Corporation are only assessed taxes when claimed on the personal income tax returns of the shareholders. In addition, many Corporations take advantage of “income shifting.” This tax-saving strategy allows for the income of a Corporation to be strategically divided between the shareholders in such a way that the overall taxes are minimized. In addition, many business expenses, such as health insurance, business travel, client entertainment, etc., are tax-deductible, resulting in reduced taxation on earned income. For example, Gloria Fuentes is the owner of a party planning company in Chicago and used to pay a hefty amount of income tax on any profit that her company generated. After she incorporated her business, Gloria was able to invest tens of thousands of dollars per year in her corporate pension fund. These investments are contributed tax free and will continue to grow tax free until she retires. This option was not available to Gloria before she incorporated! As a Corporation, Gloria is also entitled to deduct all of her medical expenses, including prescriptions, as well as 100% of her insurance premiums from her earned income. She even set up a corporate lease for a brand new Ford F150 that she uses for her events, and since the lease was issued to Fuentes Party Planning Inc. and she makes the payment from her Corporate checking account, these expenses are totally tax deductible. Gloria is also assured that her chances of an IRS audit are greatly reduced, since Corporations with less than $3 million in gross revenue are the least likely business entities to be audited. When she operated as a Sole Proprietorship, she was much more likely to be audited since these are the highest percentage of business audited every year.
There are also many legal benefits to forming a Corporation. Because of their separate legal status, Corporations may own property, enter contracts, and sue or be sued. During these kinds of transactions, a properly structured Corporation will provide many of the same facets of business liability protection, asset protection, and tax benefits as outlined above.
Another benefit of a Corporation is the formal business structure that is established. Because the Corporate management structure includes a board of directors, they are collectively empowered to make significant business decisions and enter into binding agreements on behalf of the Corporation. This way, no individual shareholders can make independent decisions or enter contracts on behalf of the Corporation that may result in serious financial consequences that would impact the business as a whole. By forming a Corporation, all the major players are on the same page.
An additional benefit of a Corporation is that it is an enduring legal business entity that is guaranteed Perpetual Duration unless stated otherwise in the Certificate of Incorporation. This means that a business does not cease to exist due to the illness or death of one of the shareholders.
Another benefit of a Corporation is that it may have a pension plan. The funds contributed into the pension plan are tax-free to the employee until they are withdrawn after retirement, and the contributed funds are tax-deductible to the Corporation itself.
The credibility of an incorporated business is also strengthened because of the formal business structure and benefits attributed to a Corporation. Customers, competitors, vendors, and other business associates get a powerful message about the stability and commitment of an incorporated business. For many, just seeing the “Inc.” at the end of the company name creates an added dimension of quality assurance.
Corporations also benefit from increased ability to attract investors and investment capital. Purchasing stock is often a much preferred way for savvy investors to invest capital in a business due to the benefits of reduced personal liability.
The ease with which ownership can be transferred through the sale of Corporate stock is another benefit to incorporating a business.
Finally, there are no income minimum or maximum requirements to become a Corporation. An incorporated business can be as small as a localized one-person operation, or as large as a massive global enterprise with thousands of employees.