The most familiar business structure is a corporation. You do not have to be a massive public company like Microsoft to be a corporation. You may be a one-person company where you are the Chief Executive Officer, the Chairman of the Board, and the sole shareholder.

When you incorporate your business with the state in which you plan to do business, you are creating a separate legal entity. In other words, your new corporation is now responsible for its actions, including paying taxes and debts. Thus, its main purpose is to shield you from personal liability. This is not to say that just because you have incorporated your business you cannot be held responsible for corporate debts and negligence, but in general, corporate officers or shareholders cannot be held personally liable for corporate actions.

There are many advantages to incorporating a business. As mentioned above, shareholders enjoy limited liability. For example, if each invests $5,000 into the corporation and it eventually fails, they have lost no more than the amount invested ($5,000). Furthermore, under the Internal Revenue Code, they may deduct up to $3,000 per year in stock losses on their personal tax returns, with the balance carried over to future years for further deductibility.

Another benefit is that ownership of corporate stock may be freely transferred by sale or gift, which is subject only to certain corporate restrictions. For example, Adam owns 200 shares of XYZ Corporation stock. The shares had a total fair market value of $20,000. He sold 100 shares for $30,000 to Bob and gave the remaining 100 shares to his daughter Carrie. This right to sell or gift away an ownership interest shares is not readily available when doing business as either a sole proprietorship or partnership. Other benefits include the flexibility that corporations offer. An incorporated company may purchase, hold, and sell property in the corporate name. The corporation enjoys great flexibility in selecting the methods it will use in raising capital. Finally, the corporation enjoys unlimited life and remains unaffected by the death of a director, officer or shareholder, no matter the size of the shareholder's ownership in the corporation.

The main disadvantage to a corporation is that the profits of a corporation, when distributed to the shareholders in the form of dividends, are subject to being taxed twice. The first tax comes at the corporate level. The distribution of any corporate profits to the investors in the form of dividends is not a deductible business expense for the corporation. Thus, any dividends that are distributed to shareholders have already been subject to corporate income tax. The second level of tax is imposed at the personal level. The receipt of corporate dividends is considered income to the individual shareholder and is taxed as such.

Numerous examples of corporations are evident throughout the United States. When people think of a corporation, they initially think of big corporations like Microsoft or IBM.  However, size is not a factor for the formation of a corporation.  A single store can be a corporation if it files the necessary paperwork with the state.  Essentially, the distinguishable feature of a corporation is the name of the business.  Most corporations will have “Inc.”, “Corp.”, or “Co.” attached to their name.  However, this does not mean that all businesses with “Inc.”, “Corp.”, or “Co.” are corporations.

For other information about Business Entities, please click on one of the following topics below:
Description
Sole Proprietorships
General Partnerships
Limited Partnership
C Corporations
S Corporations
Limited Liability Companies
Most Frequently Asked Question about Business Enterprises?