Shareholders form the cornerstone of a corporation, serving as its owners with various powers including selecting and dismissing directors, amending bylaws, approving asset sales, and even dissolving the corporation. The number of shareholders can vary, with many states permitting a single individual to possess 100% of the corporation’s stock. Directors, representing the interests of shareholders, wield authority in managing the company, steering major decisions, and electing corporate officers. While some states mandate a single director, others require a minimum of three. Corporate officers, essential for day-to-day operations, typically include a president, secretary, and treasurer, although certain states permit one individual to occupy all three positions.
Once you formalize your business structure by incorporating it, you’ll find relief from self-employment taxes on your entire business income. Usually, Social Security and Medicare taxes apply solely to the salary and bonuses disbursed to you by the corporation, rather than taxing the entirety of the company’s profits.
Incorporating brings about significant changes in your company’s tax treatment. Instead of filing Schedule C with your personal tax return, as done when operating as a sole proprietor, corporations file separate business tax returns (Form 1120 for C corporations). C corporations pay tax on their profits at the corporate level. S corporations, however, file Form 1120S and usually don’t pay corporate tax; instead, profits and losses are passed to shareholders, who report them on their personal tax returns using Schedule K-1. Moreover, incorporating can offer tax advantages, such as the ability to deduct salaries paid to owners-turned-employees, reducing corporate taxable income. Despite this, shareholders may still face taxes on compensation, dividends (for C corporations), or pass-through profits (for S corporations) on their individual tax returns.
In comparison to other business structures, incorporating often demands a greater investment of both time and finances. Corporations face heightened regulatory scrutiny at both federal and state levels, with tax regulations often proving more intricate. Furthermore, the management framework within a corporation tends to be more rigid, potentially limiting the owner’s autonomy in decision-making processes.
