A corporation is a business entity that is owned by its shareholder(s), who elect a board of directors to oversee the organization’s activities. The corporation is liable for the actions and finances of the business – the shareholders are not. Corporations can be for-profit, as businesses are, or not-for-profit, as charitable organizations typically are.
Types of corporations
There are two major types of corporations as well: Subchapter C corporations, which are larger organizations owned by multiple shareholders, which can also be other businesses, and Subchapter S corporations, which are often (but not always) smaller businesses owned by an individual shareholder.
Pros
Before creating a corporation, consider what you hope to gain from establishing this separate entity. The biggest advantages of having a corporation are:
- As with some other types of businesses, corporations provide liability protection for its owners, who are called shareholders.
- Companies hoping to raise money from investors will have an easier time as a corporation, which can sell ownership shares.
- Corporate profits are taxed, but at a lower rate than the personal income tax rate individuals pay.
- Potential employees may find working for a corporation, with the prospect of ownership benefits, to be more appealing than working for a privately-held company.
- The corporation can offer a medical reimbursem*nt plan, deducting the cost of providing insurance to employees while allowing employees to use the benefit tax-free.
Cons
While corporations can certainly shield owners from liability, the downsides are sizeable and very costly:
- C Corporations are complex and expensive to set up.
- Once established, corporations spend significant sums of money to stay on top of changing business regulations and timely filing of paperwork. They are best for large organizations with many employees.
- Corporations pay federal, state, and sometimes local taxes on profits, unlike LLCs.
- The corporation pays taxes on dividends paid to shareholders, who then pay taxes on that income themselves.
Forming a corporation
Corporations are often formed in the state in which the business operates, but it doesn’t have to be. Some corporations are formed in states thought to be pro-business, such as Delaware or Nevada, although that creates extra paperwork. You then need to register the corporation as a foreign entity in the state in which you are doing business, and pay taxes to that state.
The next step is creating Articles of Incorporation, which are filed with the state in which you have registered the corporation. These include:
- The name and physical address of the business.
- A description of the business and its goods and services.
- The name and address of the registered agent, or the person authorized to receive official notices.
- A count of the number of shares issued and to whom.
And then create by-laws, which are the rules of the corporation. They include, at a minimum:
- How often the board of directors meets, and when.
- Whether the business operates on a calendar or fiscal year.
- How long board members can serve.
- Rules for changing by-laws.
By-laws can be amended as needed once the corporation is formed.
Considerations
If you expect at some point in the near future to take your company public through an initial public offering (IPO), a C corporation may make a lot of sense.
Corporation FAQ
What is the simple definition of corporation?
A corporation is a legal entity separate from its owners, made up of individuals, groups, or other corporations, that has the power to conduct business and to own property, assets, and liabilities.
What is as corporation in business?
A corporation is a business structure that is legally separate from its owners, who are known as shareholders. Corporations have limited liability for their owners, which means that shareholders are only responsible for the amount of money they invested in the corporation and are not responsible for any of the corporation’s debts or liabilities. Corporations are allowed to enter into contracts, sue and be sued, own property, pay taxes, and issue stock.
What are 3 types of corporations?
- C Corporation
- S Corporation
- Limited Liability Company (LLC)
What is an example of a corporation?
An example of a corporation is Walmart. Walmart is one of the world's largest corporations and operates a global retail chain of stores, warehouses, and e-commerce websites.
Join 446,005 entrepreneurs who already have a head start.
Get free online marketing tips and resources delivered directly to your inbox.
No charge. Unsubscribe anytime.
Thanks for subscribing.
You’ll start receiving free tips and resources soon. In the meantime, start building your store with a free 3-day trial of Shopify.
FAQs
Claiming 1 allowance is typically a good idea if you are single and you only have one job. You should claim 1 allowance if you are married and filing jointly. If you are filing as the head of the household, then you would also claim 1 allowance. You will likely be getting a refund back come tax time.
What are the IRS tax tables for 2023? ›
Single
| If taxable income is over: | but not over: | the tax is: |
|---|
| $0 | $11,000 | 10% of the amount over $0 |
| $11,000 | $44,725 | $1,100 plus 12% of the amount over $11,000 |
| $44,725 | $95,375 | $5,147 plus 22% of the amount over $44,725 |
| $95,375 | $182,100 | $16,290 plus 24% of the amount over $95,375 |
3 more rowsJun 15, 2023
This amount is also commonly referred to as the taxable maximum. For earnings in 2023, this base is $160,200.
Do you want to claim exemption from withholding for 2023? ›
Exemption from withholding. You may claim exemption from withholding for 2023 if you meet both of the following conditions: you had no federal income tax liability in 2022 and you expect to have no federal income tax liability in 2023.
Should I claim 1 or 2 allowances single? ›
If you are single and have one job, or married and filing jointly then claiming one allowance makes the most sense. An individual can claim two allowances if they are single and have more than one job, or are married and are filing taxes separately.
What is the difference between claiming 1 or 2 on taxes? ›
Claiming two allowances
You are single. Claiming two allowances will get you close to your tax liability but may result in tax due when filing your taxes. You're single and work more than one job. Claim one allowance at each job or two allowances at one job and zero at the other.
What are the tax changes for 2023? ›
Standard deduction increase: The standard deduction for 2023 (which'll be useful when you file in 2024) increases to $13,850 for single filers and $27,700 for married couples filing jointly. Tax brackets increase: The income tax brackets will also increase in 2023.
What taxes are going up in 2023? ›
Long-Term Capital Gains Tax Rates
The 20% rate for 2023 starts at $492,301 for singles ($459,751 for 2022), $523,051 for heads of household ($488,501 for 2022), and $553,851 for couples filing jointly ($517,201 for 2022). The 15% rate is for filers with taxable incomes between the 0% and 20% breakpoints.
Are there changes to the tax tables for 2023? ›
For married couples filing jointly, the standard deduction is $27,700 for 2023, up from $25,900 in the 2022 tax year. That's an increase of $1,800, or a 7% bump. For single taxpayers and married individuals filing separately, the standard deduction is set at $13,850 in 2023, compared with $12,950 last year.
At what age is Social Security not taxable? ›
Social Security can potentially be subject to tax regardless of your age. While you may have heard at some point that Social Security is no longer taxable after 70 or some other age, this isn't the case. In reality, Social Security is taxed at any age if your income exceeds a certain level.
Single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income is more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.
What is the Social Security max for 2023? ›
The maximum benefit depends on the age you retire. For example, if you retire at full retirement age in 2023, your maximum benefit would be $3,627. However, if you retire at age 62 in 2023, your maximum benefit would be $2,572.
What is the lifetime tax exemption for 2023? ›
The federal lifetime exemption amount is $12,920,000 as of 2023, but will be dropping to $5 million in 2026, adjusted for inflation. Given the changes ahead, it is a good time to start thinking about ways to increase the monies you can gift to the next generation free of taxes.
What are personal exemptions for 2023? ›
The personal exemption for tax year 2023 remains at 0, as it was for 2022, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
What is the lifetime exemption for 2023? ›
Lifetime IRS Gift Tax Exemption
Also for 2023, the IRS allows a person to give away up to $12.92 million in assets or property over the course of their lifetime and/or as part of their estate.
Why do I owe taxes if I claim 0 and single? ›
You should not claim too many allowances, or you might end up having to pay the IRS. Claiming 0 allowances means that too much money will be withheld by the IRS. The allowances you can claim vary from situation to situation.
When should you claim single? ›
If you were not married on the last day of the tax year and you do not qualify to use any other filing status, then you must file your tax return as single.
Why can't I claim 1 on my w4? ›
You can no longer claim allowances like 1 or 0 on your W-4 since the IRS redesigned the form. However, you can claim an exemption from withholding if you owed no income tax last year and don't expect to owe anything in the current year.
How to get the most out of your paycheck without owing taxes? ›
Adjust your tax withholding
A higher number of allowances means that less will be withheld from your paycheck. Less withholding means more money in your pocket. Keep in mind that if you have less money withheld, you could end up owing money when it's time to file your taxes.
