In recent years corporations have become a less popular choice of business entity for small businesses. This is likely due to the versatility and simplicity of the limited liability company as a small business organization. Some small business owners still choose to run their small business through a corporation for reasons of governance and reasons related to securities law. A corporation is a separate and distinct legal entity created under state law and sometimes is a separate taxable entity. Corporations are owned by a person or group of persons called shareholders. Corporations have many of the same abilities that an individual has. It can enter into a contracts, it can sue or be sued and can carry on a business. A corporation provides its shareholders with the protection of limited liability since shareholders are not liable for the debts of a corporation unless they have specifically agreed to be liable or have made mistakes which could give a creditor the right to “pierce the corporate veil” and hold shareholders liable. A corporation has an unlimited life and exists despite the death of a shareholder or a shareholder selling his shares. A corporation’s life ends when it is liquidated or merged into another corporation. For federal tax purposes, a corporation can be designated as either a Subchapter C Corporation or a Subchapter S corporation. A Subchapter C Corporation is taxable entity which has the ability to pay dividends to shareholder. A Subchapter S. Corporation is tax free for federal tax purposes, but files tax returns to report profit or loss, which is passed through to the shareholders. If you are forming a corporation or have an existing corporation you should consult with a tax lawyer for advice on which type of corporation is best for you.

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