By A.J. Gross, C.P.A., E.A.
In our previous article titled “Business Entity and Liability Protection” we reviewed liability protection with corporations and limited liability companies (LLC). In an upcoming article we will review doing business as (DBA) and limited liability company (LLC). This article is on corporations.
A corporation is considered a separate entity. This provides liability protection from the owners. The owners own stock in the corporation and are considered shareholders. The corporation is set up by filing Articles of Incorporation with the State of Michigan. The corporation then needs to be properly set up by establishing Board of Directors, corporate officers, corporate shareholders, corporate resolutions, and corporate bylaws. Typically, you need the help of an attorney to establish a corporation.
There are operating formalities for corporations. The corporation must maintain an accurate record of all board meetings. Corporate funds must not be comingled with personal funds. The Board of Directors must meet annually. The Board of Directors must agree to corporate level contractual agreements. Failure to maintain operating formalities may result in weakening liability protection i.e. piercing the corporate veil.
By default, a corporation is treated as a C Corporation for IRS taxes. There is double taxation with C Corporation. The C Corporation pays taxes on profits earned, tax #1. The C Corporation profits are paid to shareholders in the form of dividends. The shareholders then pay taxes on dividends received on their personal tax return, tax #2. Due to increased tax rates over the last few years, there may be tax advantages for establishing a C Corporation even with double taxation.
A corporation may qualify to be treated as an S Corporation for IRS taxes. There are a few eligibility requirements. An election to be treated as an S Corporation must be filed with the IRS. The advantage of an S Corporation is the elimination of double taxation. An S Corporation is considered a flow-through entity. This means the S Corporation is not taxed on the profits. The profits flow-through to the shareholders. The shareholders report the profits on their personal tax return. This results in the profits being taxed once on the shareholders personal tax return. There may be tax advantages for choosing an S Corporation compared to other business structures.
The decision for establishing a C or S Corporation is specific to your circumstances. We highly recommend consulting with a tax professional for guidance.
A.J. Gross, C.P.A., E.A. is President of ALG Tax Solutions. A.J. Gross can be contacted at AJGross@algtaxsolutions.
This was printed in the November 30, 2014 - December 13, 2014 edition.