glassroofmuseum03371What is a corporation?

Corporations are legal entities formed under the laws of the state of incorporation. With respect to federal income taxes, corporations are generally taxed as separate entities and are subject to the provisions of Subchapter “C” and Subchapter “S” of the Internal Revenue Code. “C” Corporations are taxed on earnings at the corporate level, and the shareholders are also taxed when they receive dividends. Generally, “S” Corporations are not taxed at the corporate level but have “flow through” tax aspects, similar to a partnership, with the shareholders recognizing their pro-rata share of net income or loss of the corporation for each taxable year.

How do you form a corporation?

To form a corporation in North Carolina, strict compliance with state law is required. Generally, these requirements include preparing and filing articles of incorporation, conducting organizational meetings of shareholders and directors, preparing and adopting a set of by-laws, establishing records and books of the corporation including minutes of the meetings, determining the amount of the contribution to be made by each shareholder in exchange for the issuance of shares of stock in the corporation, and the filing of any required reports with appropriate federal, state, and local offices.

Who manages a corporation?

The board of directors, who are elected by the shareholders, manage the corporation. To assist in the management, the board of directors elect officers who conduct the day-to-day activities of the corporation.

What liability do the investors in a corporation have?

Generally, a shareholder or director of a corporation is not personally liable for the debts and obligations of the corporation beyond his or her contribution. However, a shareholder, officer or director may become personally liable based on his or her individual actions.

What is a “C” Corporation?

A “C” Corporation is a corporation that is taxed pursuant to Subchapter “C” of the Internal Revenue Code. “C” Corporations are taxed on earnings at the corporate level, and the shareholders are also taxed when they receive dividends. Generally, there are no limitations as to the types of shareholders in a “C” Corporation.

What is an “S” Corporation?

If a corporation meets the requirements to be taxed as an “S” Corporation, the corporation will have flow through tax treatment with the shareholders recognizing their pro-rata share of the net income or loss of the corporation for each taxable year. “S” Corporations must be a domestic corporations, have only one class of stock, and have no more than 75 shareholders. The shareholders must be individuals, estates, certain types of trusts, or in certain circumstances, other S Corporations. Since an “S” Corporation may only have one class of stock, flexibility in structuring equity and debt is limited.