{"id":2962,"date":"2023-02-19T16:11:12","date_gmt":"2023-02-19T16:11:12","guid":{"rendered":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/chapter\/introduction-to-corporations\/"},"modified":"2025-05-22T14:02:59","modified_gmt":"2025-05-22T14:02:59","slug":"introduction-to-corporations","status":"publish","type":"chapter","link":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/chapter\/introduction-to-corporations\/","title":{"raw":"Learn It 7.3.1: Corporations","rendered":"Learn It 7.3.1: Corporations"},"content":{"raw":"<section class=\"textbox learningGoals\">\r\n<ul>\r\n\t<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand the differences between C and S corporations&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12672,&quot;10&quot;:0,&quot;11&quot;:4,&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand the differences between C and S corporations<\/span><\/li>\r\n\t<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand what a benefit corporation is&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12672,&quot;10&quot;:0,&quot;11&quot;:4,&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand what a benefit corporation is<\/span><\/li>\r\n\t<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand the advantages and disadvantages of corporations&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12672,&quot;10&quot;:0,&quot;11&quot;:4,&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand the advantages and disadvantages of corporations<\/span><\/li>\r\n\t<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand the advantages and disadvantages of a limited liability company (LLC)&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:15171,&quot;3&quot;:{&quot;1&quot;:0},&quot;4&quot;:{&quot;1&quot;:2,&quot;2&quot;:16777215},&quot;9&quot;:0,&quot;11&quot;:4,&quot;12&quot;:0,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand the advantages and disadvantages of a limited liability company (LLC)<\/span><\/li>\r\n<\/ul>\r\n<\/section>\r\n<h2>Corporations<\/h2>\r\n<p>When people think of corporations, they typically think of large, well-known companies such as Apple, Netflix, Nike, and General Electric. But corporations range in size from large multinationals with thousands of employees and billions of dollars in sales to small firms with few employees and revenues under $25,000. While corporations are not the most common form of business ownership, they do account for the majority of the revenue from businesses in the United States.<\/p>\r\n<p>In this section you'll learn about C and S corporations, and, a newcomer to the corporate scene, the benefit corporation.<\/p>\r\n<h2><strong>Corporation (C Corporation)<\/strong><\/h2>\r\n<section class=\"textbox keyTakeaway\">\r\n<h3>corporation (C corp)<\/h3>\r\n<p>A <strong>corporation<\/strong> (sometimes referred to as a C corporation or C corp) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts of the business. This type of general corporation is called a C corp because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.<\/p>\r\n<\/section>\r\n<p>Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees. Corporations offer the ability to sell ownership shares in the business through stock offerings. \u201cGoing public\u201d through an initial public offering (IPO) is a major selling point in attracting investment capital and high-quality employees.<\/p>\r\n<h3><strong>Forming a Corporation<\/strong><\/h3>\r\n<p>A corporation is formed under the laws of the state in which it is registered.\u00a0<span style=\"color: #333333;\">Because corporations are recognized as entities separate from their owners, the process is much more complex than establishing a sole proprietorship or partnership. The corporation must be \"formed\" and then recognized by the\u00a0state\u2019s Secretary of State office and\/or State Corporation Commission. The way that corporations are\u00a0\"born\" is through the filing of\u00a0articles of incorporation with the\u00a0state\u2019s Secretary of State office. <\/span><\/p>\r\n<p><span style=\"color: #333333;\">Some states require corporations to establish directors and issue stock certificates to initial shareholders in the registration process. For this reason, establishing a C corporation can be expensive. Attorneys are often hired to draft the initial articles of incorporation, shareholders agreements, stock option agreements, and other related documentation. Filing the articles of incorporation, establishing a registered agent, and issuing stock are also tasks that attorneys often perform on behalf of those forming the corporation.\u00a0<\/span><\/p>\r\n<p><span style=\"color: #333333;\">As with\u00a0other forms of ownership, once the<\/span> corporation is formed, you must obtain business licenses and permits. Regulations vary by industry, state, and locality.\u00a0If you are hiring employees, you will need to understand and follow\u00a0federal and state regulations for employers.<\/p>\r\n<h3><strong>Corporate Taxes<\/strong><\/h3>\r\n<p><span style=\"color: #333333;\">When you form a corporation, you create a separate tax-paying entity. Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice: first, when the company makes a profit, and again when dividends are paid to shareholders. These dividends appear on the shareholder's personal tax returns and are subject to taxation. <\/span><\/p>\r\n<p><span style=\"color: #333333;\">It is important to note that only income paid as dividends is taxed twice. Income distributed as salary or other\u00a0compensation is a deduction for the corporation. This means that the amount of compensation paid is deducted from the amount of corporate income that is subject to taxation.\u00a0<\/span><\/p>\r\n<p><span style=\"color: #333333;\">Just like individuals,<\/span> corporations are required to pay federal, state, and in some cases, local taxes.<span style=\"color: #333333;\"> Instead of supplying a\u00a0social security number for\u00a0taxpayer identification,<\/span> corporations must register with the IRS and\u00a0state and local revenue agencies, and obtain\u00a0a\u00a0tax ID number.<\/p>\r\n<h3><strong>Advantages of a Corporation<\/strong><\/h3>\r\n<ul>\r\n\t<li><strong>Limited Liability.\u00a0<\/strong>When it comes to taking responsibility for business debts and actions of a corporation, shareholders\u2019 personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.<\/li>\r\n\t<li><strong>Ability to Generate Capital.<\/strong>\u00a0Corporations have an advantage when it comes to raising capital for their business\u2014the ability to raise funds through the sale of stock.<\/li>\r\n\t<li><strong>Corporate Tax Treatment.<\/strong>\u00a0Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.<\/li>\r\n\t<li><strong>Attractive to Potential Employees.<\/strong>\u00a0Corporations are generally able to attract and hire high-quality and motivated employees, because they offer competitive benefits and the potential for partial ownership through stock options.<\/li>\r\n<\/ul>\r\n<h3><strong>Disadvantages of a Corporation<\/strong><\/h3>\r\n<ul>\r\n\t<li><strong>Time and Money.<\/strong>\u00a0Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating, and tax costs that most other structures do not require.<\/li>\r\n\t<li><strong>Double Taxing.<\/strong>\u00a0In some cases, corporations are taxed twice\u2014first, when the company makes a profit, and again when dividends are paid to shareholders.<\/li>\r\n\t<li><strong>Additional Paperwork.\u00a0<\/strong>Because corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and record-keeping burdens associated with this entity.<\/li>\r\n<\/ul>\r\n<section class=\"textbox tryIt\">[ohm2_question height=\"400\"]3908[\/ohm2_question]<\/section>","rendered":"<section class=\"textbox learningGoals\">\n<ul>\n<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand the differences between C and S corporations&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12672,&quot;10&quot;:0,&quot;11&quot;:4,&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand the differences between C and S corporations<\/span><\/li>\n<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand what a benefit corporation is&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12672,&quot;10&quot;:0,&quot;11&quot;:4,&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand what a benefit corporation is<\/span><\/li>\n<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand the advantages and disadvantages of corporations&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:12672,&quot;10&quot;:0,&quot;11&quot;:4,&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand the advantages and disadvantages of corporations<\/span><\/li>\n<li><span data-sheets-value=\"{&quot;1&quot;:2,&quot;2&quot;:&quot;Understand the advantages and disadvantages of a limited liability company (LLC)&quot;}\" data-sheets-userformat=\"{&quot;2&quot;:15171,&quot;3&quot;:{&quot;1&quot;:0},&quot;4&quot;:{&quot;1&quot;:2,&quot;2&quot;:16777215},&quot;9&quot;:0,&quot;11&quot;:4,&quot;12&quot;:0,&quot;14&quot;:{&quot;1&quot;:2,&quot;2&quot;:0},&quot;15&quot;:&quot;Calibri&quot;,&quot;16&quot;:10}\">Understand the advantages and disadvantages of a limited liability company (LLC)<\/span><\/li>\n<\/ul>\n<\/section>\n<h2>Corporations<\/h2>\n<p>When people think of corporations, they typically think of large, well-known companies such as Apple, Netflix, Nike, and General Electric. But corporations range in size from large multinationals with thousands of employees and billions of dollars in sales to small firms with few employees and revenues under $25,000. While corporations are not the most common form of business ownership, they do account for the majority of the revenue from businesses in the United States.<\/p>\n<p>In this section you&#8217;ll learn about C and S corporations, and, a newcomer to the corporate scene, the benefit corporation.<\/p>\n<h2><strong>Corporation (C Corporation)<\/strong><\/h2>\n<section class=\"textbox keyTakeaway\">\n<h3>corporation (C corp)<\/h3>\n<p>A <strong>corporation<\/strong> (sometimes referred to as a C corporation or C corp) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts of the business. This type of general corporation is called a C corp because Subchapter C of Chapter 1 of the Internal Revenue Code is where you find general tax rules affecting corporations and their shareholders.<\/p>\n<\/section>\n<p>Corporations are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements. Because of these issues, corporations are generally suggested for established, larger companies with multiple employees. Corporations offer the ability to sell ownership shares in the business through stock offerings. \u201cGoing public\u201d through an initial public offering (IPO) is a major selling point in attracting investment capital and high-quality employees.<\/p>\n<h3><strong>Forming a Corporation<\/strong><\/h3>\n<p>A corporation is formed under the laws of the state in which it is registered.\u00a0<span style=\"color: #333333;\">Because corporations are recognized as entities separate from their owners, the process is much more complex than establishing a sole proprietorship or partnership. The corporation must be &#8220;formed&#8221; and then recognized by the\u00a0state\u2019s Secretary of State office and\/or State Corporation Commission. The way that corporations are\u00a0&#8220;born&#8221; is through the filing of\u00a0articles of incorporation with the\u00a0state\u2019s Secretary of State office. <\/span><\/p>\n<p><span style=\"color: #333333;\">Some states require corporations to establish directors and issue stock certificates to initial shareholders in the registration process. For this reason, establishing a C corporation can be expensive. Attorneys are often hired to draft the initial articles of incorporation, shareholders agreements, stock option agreements, and other related documentation. Filing the articles of incorporation, establishing a registered agent, and issuing stock are also tasks that attorneys often perform on behalf of those forming the corporation.\u00a0<\/span><\/p>\n<p><span style=\"color: #333333;\">As with\u00a0other forms of ownership, once the<\/span> corporation is formed, you must obtain business licenses and permits. Regulations vary by industry, state, and locality.\u00a0If you are hiring employees, you will need to understand and follow\u00a0federal and state regulations for employers.<\/p>\n<h3><strong>Corporate Taxes<\/strong><\/h3>\n<p><span style=\"color: #333333;\">When you form a corporation, you create a separate tax-paying entity. Unlike sole proprietors and partnerships, corporations pay income tax on their profits. In some cases, corporations are taxed twice: first, when the company makes a profit, and again when dividends are paid to shareholders. These dividends appear on the shareholder&#8217;s personal tax returns and are subject to taxation. <\/span><\/p>\n<p><span style=\"color: #333333;\">It is important to note that only income paid as dividends is taxed twice. Income distributed as salary or other\u00a0compensation is a deduction for the corporation. This means that the amount of compensation paid is deducted from the amount of corporate income that is subject to taxation.\u00a0<\/span><\/p>\n<p><span style=\"color: #333333;\">Just like individuals,<\/span> corporations are required to pay federal, state, and in some cases, local taxes.<span style=\"color: #333333;\"> Instead of supplying a\u00a0social security number for\u00a0taxpayer identification,<\/span> corporations must register with the IRS and\u00a0state and local revenue agencies, and obtain\u00a0a\u00a0tax ID number.<\/p>\n<h3><strong>Advantages of a Corporation<\/strong><\/h3>\n<ul>\n<li><strong>Limited Liability.\u00a0<\/strong>When it comes to taking responsibility for business debts and actions of a corporation, shareholders\u2019 personal assets are protected. Shareholders can generally only be held accountable for their investment in stock of the company.<\/li>\n<li><strong>Ability to Generate Capital.<\/strong>\u00a0Corporations have an advantage when it comes to raising capital for their business\u2014the ability to raise funds through the sale of stock.<\/li>\n<li><strong>Corporate Tax Treatment.<\/strong>\u00a0Corporations file taxes separately from their owners. Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends, while any additional profits are awarded a corporate tax rate, which is usually lower than a personal income tax rate.<\/li>\n<li><strong>Attractive to Potential Employees.<\/strong>\u00a0Corporations are generally able to attract and hire high-quality and motivated employees, because they offer competitive benefits and the potential for partial ownership through stock options.<\/li>\n<\/ul>\n<h3><strong>Disadvantages of a Corporation<\/strong><\/h3>\n<ul>\n<li><strong>Time and Money.<\/strong>\u00a0Corporations are costly and time-consuming ventures to start and operate. Incorporating requires start-up, operating, and tax costs that most other structures do not require.<\/li>\n<li><strong>Double Taxing.<\/strong>\u00a0In some cases, corporations are taxed twice\u2014first, when the company makes a profit, and again when dividends are paid to shareholders.<\/li>\n<li><strong>Additional Paperwork.\u00a0<\/strong>Because corporations are highly regulated by federal, state, and in some cases local agencies, there are increased paperwork and record-keeping burdens associated with this entity.<\/li>\n<\/ul>\n<section class=\"textbox tryIt\"><iframe loading=\"lazy\" id=\"ohm3908\" class=\"resizable\" src=\"https:\/\/ohm.one.lumenlearning.com\/multiembedq.php?id=3908&theme=lumen&iframe_resize_id=ohm3908&source=tnh&show_question_numbers\" width=\"100%\" height=\"400\"><\/iframe><\/section>\n","protected":false},"author":21,"menu_order":15,"template":"","meta":{"_candela_citation":"[{\"type\":\"original\",\"description\":\"Outcome: Corporations\",\"author\":\"Linda Williams and Lumen Learning\",\"organization\":\"\",\"url\":\"\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"Corporations: Limiting Your Liability\",\"author\":\"\",\"organization\":\"OpenStax CNX\",\"url\":\"http:\/\/cnx.org\/contents\/4e09771f-a8aa-40ce-9063-aa58cc24e77f@8.5\",\"project\":\"\",\"license\":\"cc-by\",\"license_terms\":\"Download for free at http:\/\/cnx.org\/contents\/4e09771f-a8aa-40ce-9063-aa58cc24e77f@8.5\"}]","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"part":2947,"module-header":"learn_it","content_attributions":[{"type":"original","description":"Outcome: Corporations","author":"Linda Williams and Lumen Learning","organization":"","url":"","project":"","license":"cc-by","license_terms":""},{"type":"cc","description":"Corporations: Limiting Your Liability","author":"","organization":"OpenStax CNX","url":"http:\/\/cnx.org\/contents\/4e09771f-a8aa-40ce-9063-aa58cc24e77f@8.5","project":"","license":"cc-by","license_terms":"Download for free at http:\/\/cnx.org\/contents\/4e09771f-a8aa-40ce-9063-aa58cc24e77f@8.5"}],"internal_book_links":[],"video_content":null,"cc_video_embed_content":{"cc_scripts":"","media_targets":[]},"try_it_collection":null,"_links":{"self":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters\/2962"}],"collection":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/users\/21"}],"version-history":[{"count":9,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters\/2962\/revisions"}],"predecessor-version":[{"id":9480,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters\/2962\/revisions\/9480"}],"part":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/parts\/2947"}],"metadata":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapters\/2962\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/media?parent=2962"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/pressbooks\/v2\/chapter-type?post=2962"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/contributor?post=2962"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/content.one.lumenlearning.com\/introductiontobusiness\/wp-json\/wp\/v2\/license?post=2962"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}