“Corporation” is a legal entity that is separate and distinct from its owners. A Corporation is formed by filing the Certificate of Incorporation or Articles of Incorporation with the Secretary of State of the state of Incorporation. A Corporation is owned by its Stockholders, governed by its Board of Directors and managed by its Corporate Officers.
The following are some of the benefits that the owners of a Corporation typically enjoy:
- Limited Liability Protection that will help keep the Corporation’s Creditors away from the Stockholders’ personal assets;
- Ability to sell or grant shares of Capital Stock to fuel business growth;
- Legal structure and corporate documents that are well known and understood by Investors and other stakeholders;
- Flexibility to be taxed as either a C-Corporation or an S-Corporation; and
- The potential to qualify for significant tax benefits such as Qualified Small Business Stock.
One issue to manage when doing business as a C-Corporation is the concept of Double Taxation, which means that the Revenues generated by the Corporation are taxed: first, upon its receipt by the Corporation, at the corporate income tax level; and second, upon a Dividend distribution of proceeds to its Stockholders, at their respective income tax levels.
Many technology-focused Startups are incorporated as a C-Corporation because they do not meet the requirements to be classified as an S-Corporation, given that (i) they often raise funding and have two classes of Capital Stock (e.g., Common Stock and Preferred Stock) and (ii) their Investors/Stockholders often are legal entities (e.g., Venture Capital Funds) or foreigners. Also, these Startups often are focused on reinvesting any Revenues to grow the business (and not issue Dividends to Stockholders); and the tax benefits relating to Qualified Small Business Stock only are available when the related legal entity is a C-Corporation.