Corporations are creatures of state law, with each state having similar types of provisions, but with the specifics of such jurisdictions potentially varying greatly.
The primary purpose of a corporation is to limit the liability of the corporation’s owners, the shareholders, from creditors. While such limitation of liability is the hallmark of a corporation, not all liability is avoided by its use, the same as with the more recently authorized limited liability companies (“LLC”). A corporation’s shareholders may be subjected to liability by a “piercing of the corporate veil” (see Piercing the “Veil” of a Company’s “Limited Liability”), by voluntarily accepting liability as in the case of a shareholder guarantying a loan, or by a shareholder’s own liability arising under tort law, as with an employee-shareholder’s operation of a motor vehicle in furtherance of the corporation’s business.
Beyond limitation of liability, there are built-in features of a body of law developed literally over hundreds of years. Thus, issues of governance, director loyalties, usurpation of corporate opportunities, rights of shareholders to acquire additional shares upon certain events, and establishment of different classes and series of stock with different attributes, including voting rights, have been, for the most part, soundly developed, something from which the more modern entity, the LLC, cannot benefit.
While a corporation is created under the laws of a specific state, taxation of that corporation is primary determined by the Internal Revenue Code and elections thereunder. Specifically, a corporation is taxed as a “C” corporation unless an election is made by the shareholders, all of which must be eligible under the Code, to be taxed under Subchapter-S. As a corporation taxed under Subchapter-S, the corporation does not pay an income tax on its earnings and profits, but instead merely acts as a “pass through” to the shareholders in the same proportion as their respective stock ownership.
Seeking out experienced business planners can help sort through the options to meet your objectives, both business and personal. With our extensive expertise, we can help you achieve and secure those objectives. After all, it’s more than just a choice of entity.