- Limited Liability: Yes
- Taxation: Two Levels
- Ownership: Any Number, No Restrictions
- Typical Complexity / Cost: Medium
- Capital Structure: No Restrictions
- Ability to Take Public: Yes
- Employee Compensation Methods: Favorable
Organizing a business as a corporation provides the business owner with limited liability, meaning, that if corporate formalities are observed, the shareholder will not be responsible for the liabilities and obligations of the corporation. While this is very important, other entities such as LLCs, LLPs, and limited partnerships also offer the benefit of limited liability to the business owner. The most important difference a corporation has from other entity types is typically the way it is taxed.
The income of a corporation is taxed a two levels. The corporation pays corporate taxes on taxable income it generates at the corporate level, and afterwards, the shareholder pays taxes on payments the corporation makes to them as dividends. This feature of corporations is often why business owners elect to use an LLC or partnership, or decide to make an election with the IRS to be treated as an S-corporation. It should be noted that dividends are typically taxed at favorable capital gains rates rather than as ordinary income, but the additional layer of tax can often result in a higher effective tax rate. However, despite this additional layer of tax, there are certain situations where corporations are more desirable from a tax perspective. We will discuss many of these situations in greater detail in coming posts to the Austin Business Advisor.
In terms of restrictions on ownership, corporations enjoy maximum flexibility — any number of persons can own shares in a corporation, and the corporation may have multiple classes of stock. Additionally, organizing a corporation is typically somewhat less complicated and expensive than doing so for an LLC or partnership. Corporations are also often favored by businesses seeking investment from certain types of investors, including venture capital firms and other institutional investors.