Corporation

Corporations provide limited liability protection to the business owners. This means that if the business fails, the business owners do not have to use their personal assets for unpaid business debt. This limited liability protection does not apply to taxes.

Before forming an corporation, check to see if there is a minimum annual tax for corporations and compare it with any minimum taxes for LLCs.

In practice, incorporating does not protect owners from acts that they do themselves. That is because people can sue both the corporation and the person individually. Also, incorporating does not protect owners if they guarantee debt. Most lenders require the major shareholders to personally guarantee debt. By incorporating, the smaller shareholders are protected, but not the larger ones.

So overall, incorporation makes sense if other people (employees or partners) will be doing some of the work or you have smaller shareholders that you want to protect from debt.

There are S corporations and C corporations. This is a tax designation only. Normal corporations (C corps) have their earnings double taxed. First the corporation is taxed. Then profit is distributed to shareholders and shareholders pay tax on those dividends. S corporations were developed so that earnings are only taxed once.

However, S corporations cannot offer incentive stock options to employees.

The kit below contains the forms for both.