The main reasons that Corporations exist is to conduct business. A corporation is usually designed to be its' own separate identity, therefore allowing many participants in two distinct classes; the controllers, and the passive shareholders.
The controllers are usually paid (sometimes too much), and are involved in management and exclusive decision making processes. They have all the power.
The shareholders get the net value which could be income and/or equity. They also have the ability to determine who are the controllers.
Most of the time the controllers own stock and decide among themselves who the controllers are, and the complete structure is a closely held friendly and mostly invisible separation venture that is protected from personal assets of the individuals involved.
The advantages of an S Corporation include:
No double taxation: In an S corporation, profits and losses are passed through to shareholders, and taxes are only paid once. Check with your state to see how it handles S Corporations. Some states do not recognize S Corporations and will tax such businesses as a regular C Corporation. Some states charge S Corporations a state tax, although the corporation will not have to pay federal tax.
Protection from liability: Your personal assets are separate from the S Corporation business's assets and are therefore protected in case any judgments occur against the business.
Investors Limit: S Corporations can have up to 100 shareholders.
Easier accounting rules: S Corporations without any inventory can use the cash method of accounting, which is much simpler than the accrual method. Check with your accountant about which option makes sense for your business.
Disadvantages of an S Corporation:
Rules and fees: Like a C Corporation, S Corporations are required to file a number of official state and federal documents, including Articles of Incorporation and corporate minutes. They must also hold regular shareholder meetings and pay the required government fees.
Shareholder restrictions: Realize that if an S Corporation has shareholders, the shareholders will be taxed for any income the company has, even if they did not receive any portion of that income. (In a C Corporation, shareholders are taxed only if they receive dividends.) In addition, S Corporations are only allowed to issue one class of stock, which can discourage some investors.
Salary requirements: The Internal Revenue Service requires all officers and owners of an S Corporation to make a salary, even if the company is not yet making a profit. This could be problematic for new businesses struggling to make payroll. A "reasonable salary" is what a person with the appropriate skills needed for the position would be paid on the free market.
Some states have a minimum tax on all corporations that may be as high as $800 each year. Annual fees for reports and remaining valid, as well as penalties and late fees can destroy your profits and ability to remain in existence. Most even charge you to close or cancel the corporation.
Do Not Mix Business and Personal Activity
Use of the Corporation - Members should expressly refer to the Corporation in all dealings with third parties so it is understood they are dealing with the Corporation, not with the Corporationís members in their individual capacities. Do not co-mingle corporate deposits, withdrawals, expenses, titles, entertainment, travel, assets, or liabilities.
Do Not Abuse the Corporation
The courts may pierce a corporate veil if officers or shareholders use it personally, mix (co-mingle) income, banking, assets, vehicles, commit fraud, evade taxes, or other serious misconduct occurs.
State of Operations
Using a corporation from another state requires local state registration. This can make it very expensive to conform to laws in additional states as well. Generally, using a non-local corporation is risky and not recommended. Remember that Corporations are only valid in one state at a time. Using a great Corporation from a permissive or privacy protected state is NOT legal in other states; unless you ALSO register them in each of the other (foreign) states. That may defeat most purposes of the good state laws, and could increase taxes, registration fees, reports, and other expenses outrageously. In fact, failure to register the (foreign) Corporation is probably a crime; both as failure to register, and perhaps also considered tax evasion. Usually, it would be far better to just use the proper residency state to operate the corporation, instead of the foreign state corporation. Example: Do not use a Nevada Corporation operating in another state like California.
Current and Valid Registration
C Corporations and S Corporations have annual registration and renewal requirements. They may also have a base tax imposed. They may cost much more and be inappropriate to own passive assets like real estate, investments, or internet businesses, just to name a few.
Current Director Reports
Submit annual reports - Keep disclosures accurate. Maintain changes and minutes in records. Act like a business. Submit tax returns and pay taxes.
Follow the Laws - Follow the Rules - File Tax Reports
Although Corporations do not have the same requirements as sole proprietorships, partnerships, LLCs, and trusts; there are some rules that must be followed to remain and protect Corporation status.
A Trust Instead of a Corporation
If you are trying to start a very small (for now) business, consultancy, multi-level venture, service, referral service, invention, buy-and-resell company, internet business, or other venture; a Private Asset Trust may be the very best way to get started. A Private Asset Trust is simpler, has less requirements, less registrations, less reporting, requires only a simple document to get started. If the the business prospers and grows, it might then evolve into a Corporation or LLC. If it becomes stale or fails, the shutdown requirements and expense will be minimal.
Compare a Private Asset Trust to other Organizations
Compare benefits, protection, legality, costs, and privacy [HERE].