Corporation. A Corporation is an artificial creation of the law existing as a voluntary chartered association of individuals that has most of the rights and duties of natural persons but with perpetual existence and limited liability. While a sole proprietorship does not exist as an entity separate from its owner and a partnership by and large is very much identified legally with the individual partners, a corporation is a separate "person" at law. It has its own identity separate and apart from it’s owners (the shareholders). Its existence is not tied to the natural life of one or more owners. And, unlike the sole proprietorship and partnership, the owners are not personally liable for the debts and obligations of the corporation unless they contractually choose to be so. From this latter characteristic comes the term "limited liability". The liability of the individual shareholder for corporate debts and torts is limited to the shareholder’s investment in the corporation (i.e., the value of their stock). The shareholder’s personal assets (home, etc.) are not at risk. Like everything else in the law there are exceptions and situations where a claimant can get at the personal assets of a shareholder but a discussion of that is beyond the scope of this blog post. In addition to having limited liability, another reason some enterprises incorporate is for tax consequences. Your accountant will give you additional information on this matter.
Generally speaking, a corporation will file and pay taxes just as individuals do. And the profits realized by the owners of a corporation will again be taxed on their individual tax returns. An exception is when the owners elect "Subchapter S" tax treatment. In that situation the profits of the corporation will be passed through to the owner’s for taxation purposes—just as in a partnership. However, there are certain guidelines which must be met in order for a corporation to receive Subchapter S tax treatment. One, for example, is that only natural persons may own stock in a Subchapter S corporation (i.e., no corporate or LLC shareholders).
The primary reason my clients incorporate is for limited liability and for certain tax advantages if the corporation is to be their "touring corporation". Artists will usually incorporate their touring activities. If their corporation is administered properly, the artist will be shielded from personal liability for claims that might arise—such as a vehicle accident while traveling to or from a performance, injury to a crew member, etc. The same with business clients—they choose not to be personally liable for business debts and torts. For example, a music publisher would incorporate as a liability hedge against a copyright infringement suit.
The formal requirements of forming and maintaining a corporation are many—though not complicated. Limited liability companies offer much more flexibility. A few words about that in Part IV.