Types of business enterprises, part 2
Ask the LDA
August 14, 2021
A business corporation is an entity created by the person or persons who organize it. This legal entity may own property, enter into contracts, sue and be sued. Because it is a person, it is subject to taxation. Its owners, called shareholders, also pay tax on certain distributions made to them, such as cash dividends. This is often referred to as double taxation. Shareholders are protected from liability and their loss is limited to the amount of money they invest in the corporation. Although the shareholders own the corporation, the corporation is managed by its board of directors. The directors typically appoint officers to carry out the directors’ policies and goals for the corporation. A corporation is subject to regulatory control by the state in which it is formed as well as any other state in which it does business.
Certain small business corporations that adhere to specific requirements of the IRS Code are provided relief against double taxation, typically common to business corporations. Called an S corporation after the original subchapter of the IRS Code providing such relief, the corporation itself does not pay tax and all income earned is passed through the corporation to the shareholders. All shareholders (who must not number more than 75) must agree to the election of S status and only eligible corporations may apply for this status. A typical business corporation is referred to as a C corporation to distinguish it from an S corporation.
Professionals such as doctors, lawyers, engineers and accountants may incorporate to obtain certain tax and other benefits available to a business corporation. These professionals remain personally liable for their own negligence and for the negligence of those working for them.
Under IRS Code 50l(c)(3) a nonprofit corporation may be formed to operate for some religious, charitable, educational, literary or scientific purpose and is eligible for certain Federal and State tax exemptions. These five purposes are usually included as purposes accepted by the individual states as a valid nonprofit corporate purpose. A nonprofit corporation, however, cannot issue shares and cannot pay dividends and, upon dissolution, must distribute its remaining assets to another nonprofit group.
Diana Wade is a Legal Document Assistant. She can be reached at (661) 821-0494 or email@example.com. Diana is not an attorney, she can only provide self-help services at your specific direction. Kern County LDA #185, ex 4/11/23.