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The corporation is a legal entity established by state law. It is a distinct and separate entity from the proprietor of the business. The corporation has a birth - legal formation - and a continuing life until it is dissolved. A corporations life is described as perpetual since its life is not dependent on individuals. Even when the founder and operator of the business dies, the corporation continues on.

The corporation is formed by filing "Articles of Incorporation" with the Secretary of State or Department of Corporations at the state level. The business is not required to do business in the state of incorporation. Often businesses will incorporate in one state and do business in another state because of favorable state laws. Most state have filing fees which may exceed $500. Contact the Secretary of State or Department of Corporations in the state capitol where you wish to incorporate for specific fee schedules.

The owners of the corporation are called stockholders or shareholders since they own shares of stock. A corporation may have as few as one or as many unlimited stockholders as suits its business purpose. Ownership change in a corporation, all or in part, is easy since shares of stock can be transferred to other individuals by merely signing a paper.

The stockholders (owners) of the corporation have limited liability against business legal and creditor claims. In most cases, the personal assets of the stockholders cannot be used for corporation business debts.

Regardless of the state of incorporation, all corporations are required to file a federal corporation income tax return - Form 1120 - annually. The corporation tax return reports all the business income and expense and is taxed on the profits. In addition, the state of incorporation also requires an annual tax return and may or may not have taxes in addition to the federal taxes. Again, check with your state government to determine the state tax rates on a corporation.

Since corporations pay tax on income, the stockholders are not taxed on the business income of the corporation, but on their individual tax returns (Form 1040). If the corporation pays dividends on its stock, those dividends are taxed twice, once at the corporate level since they are not a deductible item, and again on the stockholder's individual return.

The Internal Revenue Services classifies corporations as "C", "S", or "Personal Service" and each has unique tax advantages and disadvantages. Check those menu items and get the advice of your tax professional before selecting a corporation as your business entity.

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