A corporation is a business entity that is given many of the same legal rights as an actual person. A corporations is owned by its shareholders. Corporations exist as virtual or fictitious persons, granting a limited protection to the actual people involved in the business of the corporation.

This limitation is one of the many advantages to incorporation, and is a major draw for smaller businesses to incorporate.

There are a number of reasons to incorporate your business. Among them:

• Limited Liability for Shareholders - So long as a corporation is operated as a true separate entity, shareholders are generally not personally liable for the acts and debts of the corporation. But see "Piercing the Corporate Veil".
• Raising Capital - C corporations can issue several types of stock to finance the business (note that an S Corporation is limited to one class of stock). This makes the corporate form attractive to businesses with plans to grow through raising capital. A corporation can issue preferred, non-voting, multiple-class, etc. shares of stock, each of which has its own set of rights.
• Flexibility of Ownership - Traditional corporations (see also S Corporations) have great flexibility of ownership. Shareholders can be individuals, foreign or domestic. Other corporations or legal entities can own stock in a corporation. Corporate stock can be held in a trust, partnership or other legal tools.
• Perpetual Existence - Corporations have perpetual existence, which means that unlike other forms of business that cease to exist in the event of bankruptcy or the withdrawal or death of the owners, their continuity remains.
• Corporate Tax Deductions - Corporations can offer deductible employee benefits, employee and officer health plans, medical reimbursement plans and a number of other benefits that LLC's cannot. Corporations offer the most benefits with regard to corporate business deductions.
• Credibility - Operating your business as a corporation tends to demonstrate business viability, which is more attractive to creditors and investors.
• Transferability of Ownership - Corporations offer the most flexibility when transferring ownership of the business.
• Lower Chance of IRS Audit - The most frequently audited group of taxpayers is individuals who deduct business expenses on their personal tax returns. It is reported that corporations with less than $2 million a year in revenue are the least often audited group that claims business deductions.

Most businesses choose to incorporate in the state in which it operates (known as the "home state"). Incorporating in a home state usually provides the least complicated and least expensive option if the corporation intends to conduct business in its home state. Home state incorporation prevents double franchise taxes and double filing of annual reports.

While incorporation in the home state may make the most sense for a particular corporation, a business may opt to incorporate in another state even if it has no physical presence in that state and conducts no business activities in that state. There are several considerations when deciding in which state to incorporate:

• Company’s intentions regarding conducting business in one or more states
• Comparison of home state’s corporate income tax rate with that in other states
• Company’s aspirations about going public
• Venture capital needs
• State filing fees
• State franchise fees
• Location of corporation’s physical facilities and business operations

Many businesses choose to incorporate in Delaware. Among the reasons for doing so are the following:

• Delaware has a separate Court of Chancery, a business court. Decisions of the Chancery Court are issued as written opinions, which provide a large body of written legal precedent upon which to rely.
• Delaware is widely considered to have the most favorable corporate laws in the nation.
• Delaware has low state filing fees to incorporate.
• Delaware has low annual franchise tax.
• A business that incorporates in Delaware, but does not do business in the state, is not required to pay Delaware corporate taxes.
• Shareholders who are not citizens of Delaware are not responsible for state income taxes.
• All that you need to incorporate in Delaware is a registered agent within the state - no corporate offices or operations are required in Delaware.

Many businesses choose to incorporate in Nevada. Among the reasons for doing so are the following:

• Nevada has no corporate income tax.
• Stockholders, directors and officers of a Nevada corporation need not reside in or hold meetings in Nevada.
• Nevada does not tax a corporation's shares.
• Nevada does not have a corporate franchise tax.
• Nevada does not have an IRS Information Sharing Agreement.
• Annual fees for maintaining a corporation in Nevada are nominal.
• Nevada corporations have minimal reporting and disclosure requirements.
• Information about Nevada corporate shareholders is not public record.

The corporate structure is relatively formal. Shareholders, who are the owners of the business, elect a board of directors. The board of directors is responsible for managing the affairs of the corporation. The board of directors selects and appoints corporate officers to oversee the day-to-day operations of the business.

A corporation's bylaws serve as a rulebook for management of the corporation. The bylaws address many issues, including:

• time and place for meetings of officers, directors, and shareholders
• number of directors
• director tenure and qualifications
• titles of officers and means of determining officer compensation
• duties of the board of directors
• existence and purpose of committees

The board of directors acts on behalf of the shareholders to make policy decisions and provide oversight in running the corporation. Specific duties of the board of directors and of individual board members are sometimes set by the corporation’s bylaws. All states impose fiduciary duties on directors of a corporation. These include the duty of loyalty and the duty of care. The duty of loyalty requires that a director act in the best interest of the corporation and subordinate their own interests. The duty of care requires a director to act in good faith, in a reasonably prudent way, and with a degree of care that another in a similar situation would use.

Officers of a corporation are appointed by the board of directors to run day-to-day operations of the company. Most states stipulate that a corporation must have a president, secretary, and treasurer.

In smaller corporations, one individual is often selected to fulfill all three roles. Larger corporations may have vice- presidents and other corporate officers. Officers do not have to be owners or directors, but they may be.

The corporation's president is responsible for the overall day-to-day activities of the corporation. Acting at the direction of the board, the president generally executes contracts, stock certificates, and other legal documents. The secretary is usually responsible for maintaining corporate records, abiding by and following corporate formalities, and taking the minutes at corporate meetings. The corporate treasurer is generally responsible for supervision of corporate funds, maintaining financial records, and issuing financial reports. If a corporation has vice presidents, they tend to handle specific areas of the business as needed.

Shareholders of a corporation generally cannot be held liable for the acts and debts of the corporation. Courts, however, will, "pierce the corporate veil," and allow creditors to reach shareholders’ personal assets in certain limited circumstances:

• Corporation is improperly formed
• Corporate formalities are not followed
• Corporation is not maintained as a true separate entity, such as when a shareholder uses corporate funds as their own
• Corporation is used as a tool to perpetrate a fraud
• Corporation is undercapitalized in an attempt to defraud a lender

In order to benefit from the protections afforded a corporation, it is important that your company be properly formed and that you follow formalities, follow the rules, and maintain its separateness.

A corporation is the only type of business, as a legal entity separate and distinct from its owners, pays its own income tax. A corporation is taxed according to corporate, not individual, income tax rates. If a corporation will owe taxes in a given year, it must estimate the amount of tax due for the year and make quarterly payments to the IRS. Taxable income includes profits retained in the company to cover expenses or other purposes and profits that are distributed to shareholders in the form of dividends.

"Double-Taxation" - When a corporation distributes dividends, shareholders receiving the distributions must claim that income on their own individual tax returns. To avoid the double taxation problem, smaller corporations often try minimize their tax burden by paying out their revenue in the form of salaries. Another option for a corporation to avoid double taxation is to elect S Corporation status.

An S corporation is simply a corporation that elects to pass corporate income, losses, deductions and credit through to its shareholders for tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at individual income tax rates. This allows the corporation to avoid double taxation on the corporate income. To qualify for S corporation status, the corporation must meet the following requirements:

• Have no foreign shareholders
• Have only individual shareholders
• Have no more than 100 shareholders
• Have only one class of stock
• Not more than 25% of its income can be "passive income" (such as rental income, interest, and royalties) over three continuous years.
• Not be an ineligible corporation such as certain financial institutions, insurance companies, and domestic international sales corporations.

Corporations that want the benefits of S corporation status must file Form 2553 with the IRS. Every shareholder must sign the form.

When starting a business, a business owner has several options in regards to choice of entity. Three of the most popular options are C Corporation, S Corporation, and Limited Liability Company ("LLC"). Each differs in the areas of tax, ownership, and filing requirements.

A C Corporation provides personal liability protection for an owner against standard collection claims. A C Corporation presents the issue of double taxation, by which both the corporation and shareholders are taxed on profits distributed as dividends. A C Corporation is not limited to a certain number of owners and shares of stock tend to be easily transferable. A C corporation is managed by its board of directors, must hold annual meetings, and must follow certain formalities with respect to corporate actions.

An owner of an S Corporation is usually not liable for the debts of the corporation. Unlike a C Corporation, an S Corporation is not subject to double taxation because the corporation’s income passes directly to shareholders. There are certain restrictions on what types of corporations can and cannot be S corporations. For example, an S Corp may have a maximum of 100 individual shareholders, all of whom must be permanent residents or citizens of the United States. An S Corporation, like a C Corp, must follow the formalities of holding annual meetings.

A Limited Liability Company ("LLC") is similar to an S Corporation and C Corporation in that owners are generally not liable for the debts incurred by the company. Unless it opts to be taxed as a corporation, an LLC is only taxed once since income and losses pass directly to the members. Most states permit single member LLC’s but some require two or more members. An LLC, which is managed either by members or outside managers, generally have few formal requirements.