5. Corporation. A corporation is owned by one or more stockholders and managed by a board of directors (which may consist of only one person) elected by the stockholders. The directors appoint officers who run the day-to-day business of the company. The stockholders, directors and officers of the company are protected from the liabilities of the company, including liabilities for their own negligence in operation of the business (except in certain extraordinary circumstances). In an ordinary corporation (a “C Corporation”) the profits and losses of the corporation do not flow through to the tax returns of the owners. The corporation is a separate entity filing its own tax return and paying its own taxes. Corporate federal income tax rates are not set in graduated tax brackets, and corporations are also subject to franchise taxes in many states (in essences a state corporate income tax). The stockholders may choose, however, to elect “S Corporation” status by making a filing with the IRS. In that case the corporation is taxed like a partnership and the profits and losses of S Corporations flow through to the federal tax returns of the owners in accordance with their stock ownership. They are still protected from the liabilities of the company.
6. Limited Liability Company. An “LLC” is a hybrid of a corporation and a partnership. The ownership percentages, profit and loss distributions, and voting powers of each member are determined by the agreement, rather than by a pre-set corporate legal structure. At the formation of the company an election is made as to whether the company will be taxed like a partnership with profits and losses flowing through to the owners’ tax returns, or taxed like a corporation. The owners and any officers and directors are protected from the liabilities of the company, including for their own negligence in operating the business. An LLC is generally subject to franchise tax.
7. Others. You may also hear of Professional Corporations (PC’s) and Professional Associations (PA’s). Those are special entity forms created for lawyers, doctors, CPA’s, and other professionals subject to licensing requirements and malpractice liability. There is also a separate body of law relating to non-profit corporations.
Debra Bruce practiced business law for 18 years, and is a Certified Professional Co-Active Coach. She is a leader of the Houston chapter of the International Coach Federation, and specializes in coaching business owners and lawyers. View her websites at www.SuccessHatchery.com and www.DebraBruce.com or contact her at debra@DebraBruce.com and 713-682-4353.
