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are a favorite form of business entity used extensively by small and large companies. Chartered by any one of the 50 states, corporations afford their owners and operators with limited liability in most situations and provide clear mechanisms for business management. Owned by shareholders who elect a board of directors to direct management, corporations are operated day-to-day by officers who are appointed by the board. The most common form of corporation is the C corporation which is taxed as a separate entity and whose shareholders are not taxed until they receive distributions, commonly called, dividends, from the company. Since the corporation is separately taxed on its earnings, any dividend received by shareholders are effectively taxed twice. For example, $1.00 of earnings would be taxed to the corporation at its rate, say 25%, leaving $.75 in after-tax earnings. If that $.75 is distributed to shareholders, it will be taxed again to the shareholder at his rate, say 33%, leaving $.50 of the original $1.00 in earnings after-tax. S corporations are taxed differently. They are not taxed as separate entities but their shareholders are taxed on their pro rata portion of company earnings regardless of whether distributions are made. One dollar of earnings from an S corporation would generate, at a 33% rate, $.33 of taxes to its shareholders leaving $.67 available after tax. Many specific requirements must be met to qualify as an S Corporation. Ownership in corporations can take many forms. The most common ownership form, common stock, provides its holder with pro rata ownership interests in the company together with the right to one vote per share. Common stock can also be issued without voting rights or in classes with specially defined voting rights. Preferred stock and preferred stock which is convertible into common stock, either with or without defined voting rights, can also be used confer ownership rights in a corporation. Options, warrants, and debentures which are convertible into stock are also frequently used to afford varying interests in the ownership of a company. See: Common Stock, Control, Convertible Debentures, Convertible Preferred Stock, Convertible Securities, Joint Ventures, LLC's (Limited Liability Companies), Limited Partnerships, Options, S Corporations, Strategic Partnerships, Warrants. |
