| Business and Corporate
Law > Corporations Corporations What is a corporation? Corporations are legal entities
formed under the laws of the state of incorporation. With respect
to federal income taxes, corporations are generally taxed as separate
entities and are subject
to the provisions of Subchapter "C" and Subchapter "S"
of the Internal Revenue Code. "C" Corporations are taxed
on earnings at the corporate level, and the shareholders are also
taxed when they receive dividends. Generally, "S" Corporations
are not taxed at the corporate level but have "flow through"
tax aspects, similar to a partnership, with the shareholders recognizing
their pro-rata share of net income or loss of the corporation for
each taxable year. How do you form a corporation?
To form a corporation in North
Carolina, strict compliance with state law is required. Generally,
these requirements include preparing and filing articles of incorporation,
conducting organizational meetings of shareholders and directors,
preparing and adopting a set of by-laws, establishing records and
books of the corporation including minutes of the meetings, determining
the amount of the contribution to be made by each shareholder in
exchange for the issuance of shares of stock in the corporation,
and the filing of any required reports with appropriate federal,
state, and local offices. Who manages a corporation? The board of directors, who are
elected by the shareholders, manage the corporation. To assist in
the management, the board of directors elect officers who conduct
the day-to-day activities of the corporation. What
liability do the investors in a corporation have? Generally, a shareholder or director
of a corporation is not personally liable for the debts and obligations
of the corporation beyond his or her contribution. However, a shareholder,
officer or director may become personally liable based on his or
her individual actions. What
is a "C" Corporation? A "C" Corporation is
a corporation that is taxed pursuant to Subchapter
"C" of the Internal Revenue Code. "C" Corporations
are taxed on earnings at the corporate level, and the shareholders
are also taxed when they receive dividends. Generally, there are
no limitations as to the types of shareholders in
a "C" Corporation. What
is an "S" Corporation? If a corporation meets the requirements to be taxed as an "S"
Corporation, the corporation will have flow through tax treatment
with the shareholders recognizing their pro-rata share of the net
income or loss of the corporation for each taxable year. "S"
Corporations must be a domestic corporations, have only one class
of stock, and have no more than 75 shareholders. The shareholders
must be individuals, estates, certain types of trusts, or in certain
circumstances, other S Corporations. Since an "S" Corporation
may only have one class of stock, flexibility in structuring equity
and debt is limited.
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