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  • In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock.
  • A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income.
  • A corporation can also take special deductions.
  • For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity.
  • A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

Types of Corporations

Domestic Corporations

Domestic Corporations is one that operates and does business within the state in which it was incorporated.

Foreign Corporations

Foreign Corporations is one doing business in any state except the state in which it was incorporated.

Professional Corporations

Professional Corporations are ones under the state laws that allow professionals to incorporate (accountants, attorneys, doctors etc)

Close Corporation

A close corporation is generally a smaller corporation that elects close corporation status and is therefore entitled to operate without the strict formalities normally required in the operation of standard corporations. It often helps corporations made up of entrepreneurial individuals.

Advantages of Corporations

  • Generally a shareholder in a corporation risks his/her investment. Provides Limited Liability.
  • Shares in corporations are represented by stocks and can be freely bought, sold, or assigned unless shareholders have agreed to restrictions.
  • Corporations are regarded as perpetual, have a continuous life, and continues to exist until dissolved, merged, or otherwise terminated
  • A corporation is a legal entity in itself and is treated separately from its stockholders. It can sue, and be sued, take, hold and convey property, and can contract in own name with shareholders or third parties.
  • It is often easier to raise financing and large amounts of capital than in other business organizations by issuance of stock or other securities like bonds. It can also issue different classes of stock and/or bonds to suit its needs and market demands.
  • Persons who manage corporations are not necessarily shareholders and therefore may be more qualified. Management of a corporation is usually vested in board of directors elected by shareholders. Directors are allowed to be removed at any time with shareholders’ consent.

Disadvantage of Corporate Business Structure

  • Tax Burden may be more than on other business structures because of double taxation
  • Costs of incorporating, because must meet formal creation requirements
  • Formal operating requirements must be met
  • If the corporation goes public, there are substantial costs of compliance with federal securities laws and also maybe subject to a hostile takeover.
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