Selecting the best form of legal organization for your business can have a significant impact on the success of the business. Previously, in Part I of our discussion on business organizations, we discussed sole proprietorships and partnerships. Now, in Part II, we turn to a discussion on corporations.
A corporation is a distinct legal entity that enjoys a degree of separation from its owners. Corporations can exercise many of the same rights, and assume many of the same obligations, as individuals including contracting, asset ownership and sale, filing and defending against lawsuits, loaning and borrowing assets, and paying taxes.
In Wisconsin, corporations are formed by filing articles of incorporation with the Department of Financial Institutions. Owners of the corporation (a/k/a the “stockholders”) invest in the corporation and in return they receive “stock” reflecting their ownership interest. Due to the separation between the stockholders and the corporate entity, corporations must observe certain operational formalities that do not need to be observed by sole proprietorships or partnerships. A board of directors is elected to control the corporation, which elects officers to manage day-to-day operations.
A benefit of organizing a business as a corporation is that corporations can afford a degree of personal liability protection. As a general rule, stockholders, officers, and directors are not personally liable for the corporation’s obligations and debts. However, there are exceptions to this general rule in situations where courts may impose personal liability on stockholders, officers, and directors. Stockholders, officers, and directors may run a higher risk of personal liability exposure in certain situations involving wrongdoing, fraud, injustice to outside parties, failure to maintain the separate identity of the corporation, failure to follow corporate formalities, failure to adequately capitalize, failure to deposit withholding taxes, or violation of certain environmental laws. Personal liability exposure for corporate actions is sometimes called ‘piercing the corporate veil’.
As to taxation, there are generally two primary types of corporations, subchapter C and subchapter S corporations, with unique rules applying to each:
Subchapter C Corporations (C-Corporations)
These entities are generally separate tax payers, with responsibility to pay taxes on the corporation income. Shareholders are not taxed on corporate income, however, if corporate income is distributed to shareholders as dividends, the corporation does not receive a deduction but the shareholders must pay a tax on it.
Subchapter S Corporations (S-Corporations)
These entities are generally not taxed, but rather the corporation’s income and losses flow through to the shareholders in an amount in proportion to their ownership interest. S-Corporations typically cannot have more than 100 shareholders.
The above is, of course, a very broad overview, and there may be additional factors impacting your decision making. If you are starting a new business or have questions about the structure of your current business, it may be time to schedule a confidential consultation with the team at Bender, Levi, Larson & Associates S.C. We can work with you to evaluate your unique situation and provide counseling as to the best approach for you.
