Starting an Online Business All-in-One For Dummies®, 3rd Edition

Making It Official with Incorporation

One option to consider when you're establishing a business is whether to incorporate. A corporation is a legal entity that's separate from the individuals who create or work for it. Stock in a corporation is issued to individuals or to other business entities that form the ownership of the company.

Different flavors of corporations

Depending on your situation, you can choose one of two types of corporation:

• C corporation (or C corp): This traditional form of a corporation typically offers the most flexibility when you're seeking investors. A C corp is allowed to have unlimited shareholders, usually with no restrictions on who they are. The downside is the way in which this status of corporation is taxed. In a concept commonly referred to as double taxation, the business is taxed first on its income and then its individual shareholders must also pay tax.
• S corporation (or S corp): Electing to have Subchapter S status, or to become an S corp, is an option for your company if you have a limited number of shareholders (as few as just you and usually no more than 35). The shareholders must all be individuals (they cannot be corporations or other business entities), and they must be legal U.S. residents. You also have to agree to operate the business on a calendar year for tax purposes. The advantage of becoming an S corp is that you avoid double taxation. (Profits and losses are passed through to shareholders.)

The choice to incorporate

The biggest ...