What legal protections do corporations offer business owners? Is it possible to lose those protections?
Incorporating your enterprise will isolate your personal assets from those of your company. The corporation (or limited liability company) helps shield your home, private bank accounts, cars, retirement savings, etc. – from the ongoing threat of business related lawsuits.
S corporations also protect owners from double taxation. Double taxation occurs when corporate income is subjected first to federal income tax, and then is taxed again as personal income when it is returned to shareholders in the form of dividends.
It is possible to lose the protection of a corporation and pierce the corporate veil by not following state or federal law. Income from illegal activities is subject to confiscation. Using a legal entity such as a corporation or a limited liability company will need shield you from the consequences of illegal activity. However, when lawfully used, a corporation will provide many personal and business protections.
What is the difference between a corporate franchise tax and corporate income tax?
Corporate franchise tax and corporate income tax are based on two different measures of the company. Corporate income is based, as the name indicates, on the income of the business. Enterprises that are profitable pay taxes commensurate with their net revenue. If a company loses money or breaks even then there is no income tax to be paid. Corporate franchise tax is based on the capital structure of the company. Franchise taxes must be paid regardless of the profitability of the company.
Incorporating in Delaware has advantageous tax laws for corporations; it is for that reason many Fortune 500 companies are located in Delaware. Delaware companies do not pay corporate income tax if they do not conduct business in Delaware or do not have a physical location in Delaware. Most C-corporations pay $125 dollars in franchise tax per year. That number can go up (but has an upper) if the company authorizes and issues more shares. LLCs pay $250 a year regardless of how many partners own the company.
Found out all the advantages of incorporating your business right here!