One of the first decisions a new business owner will make is which entity is right for the business. Among the business entity menu of options are corporations. Corporations are a prevalent structure for companies because they offer many benefits:
- Limited liability
- Easier transferability of ownership interest
- A clear, formal management structure
- Potential for perpetual existence
When forming a new corporation, a founder should be aware that their business will be governed by the laws of the state in which they incorporate. This means if someone files to be a corporation in Georgia, they will be governed by the Georgia Business Corporation Code. Georgia Code dictates shares of the corporation, shareholder rights, filing requirements, and fiduciary duties of the directors and officers. This is true in every state.
But remember, the state where the company is based does not have to be the same state in which it is incorporated. Many businesses who do most, if not all, their business in Georgia are incorporated in Delaware for various pro-business reasons. However, someone considering incorporating in Delaware should also be aware that they will pay additional fees to register as a corporation in Georgia. For this reason, if your focus is to conduct business in Georgia, it might be easier to incorporate in Georgia.
If you choose to structure your business as a corporation, the next question will be whether structure it as an S corporation or C corporation.
C corporations are the basic structure, and the one most businesses default to. C corporations are a double-taxation entity, meaning that Uncle Sam gets two bites at the apple. The company pays income tax at the corporate level, once earned, and pays again at the shareholder level, when profits or dividends are distributed.
S corporations, on the other hand, can avoid double taxation. They are treated as a pass-through entity for income tax purposes. This means that only the shareholders have to pay income tax on the profits and losses of the business based on their shares While this may sound more straightforward than the C corporation, the S corporation system can create a liquidity problem for the individual shareholders: they are responsible for the corporation’s theoretical income taxes even if the corporation, in reality, issued zero dividends to the shareholders.
S corporations are also substantially limited in other significant ways. For example, they can only have one class of stock, a limited number of shareholders, and – with some exceptions – only individuals in the United States can be stockholders (See IRC § 1361). Despite these limitations, S corporations are perfect for smaller businesses who want to keep the company “closely-held” or “in-the-family.”
The best entity for your company depends on your goals as well as your liability, taxation, and management preferences. An experienced, knowledgeable Georgia Business Law Attorney can help you figure out which entity is right for your business. Call our office to speak with one of our business attorneys. We are here to support you at every business stage.