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Establishing an online business in the US – Corporations

by | Nov 27, 2015 | corporate tax, corporations, income tax corporate tax

Corporations – the traditional business

Corporations are the prime type of entity used in publicly traded companies, larger entities, and when the owners want a separate taxable entity from the individuals. A corporation is set up by filing a certificate of incorporation or articles of incorporation in the state of choice. In addition to getting a separate tax identification number, the corporation should have bylaws detailing the officers, the operation of the business and the amount of shares and any particular rights in different classes of shares. Liberation files a separate tax return and pays income tax on the income earned to both the state and federal governments. After pays taxes if it wants to distribute some of the profit to the owners, these distributions are called dividends and are taxed in the income of the shareholders. This can lead to the famous “double taxation” where the corporation is taxed and then the same income is taxed again at the shareholder level.

In order to avoid double taxation problem, there is an option to elect “S” status for a corporation. One of the core requirements to be an S corporation is that all of the shareholders must be either US citizens or permanent US residents parens green card holders on friends. This limits the option for most foreign owned corporations to being a C corporation only. Nevertheless, if an S corporation can be elected then the corporation files a tax return is usually taxed at the shareholder level rather than the corporate level. This eliminates the double tax issue but also there are number of restrictions as to the amount of shareholders and also the classes of stock. Unlike a C corporation which can have many classes of stock with different types of interest, an S corporation can have only one class of stock. It has a 2nd class of stock must simply be a nonvoting version of the first class of stock but otherwise have the same economic rights. This leads to the problem of “a shareholder being a shareholder. Quote that means a person owns one share of stock it is the same as another one share of stock and not different sets of rights if it is an S corporation. If it were irregular, or C corporation, shares can be set up to be preferred shares that may have rights to income, nonvoting shares, voting shares and other kinds of restrictions and benefits.

An advantage to non-US residents and citizens of having a corporation, particularly a C Corporation, is that the corporation is taxed not the shareholders. This means it blocks taxation of the individual shareholders on the income earned until such time as it is distributed as a dividend. It therefore allows a buildup of capital in the US entity.

There are other limited liability entities such as a limited partnership, but these are much less frequently used and are more complex to establish and operate.