Corporation
A corporation creates clear and distinct boundaries between the business, its assets and liabilities, and those of the owner. But it is far more complex than a partnership or a sole proprietorship. A corporation may sell shares of stock, which are certificates indicating ownership, to as many individuals as is desired by the business. The corporate structure requires the formation of a board of directors and elected officers and the filing of Articles of Incorporation with the state.

A corporation avoids the problem of unlimited liability. Since claims against the company are limited to the holdings of the company, the personal assets of the shareholders are protected. A shareholder’s losses are limited to the amount invested in the company. Whereas the existence of a partnership or sole proprietorship ends with the death of an owner, a corporation has a continuous life. Ownership can be easily transferred through the sale of shares of stock in the corporation.

The disadvantages of a corporation are related to the cost and complexity of the structure. Attorney participation is a must, so there are legal fees in addition to filing fees to be covered.

A corporation is also bound by the legal parameters set by the state. There is much less flexibility in operating as a corporation.

Corporations are also unique in their tax treatment. The income of the business is taxed at a corporate rate, and the earnings, which are distributed to shareholders as dividends, are taxed as income at each individual shareholder’s tax rate.

S Corporation
An S corporation was devised to create a form of incorporation that has some of the advantages of a sole proprietorship while still providing limited liability, continuity of existence, and transferability of ownership to the principals of the business.

The income from the S corporation is passed through to the individual shareholder and is taxed at the individual’s rate, thus avoiding the corporate tax rate.

The disadvantage of an S corporation is a limit on the number and type of shareholders allowed by law. There are some circumstances where the tax benefits to other forms of ownership are greater.

Generally speaking, the typical small business just starting out will elect to form a sole proprietorship because it is the simplest, most economical form of ownership. Incorporation can always come at a later date. It is much easier to move from sole proprietorship to a corporate structure than vice versa. An accountant can determine the best form of ownership for an individual business.