Are you considering starting a winery, restaurant, bed and breakfast, catering, wine-based or hospitality business? If so, when forming a business it is important to choose the legal structure that’s right for your business circumstances.
In the earlier posts of this series, we considered the “Sole Proprietorship” and the “Partnership” business entities. Knowing and understanding how each of these legal structures work will enable you to decide what legal structure is right for you. In today’s post, we will consider forming the “Corporation”.
Incorporating your business can be complex and expensive. Forming a corporation is a way for you to limit your personal liability (with some exceptions) for the debts of your business that you do not personally guarantee. A corporation is a separate entity from the person(s) who own or operate it. There are two types of corporations that are distinguishable based on federal taxation laws. A “C-Corporation” is a business entity that is separate from its owners and must pay federal corporate income tax. Conversely, a “S-Corporation” is a business entity that does not pay federal income tax. Taxes for the “S-Corporation are paid by the corporation’s owners. To form a corporation in Pennsylvania, Articles of Incorporation must be filed with the Corporation Bureau with the Pennsylvania Department of State.
Electing to establish your business as a S-Corporation allows you to limit your liability as a corporate owner but requires you to pay income taxes the same way one would if they were a Sole Proprietor or Partnership. For purposes of income tax, the income is considered earned by the corporation but is passed through the corporation to the corporate owners or shareholder’s personal income tax return. To elect to operate as an S-Corporation, the corporate owner must sign and file IRS Form 2553. Unlike the C-Corporation, which has a two tier double taxation structure, an S-Corporation tax bill is likely to be less and may therefore be a more suitable option for a start up business entity. Additional restrictions apply regarding citizenship and shareholder size that may also need to be considered.
A C-Corporation is a regular for profit entity that is separate from its owners and taxed under IRS corporate income tax rules. The corporation files its own tax returns and pays corporate taxes on the profits accumulated in the business. If the profits of the corporation are distributed to its owner(s), then the owners must pay individual taxes on the salary, bonuses, or dividends they receive. This is known as the C-Corporation’s double taxation structure. When forming a corporation, you must follow certain corporate formalities. You will need to hold annual directors and shareholder meetings. You will need to keep minutes of your corporate meetings and maintain good record-keeping systems.
As discussed in the earlier posts of this series, different business structures provide different risks, protections, and ease of administration. In the next post of this series, we’ll consider the Limited Liability Corporation. What wine or hospitality business are you creating?