This defines the responsibilities of the owners and their relationship with the company itself. The effects of incorporating a company alters its tax structure, distances the owners from the company's dealings and enables the owners to rearrange available assets to create the best income potential.
Incorporation
When a company becomes a corporation, it functions as a separate entity, meaning it takes on an identity of its own. Much like an individual person, as a separate entity a company can do many of the same things an owner can do, such as own property, enter into contract obligations and pay taxes. Instead of one or two people dictating how a company will run, a board of directors manages the affairs of a corporation. In turn, the company's stockholders become the actual owners of the company and they elect its board of directors.
Liability Factors
Incorporation distances the owners of a company from its affairs. This protects owners from financial liability if a company fails or is sued. As a corporate entity, any financial losses that occur come out of the company's assets and not the owners' personal assets. These same protections exist when a company is sued. If the corporation lacks the money to pay off debts or liabilities, incorporation prevents creditors from going after the owners for monies owed.
Tax Structures
Any business must pay state and federal taxes on a certain percentage of its earnings. The effects of incorporation subject a company and its owners to double taxation. This occurs at the corporate level and again at the shareholder or owners level. Companies can avoid this by opting for S-corporation status. An S-corporation's profits pass through to the owners without being taxed at the corporate level. The owners pay taxes on profits at individual rates.
Income Options
As a separate entity, a corporation can enter into lease agreements, which enables owners to reduce the amount of taxes paid. Owners can lease assets, such as equipment, to a corporation, which allows them to charge rental fees. The company pays the rental fees while the owners receive rental income. Owners can depreciate rental equipment they own and deduct its upkeep costs. A corporation has no time limits in which to report profits or losses when filing taxes. This means a company can carry profits over from year to year or list them on prior tax years. In doing so, companies can shift their tax costs in accordance with their earnings.
sharon kalunda answered the question on April 15, 2019 at 05:35
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February 7, 2019
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(Solved)
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February 7, 2019
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Answers (1)
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February 7, 2019
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Answers (1)
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(Solved)
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February 7, 2019
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Answers (1)
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February 7, 2019
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