Regardless, how are you going to raise money so you can carry out your business plans?

The first step most people take to raise money is to give away equity. In the case of a corporation, this means selling shares to potential investors in exchange for cash. While this is a logical step, it is not the best solution. In fact, it should be the last resort.

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Put in layman’s terms, the designation simply means the corporation will “pass through” its taxes to shareholder in proportion to their ownership interests. This allows shareholders to claim profits and losses directly on their taxes and avoid the double taxation of a C corporation.

To become an S corporation, you must file an election with the IRS. Typically, no documentation is require to be filed with any state entity, but make sure to check you particular jurisdiction. Regardless, the filing with the IRS is made using form “2553 – Election by a Small Business Corporation.”

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If a corporation is sued, its shareholders cannot be named in the suit unless they are involved in the alleged offending acts. For instance, Microsoft is a huge corporation. If I buy stock in it, I will not be a defendant in any lawsuit filed against the company.

While forming a corporation is obviously a smart move for many businesses, there are some formalities to running it. Paying a couple of hundred bucks online does not cut the bill if you don’t follow through with corporate formalities. Let’s take a look at some of the nuts and bolts.

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The basis for this protection is the fact that corporations are considered to be an individual separate from the shareholders. In practical terms, this means investing in the corporation is like giving your friend Bob money for a business idea. Unlike Bob, you can be intimately involved in the running of a corporation.

The legal fiction of individuality of the corporate entity is not absolute. Much like a body, you have to maintain the health of the corporation to receive the protection. In what is probably a terrible analogy, the shareholders and board of directors much hold meetings much like you or I would go in for regular health checkups. If these meetings are not held, the idea that the corporation is a separate individual can be challenged. This process is known as piercing the corporate veil of protection.

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This means you need to find a location and then sign a lease.

Most businesses fail. Sorry to be blunt, but it is the brutal truth. The magic line in the sand is two years. Between 70 and 80 percent of all businesses fail in the first two years. This is why banks will not touch you during this period. If you can make it past the two year mark, suddenly everyone wants to talk to you, lend you money and so on. This is true even if you are barely getting buy.

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The downside of the corporate entity, however, had to do with taxes. Simply put, a double taxation situation arose because the corporation had to pay taxes on its profits and then the shareholders had to also pay taxes on their dividends and earnings.

The IRS eventually got around to dealing with the double taxation issue. Well, Congress did. Instead of changing how the corporation was taxed, Congress enacted Subchapter S of the internal revenue code. This section, of course, lends its title to the name of the “S” corporation.

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Federal tax laws automatically consider every corporation to be a “C” designation. A small business, however, may elect to be designated as an “S” corporation by filing IRS form 2553. The election must be made prior to the tax year in which it is going to be effective. All shareholders must sign the election.

A C corporation stands alone for tax purposes. It must file tax returns and pay taxes on profits. Profits and losses are reported on the corporate tax return and do not pass through to shareholders. C corporations can elect any calendar month as the end of their fiscal year.

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Unlike each of us, a corporation can “live” for 100 years, 200 years or more. Certain forms of corporations were known to exist as far back as in the days of Ancient Rome. Despite it’s gladiator tendencies towards other companies, Microsoft was not the first corporation.

State of Incorporation

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