Why Choose a Corporation Instead of an LLC?

Since forming either a corporation or an LLC reduces an owner’s liability, why would someone choose a corporate form rather than an LLC? The most common reason is tax savings. A corporation is a legal entity separate from its shareholders. The corporation files its own tax return (IRS Form 1120) and pays its own income taxes on its profits. Although reporting and paying taxes on a separate corporate tax return can be time-consuming, there are some benefits to having a separate level of taxation. A tax expert can provide you with a complete explanation of the pros and cons of corporate taxation. Keep in mind that only the largest eBay businesses are likely to enjoy the tax benefits of corporate form. Further, there can be real disadvantages for a corporation that experiences losses or may soon be sold. Here is more about how corporations are taxed.

To form a corporation, you must file "articles of incorporation" with the corporations division (usually part of the secretary of state's office) of your state government. Filing fees are typically $100 or so.

For most small corporations, articles of incorporation are relatively short and easy to prepare. Most states provide a simple form for you to fill out, which usually asks for little more than the name of your corporation, its address, and the contact information for one person involved with the corporation (often called a "registered agent"). Some states also require you to list the names of the directors of your corporation. In addition to filing articles of incorporation, you must create "corporate bylaws." While bylaws do not have to be filed with the state, they are important because they set out the basic rules that govern the ongoing formalities and decisions of corporate life, such as how and when to hold regular and special meetings of directors and shareholders and the number of votes that are necessary to approve corporate decisions.

Finally, you must issue stock certificates to the initial owners (shareholders) of the corporation and record who owns the ownership interests (shares or stock) in the business.
In summary, here is what you must do to form a corporation.

  • Name it. Choose an available business name that complies with your state's corporation rules.

  • Appoint directors. Appoint the initial directors of your corporation.

  • File articles. File formal paperwork, usually called "articles of incorporation," and pay a filing fee that ranges from $100 to $800, depending on the state where you incorporate.

  • Create bylaws. Create corporate "bylaws," which lay out the operating rules for your corporation.

  • Meet. Hold the first meeting of the board of directors.

  • Issue stock. Issue stock certificates to the initial owners (shareholders) of the corporation.

To learn more about how to form your corporation, read Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, by Anthony Mancuso (Nolo).

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