Incorporating a business

A corporation is a distinct legal entity created by certain specific procedures of South Carolina Law, including registering the corporation in the office of the Secretary of State. Because it is a distinct entity, a corporation is treated differently from other types of business. If the corporation pays you wages, dividends or stock you will have to pay income tax on these payments. Unless the corporation elects to be taxed as a Subchapter S Corporation, the corporation does not pass profits and losses of the business directly to you as a shareholder; you will only have taxable income to the extent of dividends or compensation you receive. A corporation is also treated differently by liability law. One advantage of a corporation is the limited personal liability for corporate obligations. If the corporation is sued, generally you will not be responsible for the corporate debts; only the corporation will be liable. However, there are exceptions. A Corporation that is not carefully organized and run can sometimes be "pierced," which means that shareholders could become liable. Also, directors, officers and employees may have liability. Another advantage of a corporation is your ability to transfer your stock and easily leave the business. In a corporation, a shareholder generally may transfer his interest in the company to anyone he desires so long as there is not an agreement restricting transfer of stock. Therefore, even if you started the business, you can sell or transfer your stock and leave the business. However, in most small corporations an agreement governing stock transfers is advisable. Any transfer of stock, whether it is from the corporation or from a shareholder, must comply with state and federal laws governing securities.

In South Carolina, some smaller corporations may elect to be a "Statutory Close Corporation." This type of corporation can streamline its management and shareholder relationship by adopting certain advantages set out in the corporate code. Many corporations may qualify to elect for the purposes to be a Subchapter S Corporation. This type of corporation has all the non-tax characteristics of a corporation, including limited liability, but it has elected to be treated under special tax rules. In general, these tax rules provide that the corporation will be taxed only at the shareholder level, which means that any corporate profits and losses will be taxed to you as a shareholder even if you do not receive all your share of the profits. Many small businesses find it to their advantage to elect Subchapter S treatment. A Subchapter S Corporation, although it is a corporation, is treated like a partnership for tax purposes.

There are a number of requirements to make a Subchapter Selection. First, a Subchapter S corporation must have 35 or fewer shareholders and no more than one class of stock.

In addition, certain corporations will not qualify as Subchapter S Corporations and certain shareholders will not qualify to be owners of a Subchapter S Corporation. The timing of making the election is also important. If you are interested in forming a Subchapter S corporation, you should consult your attorney to see whether your business can qualify as a Subchapter S corporation.

If you are interested in forming a sole-proprietorship, partnership or limited partnership, you should read LawLine Starting an Unincorporated Business.
