Corporations, whether C corporations or S corporations, are formed by filing articles of incorporation with the Secretary of State. So long as they are properly formed, properly capitalized and properly maintained, they should shield the owners from personal liability for the debts and obligations of the company, except for the amount of their capital contribution.

The owners are called shareholders, and are issued shares of stock. The shareholders elect a board of directors, who then elect officers to carry out the day to day business of the corporation. Often times in small corporations, the same individual or individuals can serve as shareholders, directors, and officers.

To be properly formed, a corporation must have an organizational meeting and issue shares. It is not enough to merely file articles of incorporation with the secretary of state. Each year it must hold annual meetings of shareholders and directors and file an annual report with the secretary of state.

When it comes to taxes, a corporation has its own tax identification number and pays taxes just like an individual. IT must file an annual form 1120 U.S. Corporation Income Tax Return as well as quarterly estimated taxes. A corporation generally is entitled to the same deductions as a sole proprietor and can take additional special deductions only available to corporations.

C corporations may offer several tax advantages, however, with respect to deductibility of retirement contributions, group insurance premiums, and other benefits. The main downside to forming a C-corporation is double-taxation: the corporation itself pays taxes on profits when the income is earned and the shareholder also pays tax on dividends. For this reason, few small businesses are C-corporations.

Although no formalities are required to form a partnership, we highly recommend a written partnership agreement. As with the sole proprietorship, a partnership should use adequate insurance to mitigate personal risks.

From a tax perspective, a partnership is not a separate tax entity. Partnerships file an annual informational return (reporting all income, deductions, gains and losses) on behalf of the business; but all profits and losses are passed through directly to the partners and are reported on their respective tax returns. Partners are not employees of the company and must be supplied with a K-1 by the company each year.