The owners of a corporation are called shareholders. Shareholders are not personally liable for the obligations of the corporation. The owners risk only the investment that they make in the business to purchase their ownership interests. Most often, management of a corporation is centralized in a board of directors who usually delegate day-to-day duties to officers. Generally, a corporation is taxed as an entity distinct from its owners; i.e., it must pay income taxes on any profits that it makes, and generally shareholders do not have to pay income tax on the corporation’s profits until distribution. When the corporation makes distributions to shareholders, the distributions are treated as taxable income to the shareholders even though the corporation has already paid taxes on its profits. This is commonly called double taxation.
The tax law permits certain corporations to elect to be taxed like partnerships and yet retain the other advantages of the corporate form, such as limited liability and centralized management. Such corporations are called “S corporations.” Partnerships and S corporations are not subject to double taxation. Profits and losses flow directly through to the owners. However, there are a number of restrictions on S corporations (e.g., stock can be held by no more than 75 persons, generally shareholders must be individuals, and there can be only one class of stock).
The limited liability company is designed to offer the limited liability of a corporation and the flow-through tax advantages of a partnership. Like a corporation, it may be formed only by filing appropriate documents with the state, but otherwise it is a very flexible business form. Owners may choose various forms of owner management or hire outside managers. Unlike an S corporation, there is no limit on the number of owners, and owners are not limited to individuals.