A corporation is a business entity brought into existence by a filing made under a state or federal incorporation statute, and once it exists it is treated in law as separate from the people who own it. Federal tax law then uses the same word for a wider group. Several entities that were never incorporated anywhere are corporations for federal tax purposes, and that gap between the two definitions is where most of the confusion around the term sits.
How One Comes Into Existence
The formation step is a state law step, not a federal one. In general, a corporation is formed under state law by the filing of articles of incorporation with the state, and the state must generally date-stamp the articles before they are effective (IRS, Definition of a corporation). The date stamp is the part practitioners get asked about, because it fixes when the entity began and therefore what its first tax year covers.
Because formation is a state act, the governing rules on shares, directors and dissolution are the incorporating state’s, and they differ. Federal law takes the entity as it finds it and then classifies it.
What the Internal Revenue Code Means by the Word
The Code’s own definition is a short one, and it is an inclusive definition rather than a closed list. Read its opening scope words with it, because they govern every definition in the section: when used in this title, where not otherwise distinctly expressed or manifestly incompatible with the intent thereof, the term corporation includes associations, joint-stock companies, and insurance companies (26 U.S.C. 7701(a) and 7701(a)(3)).
Two consequences follow from the word includes. The definition does not stop at what it names, and it never says incorporated. An association that is not a corporation under any state’s law can still be one here.
The Eight Ways an Entity Lands in the Class
The regulations do the real work, and they set out the whole class. For federal tax purposes, the term corporation means a business entity organized under a Federal or State statute, or under a statute of a federally recognized Indian tribe, if the statute describes or refers to the entity as incorporated or as a corporation, body corporate, or body politic; an association as determined under the classification regulation; a business entity organized under a State statute, if the statute describes or refers to the entity as a joint-stock company or joint-stock association; an insurance company; a State-chartered business entity conducting banking activities, if any of its deposits are insured under the Federal Deposit Insurance Act or a similar federal statute; a business entity wholly owned by a State or any political subdivision thereof, or wholly owned by a foreign government or another entity described in the regulation named there; a business entity that is taxable as a corporation under a provision of the Internal Revenue Code other than section 7701(a)(3); and, except as the regulation’s own exception paragraph and its paragraph (d) provide, certain foreign entities formed in the jurisdictions it lists (26 CFR 301.7701-2(b)).
Only the first of those eight describes what most people picture. The fifth turns on insured deposits rather than on incorporation, the seventh sweeps in anything another Code provision taxes as a corporation, and the eighth is a country-by-country table of foreign forms with its own list of exceptions under it.
Is a Corporation the Same Thing as an LLC?
Not by default, and the classification rule is what separates them. A business entity with two or more members is classified for federal tax purposes as either a corporation or a partnership, while a business entity with only one owner is classified as a corporation or is disregarded, and a disregarded entity’s activities are treated in the same manner as a sole proprietorship, branch, or division of the owner, subject to the special rules the same paragraph points to for an eligible entity that is otherwise disregarded (26 CFR 301.7701-2(a)).
So a limited liability company is not a corporation because of what it is called. A business entity that is not classified as a corporation under the class list is an eligible entity and can elect its classification, and an eligible entity with at least two members can elect to be classified as either an association, and thus a corporation, or a partnership, while one with a single owner can elect to be classified as an association or to be disregarded (26 CFR 301.7701-3(a)). Absent an election, a domestic eligible entity is a partnership if it has two or more members and is disregarded if it has a single owner (26 CFR 301.7701-3(b)(1)). Limited liability partnership covers a different entity that is often confused with both.
The Tax the Entity Itself Pays
This is the practical difference the word carries. A tax is hereby imposed for each taxable year on the taxable income of every corporation, and the amount of that tax is 21 percent of taxable income (26 U.S.C. 11(a) and 11(b)). The charge is not universal. It does not apply to a corporation subject to a tax imposed by the mutual savings bank provision, by the insurance company subchapter, or by the subchapter covering regulated investment companies and real estate investment trusts, and for a foreign corporation it applies only as the separate foreign provision allows (26 U.S.C. 11(c) and 11(d)).
There is also an election that switches the charge off. S corporation sets out the eligibility test and what reaches shareholders instead, and c corp vs s corp works through how one dollar is taxed under each label.
A firm carrying a book of entity returns can hand Accountably a block of its own files through a trial task and grade the work before anything live depends on it.
