Key Takeaways

  • A corporation is a separate legal entity from its owners, whereas an individual operates a business personally.
  • Corporations offer liability protection, potential tax benefits, and ease in raising capital—but they require more complex formation and compliance.
  • An individual operating as a sole proprietor faces unlimited personal liability but benefits from simplicity and direct tax reporting.
  • Legal distinctions, such as corporate personhood, grant corporations many of the same rights as individuals in the eyes of the law.
  • Filing requirements, formation procedures, and governance structures differ significantly between the two.
  • The choice between operating as a corporation or as an individual can impact liability, taxes, and growth opportunities.

Understanding the difference between individual vs corporation is important when owning a business. When a person operates his or her own company and does not incorporate the business, this means the business is being operated as an extension of that person.

This is most commonly referred to as a sole proprietorship. In regards to taxes, the profits and losses of the company will flow through the person's personal taxes. This means that any profits earned by the company are reported as income on the person's personal taxes, while losses are reported as deductions.

Understanding the Importance of Picking a Business Structure

If you are wanting to start your own company, it is imperative to understand that the liabilities of the company will fall on your own shoulders unless you choose to incorporate the company. For example, if you own your own hair salon and you have people come to your house to get their hair cut and one of them gets injured on your property, then it will be your responsibility to cover the person's medical expenses as well as lost wages and pain and suffering.

Still, for most home-based businesses, operating as a sole proprietorship is usually the best choice to make.

Legal Distinctions Between Corporations and Individuals

A foundational difference between a corporation and an individual lies in their legal identity. A corporation is considered a separate legal "person," capable of entering into contracts, owning property, and being sued or suing in its own name. In contrast, an individual conducting business as a sole proprietor does so under their own legal identity, making them personally responsible for all business obligations.

This concept, often referred to as corporate personhood, means corporations enjoy many rights similar to natural persons, including the right to free speech and due process under the law. However, this status also subjects them to corporate regulations, distinct taxation rules, and governance requirements that individuals are not subject to.

What Is a DBA?

If you don't want to use your own personal name to operate the company, you can always file for a DBA.

DBA stands for doing business as, and it means that you are going to operate your personal business under a different name from your own personal name. If you do not incorporate the company, you cannot add LLC, Inc, or Corporation to your DBA name. For example, if you own a cleaning company and you don't incorporate it, you can operate at Wishy Washy Cleaning, but you can't operate as Wishy Washy Inc.

Tax Considerations: Corporation vs Individual

Tax treatment is another critical factor in deciding between operating as a corporation or an individual. Here are the core distinctions:

  • Individual (Sole Proprietor):
    • Business income is reported directly on the individual’s personal tax return using Schedule C (Form 1040).
    • Subject to self-employment tax on net earnings.
    • Simpler tax filing process but fewer opportunities for tax deferral or deductions.
  • Corporation:
    • Must file a separate tax return (Form 1120 for C corporations or Form 1120S for S corporations).
    • May face double taxation if operating as a C corp—once at the corporate level and again on shareholder dividends.
    • Can deduct business expenses, offer fringe benefits, and retain earnings for reinvestment.
    • S corporations offer pass-through taxation while maintaining limited liability protections.

The Internal Revenue Service (IRS) outlines specific filing requirements and forms for corporations, depending on structure and classification.

Incorporating the Business As an LLC

A lot of people who are sole proprietors will end up incorporating themselves as a limited liability company, also known as an LLC. When you do this, it means you add protection to yourself as the owner of the company. More so, it means that your personal assets can't be touched for any outstanding business debts.

Even if you incorporate yourself as an LLC, if you are the only owner, then the IRS will most likely treat you like a sole proprietor in that you will file your profits and losses on your personal income taxes.

There are several steps you will need to take to become an LLC, and these steps are going to vary from one state to the next. You will need to check with your state's small business administration office to see which steps you need to take.

Most times, you will need to file an articles of organization. You may or may not have to file a membership agreement. The purpose of filing these documents is to let the government know exactly what type of business you are operating. The pieces of information you will need to include are:

  • Name of business
  • Your DBA if you have one
  • Your business' postal address
  • Its purpose
  • Names of members
  • Roles within the organization

You will also have to pay a fee if you want to become an LLC. Once again, this amount is going to vary from state to state. In some states, it will cost you more than $1,000 to become an LLC. If you are dealing with large sums of money, it is usually best to become an LLC. In doing so, you can protect your personal assets from being seized to pay for business-related debts.

Liability and Risk Management

One of the most compelling reasons to form a corporation rather than remain an individual business owner is liability protection. Corporations shield shareholders’ personal assets from legal claims and debts incurred by the business. This limited liability protection is not available to individuals or sole proprietors, who are personally accountable for any lawsuits, defaults, or accidents arising from business operations.

However, this protection isn’t absolute. Courts can "pierce the corporate veil" if corporate formalities are not properly maintained or if there is evidence of fraud, commingling of personal and business assets, or misuse of the corporate entity.

How to Become a Corporation

If you want to become a corporation, this means that it is going to have at least on one stockholder. If you want, you can have other stockholders too. You will also need to elect a board of directors; this board is going to be chosen by the stockholders. The board of directors will also appoint officers who will determine how the day-to-day operations of the company are going to be.

In most cases, if you choose to become a corporation, your losses and profits from the company are not going to flow through your personal taxes.

Governance and Compliance Requirements

Unlike individuals who operate alone and make all decisions independently, corporations must follow formal governance structures:

  • Board of Directors: Required to oversee corporate policy and strategy.
  • Officers: Appointed to handle daily operations (e.g., CEO, CFO).
  • Annual Meetings and Minutes: Corporations must hold shareholder and board meetings and maintain formal records.
  • Bylaws and Articles of Incorporation: These documents define the internal rules and legal framework for the corporation.

Failure to comply with these requirements can result in penalties, loss of good standing, or forfeiture of limited liability status. These structures promote accountability and operational continuity, especially as a business scales.

Frequently Asked Questions

  1. What is the main difference between a corporation and an individual in business?
    A corporation is a separate legal entity, while an individual operates the business in their personal capacity, making them personally liable.
  2. Is it better to be a corporation or operate as an individual?
    It depends on your business size, risk tolerance, and tax goals. Corporations offer liability protection and tax planning advantages, while individuals benefit from simplicity.
  3. Can a corporation be treated as a person under the law?
    Yes. Under the doctrine of corporate personhood, corporations have many legal rights similar to individuals, such as the right to own property and enter contracts.
  4. What are the tax filing requirements for a corporation vs an individual?
    Individuals file Schedule C with their personal taxes. Corporations must file separate corporate tax returns using Form 1120 or 1120S, depending on classification.
  5. Does forming a corporation eliminate all personal liability?
    Not entirely. While corporations provide limited liability, personal liability may still arise if corporate formalities aren’t followed or if there's misconduct.

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