NC Corporation: Everything You Need to Know
When creating an NC corporation, you need to decide what kind of business structure you're going to use to operate your business.3 min read updated on February 01, 2023
When creating an NC corporation, you need to decide what kind of business structure you're going to use to operate your business. Here are some of the options that are available to you for incorporation.
Choosing a Business Structure
The type of corporate structure you choose affects the taxation of your business, your liability from a financial standpoint, and who the decision makers are in the company. It's a good idea to consult with your attorney and/or accountant to help you make the best decision for the type of business you are engaging in. The state of North Carolina cannot help you or give you advice on this matter.
A sole proprietorship is a business that an individual owns and operates. It is a very simple corporate structure, and many people use it to start their chosen business. There is no dividing line between you, the owner, and the business. You are able to take all the profits earned by the business and are responsible for all of the debts, liabilities, and losses incurred by the business.
Since the business and you are one in the same, there is no separate taxation of the business. The column from the sole proprietorship is yours. It is your responsibility to withhold and pay all related income taxes. You will have to pay self-employment and estimated taxes as well. All of your income and/or losses are reported on schedule C, E, F, and any other relevant IRS forms, and the standard Form 1040. The information you enter into the federal forms will translate to the North Carolina D-400.
A general partnership is put together by two or more people who agree to put their money, labor, and skills into a business. They also agree to share the profits and losses that arise during the management of the operation. All partners are usually held legally liable for their actions and those actions of the other partners.
This type of corporate structure has to file an annual information return Form 1065 with the IRS and D-403 with North Carolina. Form D-403 Is used to report
The business itself does not pay income tax. It also “passes through” any losses are profits to the partners. Partners list their respective share of income or loss from the partnership on their personal tax returns.
A corporation is a legal entity that is separate from the people who form it and its owners/stockholders. The shareholders elect an incorporator to take the actions for incorporation in North Carolina. This is done to create an entity that separates their personal liability from that of the business. The separation between personal and business liability means the owners are generally protected from business debts and legal actions. You have the option to apply with the IRS to become either an S-corporation or C-corporation. Both have implications for income taxes.
Professional corporations and LLCs register with the Corporations Division of the Department of the Secretary of State. Corporations in North Carolina are governed by North Carolina General Statutes. Corporations in North Carolina are subject to state taxes. The North Carolina corporate tax rate is 6.9 percent.
An S-corporation is a type of corporation that is created through an IRS tax election. It has between 1 and 100 shareholders and passes through net income or losses to shareholders. Profits from the business are taxed at individual tax rates on each shareholder's personal tax return. Any shareholder who works for the S-corporation has to pay himself “reasonable compensation.” S-corporations in the state of North Carolina use CD-401S to report revenue to North Carolina, and IRS Form 1120S to report to the federal government.
Limited Liability Company or LLC
An LLC offers owners limited personal liability from actions of the business. It also gets special tax treatment that has the potential to prevent what has been called “double taxation” of the income of the owner. It's a type of legal corporate structure that offers the limited-liability aspects of a corporation, and the tax efficiencies that come with a partnership.
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