Corporation

For legal purposes a corporation is an organization chartered by the state to exist as a person under the law. A corporation, for federal income tax purposes, includes associations, joint stock companies, trusts, and partnerships that actually operate as associations or corporations. As a separate statutory entity, a corporation can enter into contracts in its name, own property, and be sued, and it must pay income tax based on its taxable income.

Unincorporated organizations with certain characteristics are classified as associations and taxed as corporations. These characteristics are associates who join together to carry on business and divide gains. In addition, the organization must have a majority of the following characteristics:

  1. Continuity of life,
  2. Centralized management,
  3. Limited liability,
  4. Free transferability of interests.

Corporate profits are taxed to the corporation. When the after-tax profits are distributed as dividends, the dividends are taxed again to the shareholders. In figuring its taxable income, a corporation generally takes the same deductions as a sole proprietorship. Corporate capital gains are reported on Schedule D, Form 1120 and taxed at the corporate tax rate.