What is a corporation?
The most complex business structure is the corporation.
- A corporation is a separate legal entity that is comprised of three groups of people: shareholders, directors and officers.
- The shareholders elect a board of directors that has responsibility for management and control of the corporation.
- Because the corporation is a separate legal entity, the corporation generally is responsible for the debts and obligations of the business.
- In most cases, shareholders are insulated from claims against the corporation.
- The corporation, as a separate legal entity, is also a separate taxable entity.
- Registration with the Office of the Secretary of State is required.
- It may be necessary for corporate securities to be registered with the Office of the Securities Commissioner.
A domestic corporation is one incorporated in Kansas. It must file Articles of Incorporation with the Office of the Secretary of State.
A foreign corporation is a business incorporated in a country, state or jurisdiction other than Kansas. In order to conduct business in Kansas, a foreign corporation must file an Application for Authority to Engage in Business in Kansas.
A professional corporation is comprised of a single professional or a group of professionals who file both Articles of Incorporation and a certificate from their specific Kansas professional regulatory board with the Secretary of State. Shareholders of a professional corporation are limited to members of that specific profession.
- No shareholder, officer or director may be held liable for debts of the corporation unless corporate law was breached.
- Interests in the business may be readily sold by the transfer and sale of shares.
- The ready transferability of shares in the corporation facilitates estate planning.
- If desired, a qualifying corporation may be taxed as a Subchapter S under the Internal Revenue Code.
- Shares of the company may be sold to investors in order to obtain capital financing.
- Corporations, to a much greater extent than sole proprietorships and partnerships, may take advantage of pension plans, medical payment plans, group life and accident plans and other benefits available under the Internal Revenue Code.
- The corporate structure provides for a great deal of flexibility with respect to tax planning. For instance, income between the corporation and its shareholders may be adjusted, within reasonable limits, to obtain the most favorable tax treatment for each individual.
- The entity exists forever, so long as corporate regulations are met. There is no need to cease operations if an owner or manager dies.
- Cost of organization, legal fees and state filing fees can be expensive depending on the complexity and size of the business.
- Control is vested in a board of directors, elected by shareholders rather than control vested in the individual owners. Thus, a shareholder who owns less than 50 percent of the stock may have a less than effective voice in how the business is run.
- The possibility of double taxation exists.
- Income from the business is taxed at the corporate level and again when the individual shareholders receive profits in the form of dividends.
- The corporation must qualify in each state in which it chooses to do business.
- Unlike sole proprietorships and partnerships, individual shareholders may not deduct corporation losses unless the corporation has elected to be taxed as a Subchapter S Corporation.
- Annual Reports must be made to the Office of the Secretary of State.
The Corporation may be taxed under Subchapter C of the Internal Revenue Code (a “C” Corporation) or Subchapter S (an “S” Corporation). Kansas law provides for comparable treatment. A “C” Corporation reports its income and expenses on a Corporation Income Tax Return and is taxed on its profits at corporate income tax rates. Profits are taxed before dividends are paid. Dividends are taxed to shareholders, who report them as income, resulting in “double taxation” of profits, which are paid as dividends. If the Corporation meets the statutory requirements for “S” Corporation status, the shareholders may elect to be taxed as an “S” Corporation. The “S” Corporation is taxed in the same manner as a Partnership (i.e., the “S” Corporation files an information return to report its income and expenses, but it generally is not separately taxed). Income and expenses of the “S” Corporation flow through to the shareholders in proportion to their shareholdings and profits are taxed to the shareholders at their individual income tax rate. To elect to be an “S” Corporation, a Corporation must file Form 2553 with the IRS.
- All forms of Corporations are required to file for a Federal Employer Identification Tax Number, Form SS-4;
- Corporations must file an IRS Form 1120, which reports earnings and taxes profit;
- Corporations may be subject to quarterly estimated tax payments; refer to IRS Publication 505.
Other Helpful Publications
For more information on corporate taxes, request IRS Publication 542.
There are two ways to tax a Corporation: as a C Corporation or as a Subchapter S Corporation. In an S Corporation, salaries of officers are deductible expenses and therefore reduce the amount of income subject to corporate income tax, but they are also subject to individual income tax. If salaries become too high, the IRS may treat a portion as a dividend from the Corporation. In a C Corporation, dividends are not deductible by the Corporation, resulting in double taxation, because the same money is taxed as a part of the corporate profit and as income to the individual.
In order to qualify under the Internal Revenue Code as a Subchapter S Corporation, the Corporation must file Form 2553 with the IRS and meet the following requirements:
- Have at least one and no more than 75 shareholders (husband and wife can count as one shareholder);
- Have no shareholders who are non-resident aliens;
- Have only one class of stock;
- Have no more than 80 percent of its gross receipts from outside the U.S.; and
- Have no more than 20 percent of the Corporation’s gross receipts from royalties, rents, dividends, interest, annuities and gains on sale or exchange of stock or securities.
Note: Every Corporation must make a declaration of its estimated income tax for the taxable year, if its Kansas income tax liability can reasonably be expected to exceed $500 (K.S.A. 79-32,101). Any Corporation that began business in Kansas during this period is not required to file a declaration and no underpayment of estimated tax penalty will be imposed. Subchapter S Corporations must file a Kansas Small Business Corporation Form (Form 120S) and report income on individual income tax forms. Corporations doing business in Kansas, or deriving income from Kansas sources, must file a Kansas Corporate Income Tax Return, Form K-120. The corporate tax rate is four percent of Kansas taxable income, with an additional tax of 3.10 percent (2008) on income over $50,000 (K.S.A. 79-32,110).
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