825.What is a corporation?

825.1How do we define a corporation?

A corporation is a business entity. Corporations are formed under state corporation laws and are subject to corporate income tax at the federal and state level. Other corporations may be formed as limited liability companies under state law, but elect to be treated as corporations for federal tax purposes. When the ownership of a corporation rests in a few persons, a few families, or within a family, the corporation is generally designated as a close or family corporation.

825.2Forming a Corporation

The rules you must use to determine whether a business is a corporation changed for businesses formed after 1996. A business formed before 1997 and treated as a corporation under the old rules will generally continue to be treated as a corporation. The IRS and SSA treat the following businesses formed after 1996 as corporations:

• A business formed under a federal or state law that refers to it as a corporation, body corporate, or body politic;

• A business formed under a state law that refers to it as a joint-stock company or joint-stock association;

• An insurance company;

• Certain banks;

• A business wholly owned by a state or local government;

• A business specifically required to be taxed as a corporation by the Internal Revenue Code (for example, certain publicly traded partnerships);

• Certain foreign businesses; and

• Any other business that elects to be taxed as a corporation (for example, an LLC which elects corporate treatment).

See IRS Publication 542, Corporations for more information.