Choosing the type of corporation for a business can have profound effects on your business in the future. There are many different types of corporations, each with different features and characteristics. They may also be associated with various advantages and disadvantages depending on the needs of the business.
One type of corporation may suit one business, while the same type of corporation might not work that well for a different business. A person thinking of incorporating a business may wish to research the different types of corporations in order to find the one that might work the best for their business.
Some of these include:
- Business Corporation: Most medium- to large-sized corporations adopt this standard, for-profit corporate form; a corporation is a legal entity that is separate from its owners who are called stockholders; a corporation must pay taxes on its income. Corporations must also have articles of incorporation, which are filed with the state in which it operates, and bylaws. These documents govern its operation.
- A corporation must have a board of directors, officers, and annual meetings. Stockholders’ personal assets are not available to satisfy the claims of creditors of the corporation; rather creditors are limited to corporate assets for satisfaction of debts or other claims. There is no limit on the number of shareholders that this corporation may have and shares are freely transferable. Its shares can also be publicly traded.
- LLC: This stands for “limited liability company”; an LLC is not a corporation, but it has some of the legal advantages of a corporation. The most important one is that the owners of an LLC, whether there is one or many, have limited liability. This means that they cannot be held personally liable for debts incurred by the LLC business or for liability that arises from most business-related lawsuits.
- The income of the business is passed through to the owners and taxed to them as income. It is not like a corporation in that it does not have officers, directors, board meetings or shareholder meetings so it is easier to manage than a corporation.
- Close Corporation: The income of these corporations are taxed directly as corporate income and not passed through to shareholders. This has different tax consequences than other corporate forms such as an S Corporation; a close corporation can have only the number of shareholders that are allowed by law, and its stock cannot be publicly traded. A close corporation does not have to observe all of the formalities of a regular corporation. It does not have to have a board of directors or hold annual meetings and can be run by its shareholders. They are sometimes called “closely held corporations;”
- Non-Profit Corporation: These are corporations that focus mainly on charitable activities and programs. They are given unique tax treatment, because of their charitable nature;
- Professional Corporation: This is a corporate form specifically for professionals who are licensed to practice in a specific field, such as engineering, architecture, law, or other fields. The kind of professionals who are allowed to form professional corporations varies from state to state.
- Professional corporations limit the personal liability of the owners for business debts and claims. It does not protect the professionals from liability for their own professional negligence or malpractice. It can, however, protect one professional from liability for the negligence or malpractice of another owner.
- Professional corporations do not have pass-through taxation; the corporation is taxed as a corporation on its corporate income. The owners must also pay income taxes on the income they receive from the corporation.
- S Corporation: This is basically a regular corporation that has chosen to have its income passed through to shareholders who are taxed on their income as individuals. This feature of the corporation, i.e., its tax treatment, is its main advantage. Its losses are also divided among the shareholders and passed through to them. An S corporation is only eligible for its special treatment if it has only 100 or fewer shareholders who are all individuals. It can only have one class of stock.
There are still other types of corporations, such as foreign corporations (corporations that operate in different states), private corporations, and others. Every state has its own, sometimes very different laws that regulate and govern incorporation and corporate activity.
