The 7 Major Types 0f Corporations Explained
Choosing the right corporate structure is one of the most important decisions an entrepreneur makes when starting a business. The type of corporation you form determines everything from how your business is taxed to the level of personal liability you face. This guide examines the seven major types of corporations in 2023 and how they differ.
S Corporations
An S corporation, sometimes called an S subchapter corporation, is a legal business structure that passes income, losses, deductions and credits through to the shareholders personal tax returns. S corps avoid double taxation and allow profits or losses to be passed onto owners personal tax returns.
S corporations have up to 100 shareholders and taxation occurs only at shareholder level. To form an S corp, you must file IRS Form 2553. S corporations are popular with small businesses owners because taxation is transparent like a partnership but offers liability protection like a corporation.
C Corporations
A C corporation is the standard or default corporation under IRS rules. With a C corp, the corporation itself pays taxes on income, not the shareholders. C corps offer complete limited liability protection for shareholders but double taxation occurs on profits.
C corporations can have unlimited number of shareholders. They are more complex than other corporate structures and require regular board meetings, minutes and resolutions. C corps file IRS Form 1120 for federal tax returns. They are common among large companies that plan to go public but not ideal for small businesses.
LLCs
A limited liability company (LLC) mixes aspects of partnership and corporate structures. LLCs offer personal liability protection for owners while allowing pass-through taxation like a partnership or sole proprietorship. Profits and losses pass directly to owners personal tax returns.
LLCs can elect to be taxed as an S corp using IRS Form 2553. There is no limit on number of LLC shareholders. LLCs file IRS Form 1065 but can also file 1120 if taxed as a C corporation. The operating agreement outlines member responsibilities. LLCs combine flexibility of a partnership with limited liability of a corporation.
B Corporations
A benefit corporation (B corp) is a legal corporate structure that includes positive social impact and environmental sustainability in addition to profit as legally defined goals. B corps consider how decisions affect workers, community and environment as well as shareholders.
B corps are certified by the nonprofit B Lab to meet rigid standards of accountability and transparency. The legal structure shields directors and officers from claims breaching fiduciary duty by considering non-financial stakeholders. As of 2023, over 4,000 companies are certified B corps.
Nonprofit Corporations
A nonprofit corporation is formed to pursue social, educational, religious or charitable purposes rather than make profit. Nonprofits include associations, charities and foundations focused on causes like religion, science, literary arts or public safety.
Nonprofits can earn income but net earnings cannot unjustly enrich directors or officers. Nonprofit corporations are tax exempt, but only donations to 501(c)(3) charities are tax deductible. Nonprofits file IRS Form 990 annually instead of corporate income taxes. They have no shareholders but require a board of directors.
Cooperative Corporations
A cooperative corporation is a business owned and controlled by the people who use its services. Cooperatives can be organized as corporations governed by elected board of directors. Members contribute equity capital and share in profits.
Well known examples are retail co-ops like REI and financial co-ops like credit unions and farm credit associations. Housing cooperatives allow residents to own apartments and collectively manage property. Utility co-ops provide electricity in many rural areas. The focus is member benefit not investor profit.
Sole Proprietorships
A sole proprietorship is the simplest corporation structure with no distinction between the business and owner. The individual owns all assets and is liable for debts. Profits are not taxed separately but appear directly on the owners personal tax return. No formal paperwork is needed to form a sole proprietorship.
Sole proprietorships are easy to set up and give owners complete control but they offer no liability protection. The business ceases to exist upon the owners death. Sole proprietors must also rely on personal assets and credit. Partnerships and corporations limit liability but sole proprietors face unlimited liability.
Choosing the right corporate structure depends on your business plans, industry, location, goals and other factors. Consult professionals to select the best type of corporation for your needs. The legal and tax implications of business structures like LLCs and S corps can get complex. With the right corporate form however, you can operate efficiently and position your company for growth.
The Rise of Benefit Corporations
In recent years, there has been an increase in the number of benefit corporations formed globally. Benefit corporations are traditional corporations with modified obligations committing them to higher standards of purpose, accountability, and transparency. According to data from the Nonprofit Quarterly, benefit corporations increased by around 33% from 2018 to 2020. This rise indicates a shift toward more socially and environmentally conscious business models. However, benefit corporations still only make up a tiny fraction of businesses worldwide. They face challenges gaining awareness and distinguishing themselves from traditional corporations.
The Appeal of Cooperative Businesses
While benefit corporations are on the rise, cooperative business models have long been popular globally. Cooperatives are businesses collectively owned and governed by members. Well-known examples are REI and Land O’Lakes. According to research by the International Co-operative Alliance, cooperative membership grew by 12% between 2017 and 2020. Cooperative employment also rose by 4%. The resilience and community-orientation of the model likely buoyed demand during the COVID-19 pandemic. Cooperatives must continue adapting governance and capital-raising approaches to see sustained growth versus trends like benefit corporations.
The Ongoing Dominance of C Corporations
Despite exciting growth among alternative corporate forms, traditional C corporations continue to dominate the global business landscape. C corporations, owned by shareholders and directed by appointed boards, make up over 99% of America’s largest companies according to IRS data. Though statistics are limited, C corporations likely represent over 90% of major businesses worldwide. Their profit-driven, centralized structure remains attractive for many large enterprises. Still, shareholder primacy and lack of accountability measures may gradually undermine C corporations’ appeal versus ethical alternatives. Movement away from C corporations seems driven by younger generations and startup communities.
To summarize, while C corporations continue to be the norm, alternative business models are gaining popularity globally. Benefit corporations and cooperatives are seeing especially high growth, indicating a shift toward corporate responsibility and community orientation. It remains to be seen how impactful these trends will be long-term.
Reference:
https://web.archive.org/web/20120617104051/http://fds.oup.com/www.oup.co.uk/pdf/0-19-928983-2.pdf
https://web.archive.org/web/20171015152228/https://www.corpnet.com/types-of-corporations/#gfp
