7 Types of Corporations and How They Differ from Each Other
If you are planning to start a business, you might be wondering what type of corporation is best for you. There are different kinds of corporations, each with its own advantages and disadvantages. In this article, we will explain the main features of each type of corporation and how they differ from each other.
A corporation is a legal entity that is separate from its owners. It can own assets, incur liabilities, enter into contracts, sue and be sued, and pay taxes. A corporation is created by filing articles of incorporation with the state where it operates.
There are two main types of corporations: C corporations and S corporations. C corporations are the most common and the default type of corporation. S corporations are a special type of corporation that elects to be taxed as a pass-through entity, meaning that the profits and losses are passed through to the owners and reported on their personal income tax returns.
Similarities and differences
C corporations and S corporations have some similarities and differences. Here are some of the main ones:
– Both types of corporations have limited liability, meaning that the owners are not personally responsible for the debts and obligations of the corporation.
– Both types of corporations have shareholders, directors, and officers. Shareholders are the owners of the corporation, directors are elected by the shareholders to oversee the management of the corporation, and officers are appointed by the directors to run the day-to-day operations of the corporation.
– Both types of corporations have perpetual existence, meaning that they can continue to exist even if the owners change or die.
– Both types of corporations have to follow state and federal laws and regulations, such as filing annual reports, holding meetings, keeping records, and paying fees.
– C corporations are taxed at two levels: the corporate level and the shareholder level. The corporation pays income tax on its profits, and then the shareholders pay income tax on the dividends they receive from the corporation. This is known as double taxation.
– S corporations avoid double taxation by electing to be taxed as a pass-through entity. The corporation does not pay income tax on its profits; instead, the profits and losses are passed through to the shareholders, who report them on their personal income tax returns. However, S corporations have to meet certain requirements to qualify for this tax treatment, such as having no more than 100 shareholders, having only one class of stock, and having only U.S. citizens or residents as shareholders.
Other types of corporations
Besides C corporations and S corporations, there are other types of corporations that have specific purposes or characteristics. Here are some examples:
– Nonprofit corporations are formed for charitable, educational, religious, or scientific purposes. They do not have shareholders or pay dividends; instead, they have members or donors who support their mission. Nonprofit corporations are exempt from federal income tax and may also qualify for state and local tax exemptions.
– Professional corporations are formed by licensed professionals, such as doctors, lawyers, accountants, or engineers. They provide personal services to their clients and have limited liability for their professional malpractice. Professional corporations have to follow certain rules regarding their name, ownership, management, and taxation.
– Close corporations are formed by a small group of shareholders who have a close relationship with each other. They operate like a partnership but have limited liability like a corporation. Close corporations do not have to follow some of the formalities of regular corporations, such as holding meetings or keeping minutes. However, they may face more restrictions on their stock transfers and business activities.
– Benefit corporations are formed to pursue a positive social or environmental impact in addition to profit. They have to state their specific public benefit purpose in their articles of incorporation and report on their performance regularly. Benefit corporations are accountable to their shareholders and stakeholders for their social and environmental impact.
– B corporations are not a legal type of corporation but a certification given by a nonprofit organization called B Lab. B Lab evaluates companies based on their social and environmental performance, accountability, and transparency. B Lab also provides support and resources to help companies improve their impact. B corporations can be any legal type of corporation.
As you can see, there are different kinds of corporations that suit different needs and goals. If you are thinking about forming a corporation, you should consult with an expert export management consultant who can help you choose the best option for your business.
Different Types of Corporations and Their Global Demand
One of the important decisions that entrepreneurs face when starting a business is choosing the type of corporation that suits their needs. A corporation is a legal entity that is separate from its owners and has its own rights and responsibilities. There are different types of corporations, each with its own advantages and disadvantages, tax implications, and legal requirements.
According to Investopedia, some of the common types of corporations are:
– C Corporation: This is the most common and standard type of corporation, which is taxed separately from its owners. C corporations offer the strongest protection from personal liability, but they also face double taxation, meaning that the corporate income is taxed at the corporate level and then again at the shareholder level when dividends are distributed.
– S Corporation: This is a special type of corporation that elects to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes. This way, S corporations avoid double taxation, but they also have to meet certain eligibility criteria, such as having no more than 100 shareholders, having only one class of stock, and having only U.S. citizens or residents as shareholders.
– Non-Profit Corporation: This is a type of corporation that is formed for a charitable, educational, religious, or social purpose, rather than for making a profit. Non-profit corporations are exempt from federal income tax and may also qualify for state and local tax exemptions. However, non-profit corporations have to follow strict rules regarding their activities, finances, and governance.
– LLC (Limited Liability Company): This is a hybrid type of business structure that combines the features of a corporation and a partnership. LLCs offer limited liability protection to their owners (called members), who can also choose how they want to be taxed: as a sole proprietorship, a partnership, or a corporation. LLCs are more flexible and less formal than corporations, but they also have some drawbacks, such as varying state laws and fees.
The global demand for different types of corporations may depend on various factors, such as the industry, the market, the legal environment, and the economic conditions. According to Brex , some of the trends and challenges that affect the demand for different types of corporations are:
– The rise of digital platforms and e-commerce: These sectors have increased the demand for C corporations, especially among startups that seek to raise venture capital funding or go public. C corporations are preferred by investors because they offer clear ownership structures, standardized governance rules, and favorable tax treatment for stock options.
– The growth of social entrepreneurship and impact investing: These movements have increased the demand for non-profit corporations and other alternative business structures that aim to create positive social or environmental change. For example, some states have introduced benefit corporations (B corps), which are for-profit corporations that have a legal duty to consider the interests of all stakeholders, not just shareholders.
– The uncertainty of tax reforms and regulations: These factors have created challenges for some types of corporations, especially S corporations and LLCs. For instance, the Tax Cuts and Jobs Act of 2017 introduced a new 20% deduction for qualified business income (QBI) for pass-through entities, such as S corporations and LLCs. However, this deduction is subject to complex rules and limitations that may affect the tax benefits of these entities.
– The impact of the COVID-19 pandemic: The pandemic has affected the demand for different types of corporations in different ways. For example, some C corporations may have benefited from the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, which provided loans, grants, tax credits, and other relief measures for businesses affected by the crisis. On the other hand, some non-profit corporations may have faced challenges in fundraising, delivering services, and maintaining operations during the pandemic.
As the world changes rapidly due to technological innovations, social movements, political shifts, and health crises, entrepreneurs need to be aware of the different types of corporations available to them and choose the one that best fits their goals and circumstances.
References:
http://www1.fee.uva.nl/fm/conference/legal/ehr_2006_%20Acheson%20and%20Turner.pdf
https://books.google.com/books?id=ftzqaBv7X_sC&pg=PA159
https://www.brex.com/blog/types-of-corporations/
https://www.investopedia.com/types-of-corporations-5270647
https://www.indeed.com/career-advice/career-development/types-of-corporations
https://www.brex.com/journal/types-of-corporations
https://www.legalmatch.com/law-library/article/types-of-corporations.html
https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
https://www.investopedia.com/terms/c/corporation.asp
