Types of Corporation
There are various types of corporations, including C Corporations, S Corporations, and Limited Liability Companies (LLCs), each with distinct features and advantages.
Benefits of Forming a Business in Your Home State
Incorporating a business offers numerous advantages, irrespective of its size or type. After determining that the benefits of incorporation outweigh the costs, the next step is to choose the most suitable type of corporation for your specific business needs. Generally, there are four commonly used types of corporations for incorporation:
- C Corporation
- S Corporation
- Nonprofit Corporation
- Professional Corporation
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For a detailed comparison of the key attributes of each corporation type and a comprehensive overview of other business structures, you can refer to our Business Structures Chart.
C Corporation
A C Corporation, also referred to as a general for-profit corporation, is the most prevalent form of corporate entity. It comes into existence by filing Articles of Incorporation with the state office. Shareholders, who can be numerous, own the C Corporation, and they elect a Board of Directors responsible for formulating high-level policies. The Board appoints corporate officers to oversee day-to-day operations.
Shareholders typically enjoy limited liability, even if actively engaged in management roles. The corporation’s shares are freely transferable unless restricted by shareholder agreements. C Corporations have perpetual existence, enduring until dissolution. Additionally, they are a distinct taxable entity, requiring the filing of separate tax returns and payment of corporate taxes on profits.
S Corporation
An S Corporation is established similarly to a C Corporation but differs significantly in two key aspects:
- Taxation Election: The S Corporation makes an election to be taxed as a pass-through entity under subchapter S of the Internal Revenue Code. Unlike a C Corporation, an S Corporation isn’t taxed separately; instead, its profits and losses pass through to the shareholders, reported on their personal income tax returns, resembling a partnership.
- Ownership Restrictions: In contrast to a C Corporation, an S Corporation has specific limitations on ownership. It can have a maximum of 100 shareholders, and each shareholder must be an individual or a trust, excluding other corporations. Furthermore, individual shareholders must be U.S. citizens or “Resident Aliens,” encompassing Permanent Residents and certain Aliens meeting the Substantial Presence Test. This category includes non-permanent resident Visa holders (H1/L1), qualifying as Resident Aliens under tax laws.
Non Profit Corporation
For groups oriented towards charitable, educational, religious, literary, or scientific objectives, a specialized legal entity can be established under Section 501(c)(3) of the Internal Revenue Code. A duly qualified 501(c)(3) Nonprofit Corporation possesses the following characteristics:
Tax-Exempt Status: The corporation is exempt from taxation, providing favorable treatment for entities focused on altruistic purposes.
Dividend Prohibition: Tax-exempt nonprofits are restricted from paying dividends, ensuring that financial gains serve the organization’s mission.
Asset Distribution: In the event of dissolution, corporate assets are typically required to be distributed to another qualified nonprofit entity, reinforcing the commitment to public benefit.
Compliance Requirements: Maintaining tax-exempt status entails significant filing obligations at both the State and Federal levels, necessitating adherence to specific regulations.
Activity Limitations: Nonprofit corporations may be restricted from engaging in certain activities, including involvement in political campaigns and substantial participation in lobbying efforts. These limitations underscore the organization’s focus on its charitable mission.
Professional Corporation
A Professional Corporation is tailored for businesses offering professional services, including physicians, attorneys, accountants, architects, and other licensed professionals. Incorporating as a Professional Corporation entails adhering to specialized filing requirements, which vary among states. This structure provides liability protection for professionals, shielding them from business-related liabilities.
Tax benefits for a Professional Corporation mirror those of a C Corporation or S Corporation. However, navigating the intricate laws governing professional services and corporations requires careful consideration. It’s strongly recommended to seek legal advice from an attorney well-versed in these matters before deciding to incorporate as a professional corporation. CorXec stands ready to assist you and collaborate with your attorney in preparing and filing the requisite documents with the state office, ensuring compliance with applicable regulations.
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