A Corporation is a legal business structure that is owned by shareholders who are issued stock and elect a board of directors to manage and oversee the entities activities. Corporations provide liability protection as it is recognized as a separate entity from their owners/shareholders. While Corporations are commonly for-profit businesses but they can also work as a non-profit as a charitable organization. Corporations are formed with an article of incorporation.
Types of Corporations
There are 3 primary types of Corporations: C Corporations, S Corporations and Non-Profit Corporations:
C Corporations are the most common type of corporation. When an individual talks about a corporation in most cases they are speaking about a C Corporation. Corporations are taxed on earnings before any are distributed to the shareholders. If the Corporations board of directors approves distributed any remaining profits to shareholders, the shareholders are then taxed on their personal taxes for this income separately from the corporation. A C corporation is required to hold a meeting of shareholders and directors at least once a year. Minutes of this meeting must be maintained for transparency in how the business operates. The corporation must keep voting records and a list of the owners along with percentage ownership. C corporations file annual reports and financial statements. This is the corporate structure that is the best if you plan to offer ownership to the public (stocks) or plan to do business internationally.
S corporations are the second choice for a corporate structure. S corporations are required to meet Internal Revenue Code requirements. S corporations are the choice for smaller corporations. Unlike C corporations, S corporations limit who can hold stake (ownership) in the company. There may be only 100 shareholders and all shareholders must be US citizens. S corporations are taxed only at the shareholder level, there is no taxation at the corporate level. An S corporation may only have one class of stock. To qualify as an S corporation the business must pay a reasonable salary to shareholder-employees before any profits are distributed to all shareholders. To receive S Corporation taxation status, the entity must file form 2553 with the IRS.
Non-Profit Corporations are corporations formed for a purpose other that making profits for owners or stakeholders. While these corporations are formed like the other two corporate structures, they do not have a profit motive and do not pay out profits to owners. All profits are instead reinvested into the organization to promote its charitable mission. There are many Non-Profit Corporations a few examples include Amnesty International, The Boy Scouts of America and the Red Cross.
Advantages and Disadvantages of a Corporation
When forming an organization as a Corporation, there are variety of distinct advantages and disadvantages provided:
Advantages of Corporations
- Liability Protection for Owners/Shareholders
- Easier to obtain financing and outside investment
- Can deduct the cost of benefits it provides to employees and officers. Providing retirement plans and insurance to employees is often tax deductible.
- Have no life limit in that owners can pass shares on to subsequent generations with no change in how the business operates.
Disadvantages of Corporations
- Forming a corporation is often more costly
- States may have higher fees annually for franchise fees for corporations
- More oversight at the state and federal level. Taxation is more complex and often more record keeping is required
- Must follow the formalities and protocols that are set forth in their articles of incorporation.
Frequently Asked Questions (FAQ) about Corporations
A company is general term for any entity that engages in business. A Corporation is formal a legal business structure. Corporations are legally formed at the State level and must meet certain requirements to do business.
Most large and many small businesses operate as corporations. Large retail chains like Walmart and Target are corporations. Manufacturers like General Motors and Ford are corporations. Software companies like Google and Microsoft are corporations.
No an LLC and a Corporation are different types of formal legal business structures. They are similar in that they provide limited liability protection for the owners of the business in most cases, however they have different filing requirements and are taxed differently by default. By default LLCs provide pass-through taxation whereas a Corporation (C Corporation) is subject to “double taxation”.
Corporations are formed by filing Articles of Incorporation in their state of origin. Owners of a Corporation are referred to as shareholders and are issued stock.