A corporation is an institution that is recognised as a separate legal entity, with detached accountability, meaning it is entirely separate from its owners. It has its known rights, privileges and liabilities. There are different types of corporations, most of which are used to conduct business.
Types of corporations
Corporations can be very beneficial to business owners, so here are 4 of the main types.
A C corp is the most common form of a corporation, that is a legal entity in itself, separate from its owners. Corporations offer the strongest protection to owners from personal liability, but the cost to form one is higher than other business structures, as well as C corps requiring more extensive record-keeping, operational processes, and reporting.
Unlike other business structures, corporations pay income tax on their profits. In some cases, corporate profits are taxed twice, called ‘double taxation’ – the first taxation comes from when the company makes a profit, and again when dividends are paid to shareholders on personal tax returns.
Because of a life independent from its shareholders, if a shareholder leaves or sells his shares, the C corp can do business relatively undisturbed. C Corporations also have an advantage when it comes to raising capital because of their ability to sell stock to raise funds, which can also help to attract employees.
C corps are a good choice for medium to high-risk businesses, businesses that need to raise money, and businesses that are to be sold eventually.
S corporations are typically for smaller platforms, with a 100 shareholder limit, and all shareholders must be US citizens. These corps still follow the strict filing and operational processes of a C corp. However the key difference is that this type is designed to avoid the double taxation of C corps – they allow profits, and some losses, to be passed directly to an owner’s personal income, without being subject to corporate tax rates.
Depending on your state, you could be taxed on profits above a specified limit, whilst some corps don’t recognise the S corp election at all, deciding to treat the business as a C corp instead.
S corps also have an independent life like C corps – if a shareholder leaves or sells his shares, the S corp can still do business relatively undisturbed.
Limited liability company (LLC)
An LLC is different to S and C corps. LLCs are a flexible form of enterprise that blends elements of two business structures: partnership with corporate structures. LLCs provide limited liability to its owners in the vast majority of the US. The primary characteristic that it shares with a corporation is the limited liability, and the primary characteristic it shares with a partnership is the availability of pass-through of income taxation. However, LLC members are considered self-employed, so must pay self-employment tax contributions towards Medicare and Social Security.
LLCs are often more flexible than a corporation, and are well-suited for companies with only one owner.
Non-profit corporations use surplus revenues to achieve its goals, rather than distributing them as profit or dividends. While they are permitted to generate suplus revenues, non-profit corps must retain these for self-preservation, expansion, or plans.
I know that I want to form a corporation, but how do I go about doing so?
Here is a step-by-step, very basic summary on how to form a corporation. For more detail, visit this site.
- Name your corporation
So you’ve decided you want a business. The first step to establishing one is to actually give your business a name. Choose a unique and catchy name to attract customers, while also making sure you abide by your state’s requirements.
- Choose a registered agent
A registered agent is a person/entity who accepts tax and legal documents on behalf of your business.
- Choose initial directors and share structure
You will need a director who will oversee your corporation until the first shareholders’ meeting, and a share structure to organise the shares in a business – with different rights and privileges.
- File the formation documents
Formation documents cover the basics of your corporation. Once these documents are approved you will officially have a corporation.
- Get an EIN
An EIN is an Employer Identification Number, which identifies you as a business with a specific number.