Key Takeaways

  • There are several types of corporations, including C Corporations, S Corporations, B Corporations, Nonprofits, and Closed Corporations, each with unique legal and tax characteristics.
  • C Corps are ideal for larger businesses seeking outside investment and IPO potential, while S Corps avoid double taxation and offer pass-through income.
  • B Corporations and Nonprofits focus on mission-driven objectives, with B Corps maintaining for-profit status and Nonprofits operating exclusively for charitable purposes.
  • Closed Corporations offer simpler governance and fewer formalities, often used by small, closely held businesses.
  • Choosing the right corporate structure affects liability, taxes, fundraising, compliance, and day-to-day operations.

Learn more about the types of Corporations below:

Corporation

A corporation is an independent legal entity distinct from its owners. The law views a corporation as a distinct legal person that can enter into contracts, incur debt, and pay taxes apart from its owners. The owners of a corporation also have the benefit of having limited liability.

When most people refer to a corporation, they actually mean a “C Corporation,” but you can also form a special type of corporation called an “S Corporation.”

Both types of corporations have more in common than in opposition. Shareholders own both types of corporations. They elect a board of directors to oversee larger issues such as corporate goals, while elected officers handle more of the day-to-day business affairs.

A corporation is set-up to have shareholders own the business in a way that allows for limited liability to only the amount of money they put into the corporation. Corporations often have several business locations, adding more legal concepts to grapple with at the federal and state level.

Both have unique features that we have displayed below:

Other Common Types of Corporations

Beyond C Corporations and S Corporations, several other types of corporations may suit different business models and missions. Understanding these lesser-known structures is critical to selecting the right legal form.

  1. B Corporation (Benefit Corporation):
    A B Corporation is a for-profit business that also prioritizes social or environmental goals. It balances profit-making with purpose, and must meet certain transparency and accountability standards. B Corps can attract investors who value corporate social responsibility.
  2. Nonprofit Corporation:
    Nonprofit corporations operate to fulfill a mission rather than generate profits for owners. Commonly used by educational, religious, charitable, or scientific organizations, these entities may qualify for tax-exempt status under IRS code 501(c)(3). Instead of shareholders, nonprofits have a board of directors and reinvest earnings into their mission.
  3. Close Corporation (Closed Corporation):
    Designed for small, closely held businesses, close corporations limit the number of shareholders and can operate without a board of directors. This structure allows for more informal management and less rigorous compliance requirements, making it suitable for family-owned or tightly controlled companies.
  4. Professional Corporation (PC):
    This type of corporation is formed by licensed professionals such as doctors, lawyers, or accountants. A PC offers limited liability for business debts and malpractice claims unrelated to an individual’s own conduct but is subject to special rules and ownership restrictions.
  5. Non-stock Corporation:
    A non-stock corporation does not issue shares and has members instead of shareholders. These are often used for clubs, churches, or other organizations where the ownership structure is based on membership rather than investment.
  6. Foreign Corporation:
    A corporation that operates in a state other than where it was originally incorporated is considered a foreign corporation in that state. It must register as a foreign entity and comply with local regulations to conduct business there.

C Corporation (C Corps)

C Corps allow for an unlimited amount of shareholders and can be owned by other corporations such as LLC’s or even trusts.

C Corps have more flexibility as well with shareholder rights and ownership, but typically face tougher tax implications because of this. This is due to a corporation’s ability to offer ownership shares in the business through stock offerings when a corporation goes public through an IPO (Initial Public Offering).

S Corporation (S Corps)

An S Corp is simply a corporation that has filed a document with the IRS to become a special type of corporation.

The main difference deals with taxation issues, but additionally, an S corporation only allows a specific amount of stock to be distributed.

Shareholders rights are much simpler here and double-taxation that occurs with a C corporation’s income is eliminated.

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How to Choose the Right Type of Corporation

When deciding between different types of corporations, business owners should consider the following key factors:

  • Ownership and Size: Large businesses and those seeking venture capital often favor C Corporations for their flexibility and investor appeal. Smaller businesses may opt for S Corps or Close Corporations to simplify management.
  • Tax Considerations: S Corporations and LLCs can offer pass-through taxation, avoiding the double taxation faced by C Corporations. Nonprofits may qualify for tax-exempt status.
  • Mission and Purpose: Businesses with a strong social or environmental mission may choose to form a B Corporation or Nonprofit.
  • Industry Requirements: Licensed professionals often need to form Professional Corporations to comply with state laws.
  • Administrative Requirements: Some corporations, such as C Corps, require more compliance (e.g., formal meetings, board oversight), while others like Close Corporations offer simplified governance.

Business owners should consult with legal and tax professionals to ensure the chosen structure aligns with long-term goals and compliance obligations.

Frequently Asked Questions

1. What is the difference between a C Corporation and an S Corporation? A C Corporation pays corporate income tax and can have unlimited shareholders, while an S Corporation allows income to pass through to shareholders and is limited to 100 U.S. shareholders.

2. Can a business switch from one corporation type to another? Yes, businesses can change their corporate structure, such as converting from an LLC to a C Corp or electing S Corporation status with the IRS. Legal and tax implications should be carefully reviewed.

3. What is a B Corporation, and how does it differ from a nonprofit? A B Corporation is a for-profit entity that pursues social and environmental goals, while a nonprofit operates solely for charitable purposes and does not distribute profits.

4. Who typically uses a Close Corporation structure? Close Corporations are often used by small, privately held businesses that want to limit outside ownership and reduce formal governance requirements.

5. Do all corporations offer limited liability protection? Yes, most types of corporations offer limited liability, protecting owners’ personal assets from business debts and obligations.