Key Takeaways

  • A general corporation (also known as a C corporation, stock corporation, or open corporation) is a legal entity separate from its owners, offering strong liability protection and the potential to raise capital through stock sales.
  • It is ideal for businesses planning to go public, seek venture capital, or expand globally.
  • General corporations feature a formal governance structure with shareholders, directors, and officers, each playing distinct roles.
  • Advantages include limited liability, perpetual existence, easier capital raising, and tax-deductible benefits.
  • Disadvantages include double taxation, complex compliance requirements, and higher formation costs.
  • Shareholders can benefit from dividends and stock appreciation, but they generally have no role in day-to-day management.
  • Additional considerations include corporate governance obligations, required filings, tax implications, and strategies for growth and succession.

A general corporation is a type of corporation that is commonly used for companies that plan to eventually go public.

What Is a General Corporation?

Corporations, at their essences, are legal business entities, meaning they have an individual status that is separate from their owners. General corporations are among the most common types of corporations. Typically, a business chooses this form of corporation if it is interested in making a private stock offering or plans to one day go public. General corporations have several different names:

  • C corporation
  • Open corporation
  • Stock corporation

Forming a general corporation is also a good choice for companies that are interested in pursuing venture capital funding. General corporations are separated into three different groups, all of which play an important role in the corporation:

  • Directors
  • Officers
  • Shareholders

Thanks to the limited liability protections offered by corporations, the personal assets of directors, officers, and shareholders cannot be seized to pay for company debts. General corporations can elect Subchapter S status by meeting IRS qualifications and filing Form 2553.

There are several reasons that a company might want to form a general corporation:

  • The company plans to go public in the future.
  • The company wants to be able to raise capital more easily.
  • The company wants the ability to buy other companies.
  • The company wishes to do business on a global scale.

With a C corporation, the profits of the business are taxed separately from the profits of the owners.

Key Characteristics of a General Corporation

A general corporation is a distinct legal entity formed under state law that exists separately from its owners. This separation provides significant protections and opportunities for growth. In addition to being referred to as a C corporation, a general corporation may also be called a stock corporation or open corporation, especially if it issues publicly traded shares.

Key features of a general corporation include:

  • Separate legal personality: It can enter into contracts, own property, sue, and be sued independently of its owners.
  • Perpetual existence: The corporation continues to exist even if shareholders or directors change.
  • Centralized management: The board of directors oversees major decisions, while officers handle daily operations.
  • Transferable ownership: Shares can be sold or transferred without disrupting business operations.
  • Ability to raise capital: Corporations can issue stock to attract investors and fund growth initiatives.

General corporations are also subject to strict reporting and compliance obligations, including filing annual reports, maintaining bylaws, holding shareholder meetings, and keeping corporate minutes. These formalities help preserve limited liability and enhance credibility with investors and lenders.

Advantages of a General Corporation

The biggest benefit of structuring your company as a general corporation is protecting the assets of owners from corporate liabilities. Another advantage of a general corporation is that its lifespan can be unlimited. If an owner leaves the business, the corporation can continue operations uninterrupted.

Corporations can also easily make tax deductions for retirement plans, travel, and insurance. By selling stock, ownership of the corporation can be transferred with little difficulty. Unlike other business structures, corporations tend to have a much easier time raising capital, as they can sell bonds and stocks. A benefit of a C corporation is that the stockholders are not passed corporate taxes.

Tax Considerations for General Corporations

Taxation is one of the most important aspects to consider when forming a general corporation. Because they are typically treated as C corporations under the Internal Revenue Code, these entities face what is often referred to as “double taxation.” This means:

  1. The corporation pays income tax on its profits.
  2. Shareholders pay personal income tax on dividends received.

However, this structure can also offer strategic advantages:

  • Retained earnings: Corporations can retain profits within the business for growth without immediate tax consequences for shareholders.
  • Tax deductions: They can deduct business expenses, salaries, benefits, and retirement plan contributions, potentially lowering taxable income.
  • Potential tax planning opportunities: Corporations may explore tax credits, carryforward losses, and other incentives unavailable to sole proprietorships or partnerships.

Some general corporations choose to elect S corporation status (if eligible) to avoid double taxation by passing income directly to shareholders. However, this comes with ownership restrictions, including limits on the number and type of shareholders.

Disadvantages of Corporations

While there are several advantages of the general corporation structure, there are also drawbacks of which you need to be aware. The primary disadvantage of this type of corporation is that they can be expensive to form. Partnerships and sole proprietorships, on the other hand, can be formed without the need to cover large costs.

Another disadvantage of this corporate form is the need to follow complex regulations and rules at both the federal and state levels. Also, owners must observe corporate formalities in order to maintain their liability protections.

Legal and Compliance Requirements

Operating a general corporation comes with ongoing legal, administrative, and regulatory obligations. These requirements are designed to ensure transparency, protect shareholders, and maintain limited liability protections. Common obligations include:

  • Filing formation documents: Incorporators must file articles or certificates of incorporation with the state.
  • Adopting bylaws: These internal rules outline how the corporation will operate, hold meetings, and manage decision-making.
  • Holding regular meetings: Annual shareholder meetings and periodic board meetings are required, with minutes recorded and retained.
  • Maintaining corporate records: Financial statements, meeting minutes, and stock ledgers must be kept up to date.
  • Filing annual reports and paying franchise taxes: Most states require ongoing filings and payments to keep the corporation in good standing.

Failure to comply with these requirements can result in fines, dissolution, or loss of limited liability protections. Working with legal counsel can help ensure that the corporation remains compliant at every stage of its lifecycle.

Shareholders of a General Corporation

In a general corporation, shareholders are not responsible for any management duties and only serve as owners of the corporation. Generally, shareholders will have one vote for each corporate share they own, giving them the ability to influence the membership of the corporation's Board of Directors.

Shareholders who own common stock will also have a say in major company decisions. A general corporation can have as many shareholders as it wishes, and each shareholder will be protected from the corporation's debts. While shareholders may hold some liability, it usually restricted to what they have invested in the corporation.

The majority shareholder is a person who owns the majority of corporate shares, giving them the ability to control the company. Majority shareholders have a number of responsibilities that do not apply to minority shareholders. A minority shareholder is a shareholder who does not own a controlling interest in the company.

Typically, minority shareholders are not responsible to the company in any way, and they have the ability to assign their votes to another person if they so choose. Minority shareholders also have the ability to sell their stock.

Shareholders of a corporation benefit from owning corporate stock in one of two ways. If a dividend is declared by the Board of Directors, shareholders can receive dividend distributions based on the amount of stock that they own. Also, the value of the shareholders' stock will grow as the company expands.

Growth, Succession, and Exit Strategies

One of the strengths of a general corporation is its flexibility in planning for long-term growth, succession, and potential exit strategies. As the business matures, corporations can leverage several strategic options:

  • Initial Public Offering (IPO): By listing shares on a stock exchange, a corporation can access significant capital and increase its valuation.
  • Mergers and acquisitions: Corporations can acquire or merge with other companies to expand market reach or diversify their offerings.
  • Shareholder buyouts: Ownership stakes can be transferred, sold, or redeemed without disrupting operations.
  • Succession planning: Corporations can implement leadership transitions through board appointments, executive promotions, or structured buy-sell agreements.

These options make the general corporation structure particularly appealing to entrepreneurs and investors aiming for scalability and long-term value creation.

Frequently Asked Questions

  1. What is the difference between a general corporation and an LLC?
    A general corporation is a separate legal entity with a formal structure and the ability to issue stock, while an LLC offers more flexible management and pass-through taxation but typically cannot go public.
  2. Can a general corporation be owned by one person?
    Yes. A single shareholder can own all the shares, and many corporations start with just one owner before expanding ownership.
  3. How are general corporations taxed?
    They are usually taxed as C corporations, meaning profits are taxed at the corporate level and again when distributed as dividends to shareholders.
  4. What are the main filing requirements for a general corporation?
    Corporations must file formation documents, adopt bylaws, hold annual meetings, keep records, and submit annual reports and taxes to remain compliant.
  5. Can a general corporation change to an S corporation later?
    Yes. If it meets IRS eligibility requirements, a general corporation can elect S corporation status by filing Form 2553, which can reduce tax burdens by eliminating double taxation.

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