Types of Business Corporations: Everything You Need to Know
The main types of business corporations in the U.S. are the S corporation and the C corporation.3 min read
2. Differences Between C Corporations and S Corporations
3. Benefit Corporations
4. Professional Corporations
The main types of business corporations in the U.S. are the S corporation and the C corporation. The C corporation is the traditional type of corporation, which has no limitations on the number and type of shareholders. It is suitable for large businesses that desire to get funding from investors all over the world. S corporation status is a taxation classification that is available to small business corporations. It protects corporations from federal double taxation.
Some states have another type of corporation called the benefit corporation. Benefit corporations differ from other corporations in that the purpose of the corporation is not exclusively to get profits, as the corporation also seeks to bring benefits to the public and the environment. Most states also recognize professional corporations, which licensed professionals normally own and manage.
C Corporation and S Corporations
S and C corporations share a number of similarities in their formation and maintenance processes:
- They must both file initial formation documents with the state.
- Both corporations give limited liability protection to their shareholders.
- Both corporation types must follow formal requirements, such as having directors, holding an annual board of directors and shareholders meetings, and keeping records of corporate resolutions.
- Both corporation types are typically subject to state annual filing requirements and normally pay state franchise tax.
Differences Between C Corporations and S Corporations
- Formation. The way S corporations and C corporations are formed is similar. However, in addition to the formation procedures they have in common, an S corporation must apply for S corp tax status with the IRS. The filing is done using IRS Form 2553.
- Taxes. Both corporations pay a number of taxes at similar rates. The major difference between the two corporation types is that the IRS requires C corporations to pay corporate tax on the corporations' annual profits. This tax is not levied on the typical S corporation. Although both corporations are required to pay taxes on any fringe benefits given to employee-shareholders, most C corporations can deduct the value of such benefits from the taxes. But such an option is only available to S corporation employee-shareholders who own no more than 2 percent of the company.
- Shareholders. S corporations are allowed to have a maximum of 100 shareholders, but C corporations don't have any limitation on the number of shareholders. In addition, S corporations are not allowed to have shareholders who are not U.S. citizens or U.S. residents. However, C corporations are free to have shareholders from most countries in the world. S corporations are not allowed to have corporate or business shareholders. This is allowed for C corporations.
- Stock. S Corporations are allowed only one type of stock. C corporations can have several classes of stock. The basis for distributing earnings in an S corporation is strictly the number of shares the shareholder owns. Although some C corporations also base their dividend distribution on the number of shares a shareholder has, it is not a requirement. Some C corporations have superior stock owners who receive comparatively bigger dividends compared to common stock owners.
Benefit corporations are corporations whose purpose is not solely to make profits for the shareholders, as they also strive to provide benefits to the society and the environment. In turn, the directors and officers of such corporations get more liability protection from the state.
The process of formation of benefit corporations is similar to the formation of the normal corporation. However, the articles of incorporation or the certificate of incorporation of a benefit corporation must state that the corporation is a benefit corporation and may state the benefit the corporation will provide.
Benefit corporations are required to hire a reputable body to verify the benefit they provide to the public or the environment every year.
A professional corporation is one that is organized for the purpose of offering a professional service. The requirements for formation of professional corporations differ from state to state, but normally, all the members of a professional corporation must have a professional license in the industry in which they are doing business.
Apart from professional requirements, professional corporations normally have the same requirements and tax treatment as normal corporations. Common professional corporations include:
- Law firms
- Medical practices
- Accounting firms
- Engineering firms.
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