Types of Corporations: Everything You Need to Know
A corporation is oft thought of as a person - they have their own rights, are subject to unique privileges and liabilities, and are wholly distinct from their members or owners in the eyes of the law.8 min read
Types of Corporations
There are many types of corporations. Plainly defined, a corporation is an institution. They’re recognized as their own unique legal entities and provide protection for their members via detached accountability. A corporation is oft thought of as a person -- they have their own rights, are subject to unique privileges and liabilities, and are wholly distinct from their members or owners in the eyes of the law.
Many different types of corporations exist. Most of them are used primarily for conducting business with reduced liability. The most common types of corporations are as follows:
Publicly Held Corporation: When most people hear the word “corporation,” this is what they’re thinking of. These Publicly Held Corporations (or PHC) are publicly traded, and many of the top corporations in the country would fall into this category.
Closely Held Corporation: A closely held corporation, or CHC, is a corporation with a relatively small pool of stockholders, and one without a public market for its stocks. They’re not as common or useful at limiting liabilities as other types of corporations.
Limited Liability Company: An LLC, unlike a corporation, is a pass-through type of business. That means the responsibilities of various individuals, such as tax obligations, may be distributed amongst members, or placed on the shoulders of the business itself, in order to protect members.
C Corporation: A C Corporation is not limited in the number of shareholders it can have. This is one of the better options for global corporations, as a C corporation may have shareholders who are foreign citizens.
S Corporation: An S Corporation is limited in that it can only have 100 or fewer shareholders at any given time. These corporations are also limited in the types of stock they’re allowed to utilize and are capped at only one class of stock. Spouses are automatically looked upon as single shareholders in S corporations by the law.
Professional Corporation: These corporations consist of professionals who are licensed practitioners in their field. Think of accountants, lawyers, doctors, and dentists.
Professionals can form a corporation to utilize the many advantages and benefits that are inherent to corporations, such as liability protection, structure, shareholder protection, continuity of life separate to the owners/members, and centralized management. Many private practices, regardless of the field, use this type of corporation to conduct business.
As far as the market is concerned, shares in a professional corporation are only transferable to individuals who are also licensed to practice the same profession as the proprietary shareholders. That means a dentist’s office cannot trade the shares of their professional corporations to anyone who is not also a licensed oral health professional.
Nonprofit Corporation: These nonprofit corporations are organizations that serve the public, and don’t have any explicit structure or goals surrounding the accumulation of profits.
To help stow the tide of operating losses, these corporations do get to enjoy tax-exempt status. However, a nonprofit corporation must meet specific requirements and criteria. Even after obtaining their tax-exempt status, there are numerous limitations imposed on their activities by the law.
The four main types of corporations are designated as C, S, LLC, and nonprofit organizations.
Filing a DBA
Of course, a corporation isn’t the only way to conduct business, protect oneself in the business environment, or gain liability protection in the marketplace. There are alternatives used by small and large entities alike that are preferable to forming new or separate corporations.
The most common of these is known as a DBA, or a “doing business as” company. Think of a pen name or moniker, only for businesses and not individuals. These assumed, fictitious, or unique names allow a company to conduct business using a name other than their own. This type of entity is popular for corporations and small freelancers or business owners alike.
Many airlines are DBA entities, as there are only a small number of aircraft in the country, which are owned by a select few, large airlines. Smaller airlines seek the ability to “do business as” a larger airline, not unlike the way a franchise operates.
Filing a DBA usually takes place at the county level. Some states do allow for state-level DBA filings, which are unique in the protections they offer.
A DBA is required to use a name separate from the owner’s name. Without a DBA (or other corporate distinction), most business entities would be categorized as sole proprietorships or general partnerships.
Consider an example - if John Doe operates a landscaping business and doing so as a sole proprietorship and without a DBA, his landscaping business would carry his exact name by necessity. All transactions would have to be performed under the name John Doe. However, if John Doe wanted to name his business “Landscaping 4 U,” he would have to file a DBA at the county or state level in order to legally conduct business under that name.
LLC’s and corporations are both legally entitled to file a DBA as well. This allows them to perform transactions using a name other than the one registered with the state the business was incorporated in.
For example, a corporation named Doe and Gang, Inc. may choose to do business under another name -- one that more clearly describes the purpose of the company. Doe and Gang, Inc. could file a DBA to legally conduct and advertise business as something more digestible to clients, such as Doe’s Landscaping, Inc.
Advantages & Limitations of DBA
While the protections offered to members and entities utilizing a DBA are considerable, there are both pros and cons to conducting business in this manner. In particular, a DBA is limited in that it cannot provide the same compliance requirements for forming an LLC. That means a company isn’t changing into another one by achieving a DBA, but is simply conducting business using a new name.
Another key limitation of a DBA is the lack of liability protection and tax liability mitigation they provide in contrast to fully incorporating a business.
Further, filing a DBA does not actually change the official name of a corporation, or an LLC. It is, for all intents and purposes, a way for businesses to use a different name for specific transactions or types of transactions only, and is wholly separate from the process a company would undergo to legally change their name.
Forming a Corporation or LLC
From square one, forming a corporation or LLC will require preparation, and no short amount of documentation. These documents are often referred to as “formation documents.” To incorporate your business, these formation documents, also known as “articles of incorporation,” must be filed with the appropriate state agency or agencies.
Personal assets are more protected after incorporating than they are under DBA filings or sole proprietorships. Both of those entities can incur unlimited liability. There are more specific benefits to incorporating, and the protections you gain depend on the type of corporation you form.
What is a C Corporation?
A C corporation is very unique. They are separate legal entities operating under state laws designed to protect owners and shareholders both from creditor claims. Potentially fraudulent claims that could lead to bankruptcy or could cause other damages are behaviors that owners and shareholders are potentially shielded from after incorporating.
The very incorporation of a business will automatically classify it as a regular C corporation. For that reason, C corporations can be thought of as a standard, and most of the corporations we’re familiar with from everyday life fall into this category. C corporations are separate taxpayers, unique from their owners and shareholders. Their income and expenses are taxed on the corporate level, and not the owner level.
Corporate profits under this structure can be distributed to owners as dividends. In this situation, owners must pay the government personal income tax on distribution, which creates “double taxation,” wherein profits are taxed once (first) at the corporate level, and again at the personal level, as dividends. A C corporation essentially refers to any corporate entity that, under the United States federal income tax law, is taxed independently from its shareholders and owners.
Most small businesses are better off operating under a DBA or as a sole proprietorship, and many do not opt to incorporate because of the tax responsibilities C corporations face. LLCs, or limited liability corporations, are another great alternative for smaller businesses.
What is a Limited Liability Corporation
LLCs offer personal liability protection to those who form them. In the tax world, and LLC is much like an S corporation, with the business’ income and expenses being passed on to the owner's’ personal tax returns.
If someone is the only owner of an LLC, they’re classified as a “disregarded” entity. An LLC is a very flexible type of enterprise -- they blend the various elements of partnership, and corporate structures, with consumer and shareholder protections. Many businesses are LLCs, ranging from the very small, to global companies.
They’re one of the oldest types of corporations in the world, too. LLCs have been a staple in business across Europe and Latin America before they were popular in the United States. LLCs were brought to the United States by Wyoming in 1977. The state authorized pass- through taxation, which is what partnerships and S corporations undergo, by the IRS in 1988.
While federal law eventually grew to incorporate this business structure into everyday society shortly after Wyoming introduced it, not every state followed suit immediately. With the inclusion of Hawaii and Washington D.C. in recent years, all 50 states now allow for, and regulate, LLCs.
This uniformly-legal type of company provides limited liability protections to its owners and shareholders in the vast majority of jurisdictions in the United States.
An owner would, therefore, report the LLC’s income Schedule C of Form 1040. This is the same tax schedule used by sole proprietors.
There are, of course, pros and cons to operating using an LLC. The same applies to all types of corporations. There are some rules of thumb to consider:
- C corporations, S corporations, and LLCs provide owners and shareholders with personal liability protection and fraud mitigation. LLCs have a limited life, and are often not allowed to live past 30 years without matriculating in the corporate marketplace, and becoming another type of corporation entirely.
- S corporations and LLCs are more commonly used by small businesses.
- C corporations and S corporations allow owners and shareholders the ability to grow their businesses and even transfer ownership.
- C corporations and S corporations use a pass-through income tax structure, so owners and shareholder have to report profits, losses, and expenses on their personal returns.
Making Your Decision
Choosing between a sole proprietorship or a DBA, or a more formal corporate structure, greatly depends on the particular business, situation, goals, budget, and any number of other factors, a given business is beholden to. Some businesses will fare better using a DBA. Others will be better suited to file as S or C corporations.
LLCs and already-existing corporations typically evaluate whether or not to file a DBA. When they do, they often consider the following:
Does the potential new name (the DBA) project a business focus that is effective and allowed under the business purpose? This is all outlined on the Articles of Incorporation or organization a business must file in order to incorporate.
If you have questions about your specific situation, you’d be best served by talking with an attorney or accountant. If you’d like assistance or more information on the types of corporations, post your legal need to UpCounsel’s marketplace. Only the finest lawyers, representing the top 5 percent in the country, are accepted to the marketplace. Lawyers from UpCounsel are Harvard and Yale graduates with an average of 14 years of legal experience. They are top practitioners of law who have worked with the likes of Google, Stripe, Twilio, and more.