Types of Corporations
Businesses may choose from a variety of corporate entities, based on their needs. Below are useful descriptions.
If you have further questions, your legal or financial advisors can help you decide which type of structure best suits your business needs. While Active Filings does not offer legal or tax advice, we will help you form your new corporation or LLC in any state by providing you fast, affordable and high quality incorporation services.
A general corporation, also known as a “C” corporation, is the most common corporate structure. A general corporation may have an unlimited number of stockholders. Consequently, it is usually chosen by those companies planning to have more than 30 stockholders or large public stock offerings. Since a corporation is a separate legal entity, a stockholder’s personal liability is usually limited to the amount of investment in the corporation and no more.
A close corporation is most appropriate for the individual starting a company alone or with a small number of people. There are a few significant differences between a general corporation and a close corporation. A close corporation limits stockholders to a maximum of 30. In addition, many close corporation statutes require that the directors of a close corporation must first offer the shares to existing stockholders before selling to new stockholders. Not all states recognize close corporations.
Subchapter S Corporation
A Subchapter S Corporation is a general corporation that has elected a special tax status with the IRS after the corporation has been formed. Subchapter S corporations are most appropriate for small business owners and entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners.
When a general corporation makes a profit, it pays a federal corporate income tax on the profit. If the company also declares a dividend, the stockholders must report the dividend as personal income and pay more taxes.
S Corporations avoid this “double taxation” (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the stockholders.
For many small businesses, the S Corporation offers the best of both worlds, combining the tax advantages of a sole proprietorship or partnership with the limited liability and enduring life of a corporate structure.
Limited Liability Company (LLC)
A Limited Liability Company is not a corporation, but it offers many of the same advantages. Many small business owners and entrepreneurs prefer LLC because they combine the limited liability protection of a corporation with the “pass through”” taxation of a sole proprietorship or partnership.