Are you confused about the different types of corporations in the United States? With so many different types of corporations, from C-Corporations to Nonprofit Organizations, it can be challenging to keep track of them all. Nonetheless, one of the most important decisions you’ll have to make as an entrepreneur is choosing the right type of corporation for your specific needs and circumstances. Learning the key differences between each organization’s structure is key to making an informed decision about your new business. 

Join us as we explore four of the most common types of corporations in the United States.

C-Corporations

In the United States, the most widely used type of corporation is the C-Corporation, also known as a C-corp. Under this structure, the owners or shareholders of a company are taxed separately from the entity itself. In other words, C-corporations legally separate the owners’ or shareholders’ assets and income from their corporation.

To better understand how C-corporations work, let’s take a closer look at how they are taxed. C-corporations are subject to corporate taxes, which must be paid on the corporation’s taxable income before distributing profits to shareholders in the form of dividends. Following dividend distribution, individual shareholders are then subject to personal income taxes. This process can result in "double taxation," which can be a deterrence for some.

United States federal law requires that C-corps hold at least one meeting each year for their shareholders and directors. Decisions made during these meetings must be carefully recorded in the company’s voting records. Moreover, C-corps must enact bylaws and keep them on file in their primary business locations.

S-Corporations

While S-Corporations share some similarities with C-corporations, there are some significant differences between the two structures. In an S corporation, the corporation and shareholders are not taxed separately, which avoids the double taxation applicable to C corps. In these corporations, profits and losses are passed through directly to the owners as personal income while avoiding corporate taxes.

The Internal Revenue Service (IRS) imposes specific requirements for qualifying as an S-corporation. Subject to certain exceptions, to qualify as an S-corp, a business may have no more than 100 shareholders, must be incorporated with the United States, and have only one class of stock. There are also several criteria and limitations on who is allowed to be a shareholder. 

Furthermore, under federal law S-corps are not required to conduct regular shareholder meetings, have a board of directors, and establish corporate bylaws. However, it is essential to know that state laws may differ in this regard. 

Non-Profit Corporations

Unlike C-corps and S-corps, non-profit corporations are established with the primary goal of serving a charitable or public purpose and do not have owners or shareholders. Any excess revenues generated by the company are directed toward supporting the organization’s key operations and missions. In general, non-profit corporations are created for charitable, educational, literary, public safety, or religious purposes. A few common examples of non-profit corporations include certain hospitals, churches, educational institutions, environmental and conservation foundations, and charitable organizations. 

Non-profit organizations are exempt from taxation since they generally support a social cause and provide public benefit. As a result, these corporations will not be required to pay taxes on the funds they solicit through fundraisers and receive from donors. Additionally, donors of funds to nonprofit organizations may be eligible for tax deductions for their financial contributions.

While some non-profit organizations rely solely on volunteer labor, most larger companies require a paid staff of employees, managers, and directors. In these cases, non-profit organizations are not exempt from employment taxes and must comply with employment laws in the same manner as for-profit organizations.

Limited Liability Companies (LLC)

While Limited Liability Companies (LLCs) are not technically classified as corporations, they possess many of the same features as corporations. Their structure is meant to protect a corporation’s owners from individual responsibility for its liabilities. In other words, in an LLC, the owners of the business will generally not be held personally responsible for the LLC’s debts or liabilities. However, similar to a partnership and unlike a standard corporation, the profits and losses of the company are typically passed through to the members and reported on their personal tax returns. 

While LLCs generally provide a relatively flexible management structure, the laws and regulations governing these companies vary from state to state. Nevertheless, in many states, LLCs may be required to file articles of association, organization, or similar documents with the state in which the company is formed. Additionally, LLCs are typically required to maintain accurate records of their financial transactions and meetings of the members or managers.

Bottom Line

Let’s face it: choosing the right type of corporation can be tricky. There are so many different options to choose from, each with its own advantages and downsides. Even so, understanding the critical distinctions between the various corporation structures can go a long way in selecting the best fit for your business.

If you're unsure about which type of corporation suits your needs or need help with officially establishing your business, it is recommended that you consult with a lawyer who with extensive experience in practicing business law. Through AAL’s directory, you can find many skilled lawyers that can assist you in selecting and establishing the best structure for you and your business’s needs.