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 difficult 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.
In the United States, the most widely used type of corporation is the C Corporation, also known as C corps. According to 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.
In order to better understand how C corporations work, let’s take a closer look at their taxation process. C corporations are subject to corporate taxes, which are generally paid on earnings 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 disincentive for some businesses.
United States federal law requires C corps to hold at least one meeting each year for its shareholders and directors. Decisions made during these meetings must be carefully recorded in the company’s voting records. Moreover, C corporations must enact bylaws and keep them on file in their primary business locations.
S Corporations share a number of similarities with C corporations. However, there are significant differences between the two structures. In an S corporation, shareholders are not taxed separately, which avoids the double taxation drawback of standard C corps. In these corporations, profits and losses may be passed through directly to the owner’s personal income without being subject to corporate taxation rates.
The Internal Revenue Service (IRS) sets certain requirements to qualify for S corporation status. The availability of S corps is limited to small businesses with no more than 100 shareholders. Moreover, the business must be incorporated with the United States and have only one class of stock.
Aside from its taxation conditions, S corps are quite similar to C corporations and must observe all necessary corporate requirements. S corps must conduct regular shareholder meetings, have a board of directors and establish corporate bylaws.
Unlike C corporations or S corporations, non-profit corporations are not organized to make a profit for their owners or shareholders. Any profits generated by the company are directed towards 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 hospitals, churches, foundations and national charities.
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 forced to pay taxes on the money they earn through fundraisers or receive from donors. Accordingly, donations made to nonprofit organizations may also be considered tax-deductible to the entity that pays them.
While many 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.
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 not be personally pursued for repayment of a company’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 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, most LLCs are required to file articles of association and organization 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.
Let’s face it: choosing the right type of corporation can be tricky. There are so many different options to choose from, each with their 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 still unsure about which type of corporation suits your needs, or need help with officially establishing your business, it's best to consult with a lawyer who specializes in business law. Get in touch with a top-tier attorney today with Attorney At Law.