Learn something new every day
More Info... by email
Distinguishing among the corporation forms is crucial to entrepreneurs who want to choose the best business structure. Incorporating a business often shields the owner from personal liability, whether caused by his or her own activities or by employees. Forming and maintaining a corporation requires the owner to file articles of incorporation and various corporate filings required by local and regional laws. The legal requirements depend on the type of corporation. Each country has its own legal rules for corporations, and they are known by different names; in the US, the main forms include C, S, close, and professional.
The C corporation is the default corporation form for businesses that incorporate. The structure is recognized as a "person," separate from the shareholders. The incorporator must file articles of incorporation with the state or region where it wishes to incorporate, and pay the required filing fees. When the location of incorporation is also the corporation's place of business, it is considered a domestic corporation. Corporations doing business in a region where they are not incorporated are considered foreign corporations.
The S corporation is one of the most popular corporation forms in the US because of the corporation tax rules associated with it. It is really a tax status according to Subchapter S of the Internal Revenue Code, and the corporation has to elect to be taxed as an S corporation with the US Internal Revenue Service (IRS). The major benefit to the corporation is that it won't be taxed twice: once for the corporate income and again for income distributed to shareholders, such as dividends, bonuses, and salaries. The tax passes through the entity, and the shareholders are taxed like a partnership, which means the income is only taxed once.
The close corporation is another status that a corporation can elect under state laws. It is limited to between 30 and 35 shareholders, depending on the state of incorporation. Like the S corporation, it is a corporation form that acts more like a partnership than a C corporation.
The professional corporation is limited to shareholders of specific professions. It is often the best option among the corporation forms for professionals who want to limit their personal liability as it relates to negligence, errors, and omissions claims. Healthcare professionals and attorneys form professional corporations if they decide to incorporate their businesses.
All corporation forms are uniform in corporate structure. The three components of the corporate structure are shareholders, directors, and corporate officers. The shareholders are often the business owners, but more are added as stocks are sold publicly or privately. The directors are named in the articles of incorporation, but more may be elected at corporate meetings. The main corporate officers are the president and secretary.
When some is starting a business, it is a good idea to get advice from a small business attorney because of the legal and tax implications of the various corporation forms. If a corporation fails to meet its legal duties and fulfill requirements according to state laws, such as corporation filings, it will not remain in good standing. Choosing the right corporation form can help make a business more efficient for all stakeholders involved.