Choosing the type of corporation for a business can have profound effects on your business in the future. There are many different types of corporations, each with different features and characteristics. They may also be associated with various advantages and disadvantages depending on the needs of the business.
One type of corporation may suit one business, while the same type of corporation might not work that well for a different business. A person thinking of incorporating a business may wish to research the different types of corporations in order to find the one that might work the best for their business.
Some of these include:
- Business Corporation: Most medium- to large-sized corporations adopt this standard, for-profit corporate form; a corporation is a legal entity that is separate from its owners who are called stockholders; a corporation must pay taxes on its income. Corporations must also have articles of incorporation, which are filed with the state in which it operates, and bylaws. These documents govern its operation.
- A corporation must have a board of directors, officers, and annual meetings. Stockholders’ personal assets are not available to satisfy the claims of creditors of the corporation; rather creditors are limited to corporate assets for satisfaction of debts or other claims. There is no limit on the number of shareholders that this corporation may have and shares are freely transferable. Its shares can also be publicly traded.
- LLC: This stands for “limited liability company”; an LLC is not a corporation, but it has some of the legal advantages of a corporation. The most important one is that the owners of an LLC, whether there is one or many, have limited liability. This means that they cannot be held personally liable for debts incurred by the LLC business or for liability that arises from most business-related lawsuits.
- The income of the business is passed through to the owners and taxed to them as income. It is not like a corporation in that it does not have officers, directors, board meetings or shareholder meetings so it is easier to manage than a corporation.
- Close Corporation: The income of these corporations are taxed directly as corporate income and not passed through to shareholders. This has different tax consequences than other corporate forms such as an S Corporation; a close corporation can have only the number of shareholders that are allowed by law, and its stock cannot be publicly traded. A close corporation does not have to observe all of the formalities of a regular corporation. It does not have to have a board of directors or hold annual meetings and can be run by its shareholders. They are sometimes called “closely held corporations;”
- Non-Profit Corporation: These are corporations that focus mainly on charitable activities and programs. They are given unique tax treatment, because of their charitable nature;
- Professional Corporation: This is a corporate form specifically for professionals who are licensed to practice in a specific field, such as engineering, architecture, law, or other fields. The kind of professionals who are allowed to form professional corporations varies from state to state.
- Professional corporations limit the personal liability of the owners for business debts and claims. It does not protect the professionals from liability for their own professional negligence or malpractice. It can, however, protect one professional from liability for the negligence or malpractice of another owner.
- Professional corporations do not have pass-through taxation; the corporation is taxed as a corporation on its corporate income. The owners must also pay income taxes on the income they receive from the corporation.
- S Corporation: This is basically a regular corporation that has chosen to have its income passed through to shareholders who are taxed on their income as individuals. This feature of the corporation, i.e., its tax treatment, is its main advantage. Its losses are also divided among the shareholders and passed through to them. An S corporation is only eligible for its special treatment if it has only 100 or fewer shareholders who are all individuals. It can only have one class of stock.
There are still other types of corporations, such as foreign corporations (corporations that operate in different states), private corporations, and others. Every state has its own, sometimes very different laws that regulate and govern incorporation and corporate activity.
What Are Some Other Factors to Consider?
Some additional factors to consider when choosing a type of corporation include:
- Where to incorporate: Filing for incorporation in one state can lead to different tax treatment or other legal issues as compared with filing in a different state;
- Corporate taxes: Each corporate form is associated with a different type of corporate tax treatment. These can affect the overall profit and performance of the corporation; clearly the differing treatment of corporate income by the Internal Revenue Service (IRS) would be an important consideration in deciding on a corporate form for a business; and
- Liability: Some corporations such as professional corporations, may have different rules when it comes to issues such as corporate liability or dissolution.
Not every form of corporation is appropriate for every type of business. A professional corporation is a form that is only available to the professionals whose professions are authorized by state statute. In addition, the income of a professional corporation is taxed twice, first as income to the corporation and then as income to the owners. The income of an S corporation is only taxed once, as income to the shareholders when the income is passed through to them. So this different tax treatment would be a factor for prospective owners to consider when choosing a legal structure for their business.
The number of shareholders is another factor that may determine the type of corporation that founders should select for their business. If the founders expect the corporation to grow to a large size and eventually take its shares public, it will choose the standard business corporate form.
An experienced business lawyer can help a person or group of people who want to start a business decide if a corporate form is right for their business and if so, which type would best fit the needs of the particular enterprise they want to start.
It is important to keep in mind that other forms of legal entity are available to people who wish to start a business. An experienced business lawyer can help prospective business owners decide if a corporate form is the best choice or if some other type of business structure best suits their purposes.
Do I Need a Lawyer for Help with Selecting a Type of Corporation?
It may be necessary to consult an experienced business lawyer when attempting to start a business. Your attorney can help you with the planning process by identifying the features of the business and the various factors involved in choosing a structure for it. An experienced business lawyer can prepare all of the legal documentation or plans that might be necessary for incorporating.
This can help ensure that you are making the right choice of corporations, and that your filings and operations conform to state laws. A business lawyer can also help you start operations in compliance with applicable law, if you choose a corporate form that requires articles of incorporation, bylaws, annual meetings and other formalities. Also, your attorney can represent you in court if you need to file a lawsuit due to a legal conflict.