What is a Corporation
A corporation is a legal entity created by individuals, stockholders, or shareholders, with the purpose of operating for profit. Corporations are allowed to enter into contracts, sue and be sued, own assets, remit federal and state taxes, and borrow money from financial institutions. There are generally four types of corporations; C corporations, S corporations, Non-profit corporations and Professional Corporations.
C Corporations
C corporations are the standard, “default” type of corporation. Like individuals and LLCs that pay taxes annually, C corporations are also taxed as separate entities each year. This means that profits pass through the corporation and on to shareholders as dividends reflecting each shareholders proportion of ownership. Generally, C corporations require a Board of Directors, Articles of Incorporation, owners, and a designated office in the state they are incorporated in.
S Corporations
S Corporations, or “Sub S” corporations, are similar to C corporations in that they have a Board of Directors, Articles of Incorporation, owners and a designated office in the state they are incorporated in. The difference is that rather than taxes being paid at the corporate rate, S corporations are “pass-through” entities and profits are distributed to the shareholders’ personal tax returns.
Non-profit Corporations
The IRS defines a non-profit corporation as a corporation that is formed for a mutual, public or charitable purpose, and obtained a 501(c)(3) exemption from the IRS. Non-profits are usually established to provide a public benefit, such as education, religion, art, public safety, research, or health. Examples of non-profits include religious organizations, universities, hospitals and charitable foundations.
Professional Corporations
Professional Corporations are similar to the other corporate types in form, but are formed by professionals, such as dentists, attorneys, physicians, and accountants. The purpose of these corporations is to act as a sort of shield against potential liabilities. Generally speaking, professional corporations afford their shareholders limited personal liability protection if a lawsuit should arise from work conducted by the corporation.
Conclusion
Forming a corporation is often an important step for any business. It can help provide limited liability protection, the ability to raise capital, and the potential for tax efficiencies. Whether you’re a small business owner or a large corporation, if you’re considering incorporating, it’s important to understand the differences between the different types of entities, and determine which type aligns with your overall vision and objectives.
