What are the different types of corporations?
Discover the different options to form a corporation. Learn why some options may not work for every business, and get the details comparing the two common corporation choices.
Forming a business requires choosing which type of formation to use. Every company will have an organizational structure that comes from predesignated categories. One of those categories is corporations, but there are a variety of them, each with its advantages and disadvantages.
Two main options
Oregon Business Xpress explains there are two main options for the type of corporation a business owner may form. These are a business corporation and a nonprofit corporation. They have some similarities and differences worth noting.
Both of them require filing an Articles of Incorporation and annual reports. They also must have bylaws. Both will have directors who oversee policies and help appoint board members.
A business corporation has owners, whereas a nonprofit does not. If the business dissolves, the nonprofit’s assets transfer to another nonprofit organization. In a business corporation, the assets go to shareholders or owners. Owners in a business corporation are liable for losses, but this is not the case in a nonprofit.
Perhaps the main distinguishing difference concerns taxation. A business corporation pays taxes on profits. The owners also pay taxes on their earnings. In a nonprofit, there are no taxes due to exempt status.
Types of business corporations
There is a further breakdown of the types of business corporations with different operation rules. The U.S. Small Business Administration explains the two most common options are C corp and S corp.
The main difference between the two is the type of taxation. In a C corp, the business is its entity. It pays taxes on profits. In an S corp, the owners pay the taxes for the company.
C corps also protect owners from personal liability for losses. They can have a larger number of shareholders, and they have more options in raising capital by selling stock.
S corps have a limit on the number of shareholders and only one class of stock. They also have specific requirements the business must meet. For example, certain types of companies cannot operate as an S corp. The owners have to meet eligibility requirements as well.
Choosing a corporation option
Typically, making the decision about which type of corporation to form is relatively easy because each has requirements to meet. For example, only certain kinds of businesses can qualify as a nonprofit, which will automatically mean certain companies must be a business corporation.
The same is true when operating a C or S corp. While most businesses can form a C corp, it may be more advantageous for them to create an S corp. However, not every business can meet the qualifications for an S corp.
It is important to make business formation decisions carefully. A mistake at this point can set the stage for issues within the business for the rest of its existence. Making changes after the company is already operating can be detrimental and even cause serious problems for owners. To make the process easier, it may be helpful to consult with a business attorney, such as those at Slinde Nelson.