What Is a Corporation and What Type Is Your Business?
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What Is a Corporation?
Corporations are a type of business structure in which the company is considered a separate legal entity from its owners and shareholders. This provides corporations with the ability to enter into contracts, own assets, loan money, and hire individuals, all without the risk to shareholders of being personally liable for the business’ debts or legal obligations. Some widely known corporations include: Google, Microsoft, General Motors, Bank of America and eBay.
What Is the Difference Between a Corporation and a Company?
A “company” is an umbrella term for any entity that engages in business. They can be sole proprietorships, general partnerships, limited partnerships, limited liability companies, or corporations. When starting a business, one of the first and most important steps is deciding how to structure it for future growth, leadership change, and tax purposes.
The Main Types of Corporations
Doing Business As (DBA Filing)
DBAs are fictitious or assumed business names created with the intention of letting the public know what people are behind a business for the sake of protecting the consumer. Sole proprietors are required to get DBAs when starting businesses with a name that is different than their own; unless their full name is included in their business name. Corporations and LLCs, on the other hand, are only required to get a DBA if they plan on conducting business with a different name than the one filed with their corporation or LLC paperwork.
S corporations are usually formed predominantly for tax purposes. Tax incentives for S corporations include passing corporate income, as well as deductions, losses, and credits onto shareholders in order to pay less federal taxes. This income is generally recorded on the owners’ and shareholders’ personal tax returns so they are taxed individually instead of as a company, which may benefit them. S corporations also allow for more independence from the business owner, as they can continue to operate regularly, even with the loss of a shareholder.
However, the IRS is known to look more closely into the tax returns and business efforts of S corporations, which means these corporations must be diligent in recording shareholder meeting minutes. These detail the full names of the meeting attendees, agenda items, main points of the meeting, actions or tasks, due dates, and decisions made by the participants.
C corporations are the most common type of business in the U.S. for federal income tax purposes, and involve the business being taxed apart from their owners. This takes accountability further away from the owners in case of issues between partners, taxes or other legal matters. C corporations are taxed based on their profits, and shareholders are taxed based on the dividends or profit sharing disbursements they receive from the company. In this type of business, the owners’ personal assets are protected from the investments they make with the business, which means they’re less likely to be affected by the failure of the company.
These corporations demand a larger initial investment from the owners, however, as there can be thousands of dollars in fees that come with the legal formalities of filing for corporation status. C corporations often receive more government oversight due to the additional protections received by business owners and the complex tax rules. They are also double taxed; once as a corporation and again when the shareholders receive their payout.
Other Types of Corporations
Other less common types of corporations include:
- Sole Proprietorship: This is the simplest form of business because it doesn’t need to be a legal entity; rather, it’s one business owner who is responsible for the business’ actions and debt. There is no state filing required, therefore, no fees to start up.
- General Partnership: This is an arrangement in which two or more hopeful business owners agree to share in all profits, financial and legal liabilities of a business. These partners’ personal assets are all liable to the partnership’s obligations.
- Limited Partnership: These partnerships are made up of both general and limited partnerships. General partners manage the business, and benefit from the profits and losses while limited partners benefit from profits but don’t face losses beyond their investment into the company.
- Limited Liability Company: LLCs offer corporate liability protection in the form of protection of personal assets from business debt you or your other partners may face. There are no ownership restrictions for LLCs, and they offer a lot of organizational freedom for proposed business structures. However, profits and losses do pass through to personal income tax returns for owners; and these types of companies are notorious for being short lived due to potential dissolution with the loss of a business partner.
- Nonprofit Corporation: Nonprofits are business corporations with a public purpose, which entitles them to receive different treatment during tax season than their for-profit counterparts. Once nonprofits pay their costs for running the organization, any further profits are returned to them to continue investing in their organization.
Forming a Corporation
Corporations are often expensive and complex business structures to form, so it may be a good idea to hire a lawyer or use an online legal service to help you. You will need to file articles of incorporation, appoint a board of directors, create organizational resolutions to detail the operating rules, and issue stock certificates to your original shareholders. You must also register a trade name and obtain local permits for your business.
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This post was updated December 18, 2018. It was originally published November 20, 2018.