What Are The Types Of Corporations In Business? – Let’s Find Out
A corporation is basically a legal entity that individuals and shareholders create by converting their business structure. The motivation behind forming a corporation is profit. By creating a corporation, the business owners become free from the legal liability of the business. The corporation by itself gets the permission to enter into contracts, own assets, remit federal and state taxes, or even borrow money from banks. We will discuss the types of corporations in such a way so that you get a brief idea of the significance of each of them. Hence, to learn more about corporations in business, read on through to the end of the article.
In this article, you will learn about the major types of corporations in business operations. However, before that, we will also discuss what a corporation is and how to form a corporation in the United States.
What Is A Corporation?
According to Investopedia,
“A corporation is a legal entity that is separate and distinct from its owners. Under the law, corporations possess many of the same rights and responsibilities as individuals. They can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. A corporation’s distinguishing characteristic is limited liability.”
By creating a corporation, shareholders of the business earn profit through dividends and stock appreciation. Furthermore, they are also not personally liable for the debts of the company or even if someone or some entity sues the company. Almost every large business that you will come across is a corporation.
Some of the major examples of corporations include Microsoft Corp., Coca-Cola Co., and many more. Some corporations even do business under one name and a corporation under another, which is the case with Google (Alphabet Inc.).
How To Form A Corporation (Choosing A Business Structure)?
According to the Corporate Finance Institute,
“The creation of a corporation involves a legal process called incorporation where legal documents containing the primary purpose of the business, name and location, and the number of shares and types of stock issued, are drafted. The process of incorporation gives the business entity a distinct feature that protects its owners from being personally liable in the event of a lawsuit or legal claim.”
To convert your business into a corporation, you will need to incorporate your business with the Office of the Secretary of State (in your own state of operation). Depending upon the state in which you are located, the requirements might vary. The following are the stages of the process of incorporation:
1. File the articles of incorporation with the Office of the Secretary of the State.
2. After the incorporation process begins, consider identifying the name of the new firm.
3. Draft an operating agreement that consists of the key financial decisions of the organization, rules for voting, profit allocation, hierarchy of the organization, etc.
4. State the corporate bylaws of the company that the Board of Directors need to enforce.
5. Based on the size and function of the organization, the owners need to appoint directors and managers in the business. Also, appoint a registered agent for the company.
6. Get the Federal Employment Identification Number (FEIN) from the government.
7. Start a Business account of the company to store funds.
8. Ensure the development of a comprehensive accounting process.
9. Create a shareholder’s agreement which consists of the procedure to share or transfer stocks.
10. Issue and divide the stocks of the company among the owners based on size.
What Are The Types Of Corporations?
According to Indeed.com,
“Corporations are separate and distinct from their owners, and the state allows these entities to possess the same rights and responsibilities as individuals. A corporation allows groups of people to work together to earn a certain profit, depending on how much they invest. It’s also possible for a corporation to have a single owner with a 100% share.”
Here, the corporation pays the tax separately apart from the taxes of the owners. Thus, there is a double taxation. Most large companies act like C-corporations for federal income tax purposes. They also have the benefit of receiving an unlimited number of shareholders from both domestic and foreign areas.
In S-corporations, the shareholders take responsibility for corporate income, credits, losses, and decisions for tax purposes. As they structure themselves as a partnership, they avoid the double taxation that happens in C-corporations. The tax is only at the shareholder level and not at the entity level.
3. Limited Liability Company (LLC)
These companies offer limited liability protection to their owners while they protect them from financial liabilities for any damage to the company’s causes. In LLCS, a Board of Directors is not always necessary, as the owners might decide the business to have the structure of a partnership.
These corporations are based on profits but provide some type of public benefit on behalf of the company’s shareholders. While doing business, they focus on social and environmental performance as well.
5. Closed Corporations
These corporations have a small and select number of shareholders that are associated closely with a business. These corporations do not have a Board of Directors and have less than 35 shareholders.
6. Non-Profit Organizations
Depending on the cause, non-profit organizations use their surplus revenues to achieve their goals. They mostly have a Board of Directors that makes important decisions on behalf of the organization. These corporations rely on funding from governments or donors.
Basically, corporations have the legal rights as well as the responsibilities that are available to individuals. Both an individual and a group of individuals can form a corporation. In the case of a Limited Liability Corporation (LLC), the shareholders of the company are not personally responsible for the debts that the company has.
However, if you want the strongest protection from personal liability, you must choose C-corporation. On the other hand, if you want to avoid some corporate taxes, you can structure your business to form an S-corporation. Do you have any recommendations about the best type of corporation? Share your thoughts and ideas with us in the comments section below.
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