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Establishing a corporation can be very rewarding, but the process might feel overwhelming at times!
If you resonate with that sentiment, you may benefit from this overview of the 6 different types of corporations prior to laying the foundation for your business.
To accurately assess each corporation type, we will be providing a mixture of explanations (with statistics), quick tips, real-life examples, common misconceptions, and applicable resources to help you get started.
Each corporation type has its own pros and cons, so feel free to compare them all. Let’s jump into it!
6 different types of corporations
1. C Corporations
C corporations (or C corps) are a legal business structure that is commonly adopted by large, publicly traded companies.
However, there are some specific scenarios in which a small business might become a C corp.
C corps have a limited liability status that protects personal assets in the event that the corporation’s legal status is at stake.
Additionally, C corps are double taxed, which means that the corporation’s profits are taxed – as well as any dividends that are allocated to shareholders.
As you can see in the provided graph (according to the Department of Treasury data, supplied by the National Economic Bureau of Research), C corps pay the most in tax as per the double taxation requirement.
However, becoming a C corp may be beneficial if keeping your corporation legally separate from your personal finances is important to you.
Additionally, C corps typically involve stock option programs for employees – making them an ideal place to work and build wealth.
Quick Tip: If you go to the IRS website, you can begin the process of registering your company as a C corporation. If you are unsure whether you are a good candidate for becoming a C corporation, consult a legal professional!
Related article: How to set up a C Corp
2. S Corporations
This method of taxation does not require the company to pay taxes. Rather, the shareholders pay taxes based on their income bracket.
Typically, people save money in this structure.
There are approximately 3 times as many S corps as there are C corps in the United States, which speaks to how preferred it is among business owners.
However, not every company is eligible to be an S corp, and the C corp structure might be more beneficial for your company’s goals.
Some believe that S corps can have an unlimited amount of shareholders, but this is not the case.
S corps cannot have more than 100 shareholders, and all shareholders must be citizens or residents of the United States.
Related article: How to set up an S Corp
3. Limited Liability Company
Moving away from the big corporation structures, limited liability companies (or LLCs) are more suitable for small or medium business owners.
LLCs also benefit from pass-through taxation and asset shielding from company liability.
However, the regulations of LLCs can differ from state to state, so be sure to check with your state’s specific laws.
If you want to open a small boutique shop in your town, you may want to consider becoming an LLC.
The structure of an LLC makes it so that members (managers, directors, etc.) are part of the decision-making processes for the business.
Also, there are fewer hoops to jump through when establishing a business as an LLC – allowing you to start selling in no time.
Resource: If you’d like to learn more about the process of establishing an LLC, visit the Small Business Association website to get started.
Related article: How to start an LLC
4. Sole Proprietorship
Sole proprietorships are unincorporated business structures that involve a single organizational operator.
Sole proprietorships are very simple: all they require is one person who solely owns and operates the business.
Although having no partners in a business can make decisions easy, sole proprietors have personal liability considerations which can put personal assets at risk.
Additionally, sole proprietorships partake in pass-through taxation like an S corporation and an LLC.
In 2019, there were approximately 30 million non-agricultural sole proprietors, and this number has been increasing steadily.
There are two misconceptions regarding sole proprietorships: Your company cannot be an LLC as an individual business owner, and sole proprietorships cannot have employees.
Both of these are false. You can have employees as a sole proprietor, so long as your state’s employee regulations are followed.
Also, LLCs can be operated by a single person.
Nonprofit organizations offer a structure that is beneficial for companies that engage in philanthropic activities, such as major donations and community outreach.
Nonprofits do not distribute their income; rather, it is reinstalled back into the company.
Additionally, nonprofits are usually driven by a cause or mission – typically in areas of education, religion, or science.
Churches (and other religious institutions) are non-profit organizations, so they are exempt from taxation and do not distribute their profits to shareholders.
Additionally, religious organizations are considered to be a benefit to public life, so they are able to maintain their nonprofit status.
Not all nonprofits are charities. Some nonprofit organizations have specific scientific goals in mind (such as cancer research), while others are created as advocacy organizations (such as political groups).
Lastly, partnerships are similar to sole proprietorships, but they typically involve two (or more) individuals who establish a business together.
Like an LLC, partnerships are flexible and are favored by small businesses.
In a partnership, decisions are made equally and profits are distributed based on the terms set at the beginning of the arrangement.
If you want more information about starting a partnership (as well as key differences between LLCs and partnerships), you may want to visit the small business association website or the IRS website for clarification.
Which corporation structure should I choose?
This question can lead to a complex answer – the corporation structure that is best for you is determined by your goals of establishing a corporation, as well as your company’s aims.
Additionally, you may opt to choose a different corporation structure as time goes on (and your company becomes larger).
As always, be sure to consult a legal professional who is well-versed in your business goals and corporate structures as they can provide you with all of the information that you need to make your decision.
What is a corporation?
A corporation is a legal entity that exists separately from its owners. The owners of a corporation are known as shareholders.
How does your type of corporation affect your business?
The type of corporation that you adopt will have implications for your tax status, liability, stock distribution, and ownership. Choose wisely.
Is it a good idea to incorporate your business?
It can be a smart idea, but it depends on a variety of factors. Consider the following: liability, taxation, access to funds, and regulations (per industry).
Those are just a few of the points to consider prior to incorporating.