Types of Corporations
Before you start a corporation, it’s important to know these three common corporations and their use cases:
- C corporation
- S corporation
- Nonprofit corporation
C Corporation
A C corporation (C corp) is a type of corporate structure that offers the strongest legal protection to its owners. Registering a C corp is the most common way to form a corporation. Follow the steps below as we walk you through starting a corp.
Filing as a C corporation is a legal procedure that allows corporations to profit and be taxed accordingly. Although C corporations protect their owners from personal liability, they need extensive record-keeping, reporting, and operational processes. Not familiar with C corps? See a full C corp definition.
Advantages and Disadvantages of a C Corporation Formation
If you want to raise money for your business concept and sell shares to investors, you’ll want to incorporate as a C corporation.
C Corp Advantages
- Limited liability: You are generally not responsible for the debts of the corporation. If someone sues the corporation, they usually can’t go after the personal assets of the shareholders.
- Ability to issue shares: Your corporation can sell shares to investors to raise money.
- Unlimited number of investors: This is important for growth.
- Unlimited classes of shares: Issuing classes of non-voting or limited voting shares allows you to keep control of the corporation.
- Ability to go public: You can become a public corporation, selling shares in the stock markets.
C Corp Disadvantages
- Higher cost: The corporation is more expensive to maintain and administer because compliance with regulations means keeping extensive records.
- Double taxation: Corporation income is taxed at the corporate rate, and dividends issued to shareholders are taxed at the individual income tax rate.
- Losses are not deductible: Business losses can’t be deducted from owner/shareholder income.
If the pros and cons don’t help you decide how to incorporate, do more research on sites such as ZenBusiness. If you’re sure you need a C corporation, then you should start the incorporating process.
Ready to start a C corp? We offer fast, reliable formation, and we’ll set up a C corp for you. We’ll also help you start, run and grow your business over time.
Shareholders’ Relation to the C Corporation
C corporations are structured so that if a shareholder decides to leave the company and/or sell their shares, it can remain undisturbed. The lives of shareholders and the corporation are completely independent of each other. Because of this structure, C corporations are a great choice for medium- to high-risk businesses or businesses that plan to be sold or “go public.”
Nonprofit Corporation
A nonprofit corporation is designed to do charitable, religious, educational, literary, or scientific work. Nonprofit corporations work for the public and can receive tax-exempt status, which means they do not pay state or federal taxes for any income or profits.
In addition to following rules that are very similar to a C corporation, they also follow a special set of rules about what to do with any profits.
S Corporation
An S corporation (S corp) is not a business entity. It’s a tax selection that you can make as a corporation or LLC. It is designed to avoid the double taxation issues of C corporations. Taxes can be passed directly through the owners’ personal income, avoiding corporate tax rates. Most states recognize S corps the same way that the federal government does and tax shareholders according to those laws.
S-Corps are not all taxed the same
Since each state can set its own laws for corporations, not all S corps are equally taxed. For example, some states do not recognize S corporations, taxing them like C corporations. In other cases, certain states might tax S corporations in profits above a specified limit.