What Are Corporate Structures And How Are They Formed?
There are several types of corporations. What they can and cannot do and how they’re formed depend on state laws. They’re a popular choice among those starting and owning businesses for many reasons because they typically help shield owners from the business’s liabilities. Here are some corporate forms to consider if you’re starting a business or charity.
C Corporation
This is also known as a general for-profit corporation. It’s the most common corporate entity. It’s formed by filing Articles of Incorporation and other documents with a state agency, usually the Secretary of State’s office. Shareholders own it, and there’s no limit on how many there can be. Shareholders choose a board of directors to develop and direct high-level policies, rules, and goals. They appoint corporate officers who manage daily operations.
Unless the corporate entity is determined to be a sham, shareholders generally have limited liability, even if they’re involved in business management or are an employee or corporate officer. Corporate shares are freely transferrable unless a shareholder agreement states otherwise.
The corporation could exist indefinitely if the required forms and reports are created and filed with state agencies. The corporation is a taxable entity, so it files its own tax return and may pay taxes on profits. As a trusted lawyer, like a business partnership lawyer knows, shareholders given dividends may be subject to income taxes as well, so a downside to a corporate entity is its earnings are potentially subject to taxes on two levels.
S Corporation
It’s formed the same way but is different. S corporation shareholders can decide to be taxed as a pass-through entity under subchapter S of the Internal Revenue Code. The business’ income isn’t taxed separately from its shareholders. Profits and losses pass through to shareholders, who include them on their income tax returns.
S corporations have ownership limits. There can only be up to 100 shareholders who must be a trust or a person (not another corporation). They also need to be US citizens or a resident alien. They include permanent residents (they have a “green card”) and others with a substantial presence in the US.
Nonprofit Corporation
This legal entity is for you if you want to create an organization for religious, charitable, literary, educational, or scientific purposes, not to generate profits for shareholders. The organization must comply with the federal Internal Revenue Code and has the following qualities:
- It’s exempt from taxation
- It can’t pay dividends.
- If it dissolves, assets must generally be given to another nonprofit group
- There are usually significant filing requirements at the state and federal levels to create and keep a tax-exempt status
A nonprofit may be prohibited from engaging in certain political and lobbying activities.
Professional Corporation
As lawyers, like those at Focus Law LA know, a professional corporation is owned by individuals providing professional services. This can include physicians, dentists, lawyers, accountants, architects, and other licensed professionals. Like other corporate forms, filing requirements, and other rules vary from state to state. Shareholders may be shielded from liability due to the corporation’s operations.
You also have the option of forming a non-corporate business entity like a limited liability company. Before deciding which is right for you, consult with an attorney who works on business formation for clients. Each entity has costs and benefits, and you should choose which one best fits your business, priorities, and goals. Speak with a local lawyer if you would like help with your business formation needs today.