The type of corporate structure, that is, which form of corporate entity you decide to use, is one of the single most important planning decisions a business can make when it’s time to consider tax advantages. It is usually one of the areas where the most misinformation is given and mistakes are made. Most businesses eventually choose to incorporate in some form or fashion, and this can have benefits for a professional corporation, both from a legal and a tax standpoint.
What Are The Five Types Of Corporations
Before you let yourself get into trouble with the murky waters of choosing a type of corporation for your business, check out this overview of 5 types of corporations to learn more.
A corporation that elects to pass corporate income, losses, deductions, and credits on to its shareholders for federal tax purposes is an S corporation. Taxes on the flow-through income and losses of shareholders in S corporations are calculated based on the individual income tax rate applied to shareholders. In this way, S corporations can avoid double taxation on their corporate income.
Advantages Of An S Corporation
The personal assets of shareholders are protected under an S corporation. S corporations do not pay federal taxes at the corporate level. When possible and under the right circumstances, S Corps are considered to be the “best of the best” of tax entities. They offer the same legal protection as the other entities but have one major advantage: Earnings in excess of the shareholder’s salary are not subject to self-employment tax. And the savings are not in taxable income, but in actual tax to be paid.
It’s easy to form an S corporation with a wise business plan that can save you time and help you focus on your dream business.
Disadvantages of An S Corporation
An S corporation must first be incorporated by filing Articles of Incorporation with the state in which it plans to operate and obtain a registered agent along with the appropriate fees. S corporations must adopt the calendar year as their tax year unless they have a business purpose that allows them to utilize a fiscal year. S corporations can only have one type of stock, although they can have voting and non-voting shares.
Read Also: How to form an S Corporation
A C-Corporation is one of a few different ways to lawfully recognize a business for tax, regulatory and official reasons. A C-Corp is basically an approach to structure ownership of a business and contrasts with another famous types of business structures including Limited Liability Companies (LLCs), S Corporations, Sole Proprietorships, and others.
Wall-Mart, IBM, and other major corporations are C-Corporations. This is because businesses with
- more than one class of stock or
- more than 100 shareholders are not given the option of the S-Corp election.
Advantages Of C Corporation
The stock is able to be widely traded. This makes raising capital much easier and also makes the ownership readily transferable. It allows for different classes of stock, which plays a major role when corporate decisions are at stake. A C corp over an S corp or LLC has the advantage of having an easier time attracting investors, including capital through equity financing. The C Corporation can offer medical reimbursements and other employee benefits, and deduct the costs of running those programs, including premiums.
Disadvantages of C Corporation
There are disadvantages to a C-Corp, also. The c corporation itself is taxed and then any earnings that are disbursed to shareholders, as dividends, for example, are also taxed. In effect, double taxation. As small business owners, there are few circumstances that would warrant taking this tax hit. if are thinking about creating your c corporation & looking for professionals, follow these simple steps to create your business entity.
Related Article: How to form a C corporation
3. Close Corporation?
Close corporations are generally smaller corporations that elect to be considered close corporations and, therefore, are not subject to the strict formalities normally required by standard corporations. This is an invaluable benefit for small businesses. Close corporations are corporations whose shareholders and directors are entitled to operate as partnerships. Close corporations are elected by each state, and every state has its own laws governing the qualifications and rules that govern them. Some states do not allow them.
For a corporation to qualify for close corporation status, certain requirements must be met. Generally, a close corporation cannot have more than a certain number of shareholders–between 30 and 35 is usually the maximum. A close corporation cannot offer its stock for public sale.
Advantages of Close Corporation
Compared to traditional corporations, they require fewer formalities. Shareholders of close corporations have enormous control over the sales of their shares to outsiders. Shareholders are well protected from liability. The proper following of corporate formalities is key to protecting shareholders from liability. The fewer formalities the corporation follows, the less likely it is to misstep in following them. One of the main benefits of a close corporation is that it will be exempt from a variety of formal rules that usually govern corporations.
Disadvantages of Close Corporation
It is not possible to form a close corporation in all states. Alternatively, you can incorporate in a state that does not observe close corporations. The corporate law of the state where your corporation is chartered will govern it. The cost of forming a closed corporation is higher. Closed corporation shares are less valuable. Closed corporations are not permitted to make a public offering of their shares. Bylaws and shareholder agreements govern close corporations, making them a more complex and restrictive form of corporate governance.
4. B Corporation?
B corporations are for-profit corporations that are driven by both profit and mission and are recognized by the majority of U.S. states. The shareholders hold the company responsible for producing a profit as well as some type of public benefit.
As a B Corp, companies must achieve a minimum score on their B Impact Assessment, which evaluates their impact on workers, customers, community, and the environment. The B Impact Report – the breakdown of the assessment – should also be transparent on the Certified B Corporation website.
As a B Corp, companies can maintain their social mission while scaling the business. They are set up as a for-profit company, which allows them to raise money while still following a socially responsible standard.
Advantages of B Corporation
As a B Corp, your company’s social and environmental responsibilities are held to account. Having your company registered as a B corporation can save you money in the long run. B corp community data can help you learn the most cost-effective ways to be sustainable. B corps adhere to standards that are transparent, so customers can see how their support makes a difference. As a result of B corporation legislation, the entity has more freedom to benefit society as it is not required to maximize the profit of its shareholders.
Disadvantages of B Corporation
An important disadvantage of operating a B corporation is the extensive reporting requirements. Transparency is one of the most important features of a B corporation, and the company must publish an annual report to shareholders and the public. A potential drawback of B corporations is that since they are relatively new legal entities, it is uncertain how courts will interpret mandates seeking to increase profits and benefit society at large.
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5. Nonprofit Corporation?
Any legal entity that has been incorporated under the laws of its jurisdiction for purposes other than making profits for its owners or shareholders is considered a nonprofit corporation. A nonprofit corporation is a business formed for charitable, educational, religious, literary, or scientific purposes. Depending on the laws of the jurisdiction, nonprofit corporations may seek official recognition as such, may be taxed differently than for-profit corporations, and may be treated differently in other ways.
Advantages of a Nonprofit Corporation
Nonprofit companies enjoy tax exemption when it comes to paying corporate tax, as well as income tax at the federal, state, and city levels. This way, you put all your earnings back into the company to provide more services. Additionally, nonprofits are permitted to raise money with public and private grants, as well as donations from individuals and companies. When an organization is structured as a nonprofit corporation, its directors, officers, and members are protected from personal liability for its debts and liabilities.
Disadvantages of Nonprofit Corporation
A nonprofit corporation requires both time and money to operate. The fees can prove especially problematic for some nonprofits. It is normal for directors and officers of a corporation to receive a portion of profits, but nonprofit corporations do not have that privilege. You are responsible for keeping the public informed about your activities as a nonprofit corporation. As compared to starting a for-profit, a nonprofit requires more paperwork.
As a default, all of the earnings are considered self-employment income and are thereby subject to self-employment tax.
Remember, your company is unique, even though there may be a thousand other companies in the same business as you. Make sure to take the time to sit down with a professional and discuss your personal situation to see what approach will be the best for you.
If are looking for professionals for creating an LLC, these 4 simple steps to create your business entity might be helpful for you to run your dream business.