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Types of Corporations

Corporate Compliance by Local Corporate Guides®

Different types of corporations include benefit corporations, nonprofits, closely-held corporations and more.When most people think of corporations, they envision stock, shareholders, officers and a board of directors. However, not all types of corporations have these characteristics—and some have alternative or additional rules or requirements. We describe common types of corporations below, including their benefits and drawbacks.

Learn about Different Types of Corporations

1

C corporation

Despite the name, a C corporation is not a business entity—it’s an IRS tax designation. Corporations are automatically taxed as C corporations. LLCs can also file IRS Form 8832 to be designated as C corporations for tax purposes with the IRS.

One of the disadvantages of being taxed as a C corporation is double taxation. Businesses designated as C corporations file corporate income taxes. If shareholders receive any distributions, they must also report the income on their personal tax returns. Because both the business and the shareholders pay taxes on income they receive, any distributions are essentially taxed twice.

However, shareholders only pay taxes on distributions they actually receive. If a C corp chooses to keep money in the business, shareholders don’t owe taxes on it. This is different from a business taxed as a partnership or S corp. In these cases, owners must pay personal income taxes on their share of income—even if the money is kept in the business. Since investors don’t tend to appreciate paying taxes on money they don’t keep, C corporations are a common choice for businesses that plan to retain income for growth.

Check out our C Corporation page for information on tax forms, due dates, common questions and more.

2

S corporation

An S corporation (or “small business corporation”) is also an IRS tax designation—not a business entity. Corporations and LLCs can both file paperwork with the IRS to be taxed as an S corporation. One benefit corporations receive from an S corp designation is pass-through taxation. Unlike C corps, businesses taxed as S corps are not subject to federal corporate income tax. Instead, income “passes through” the business to the owners who then report dividends on their person income taxes.

Not every corporation can (or should) be taxed as an S corp. S corps are subject to many more restrictions than C corps. Businesses designated as S corps cannot have more than one class of stock. They can’t have more than 100 shareholders. Shareholders must meet requirements as well. They must be US citizens or permanent residents. In most cases, shareholders must be individuals, not businesses like corporations. And if the business retains earnings, S corp shareholders must still pay personal income taxes on their share.

Interested in changing your corporation’s tax classification? Learn everything you need to know on our What is an S-corp? page.

3

Benefit corporation

A benefit corporation is a for-profit corporation with a purpose that benefits the public. This differs from a standard for-profit corporation, where the directors are responsible for acting in the interest of shareholders, maximizing profits.

For example, in a standard for-profit corporation, imagine directors opted to switch to environmentally-friendly packaging—but it came at a higher cost. Shareholders might balk at the hit to their profits and sue. A benefit corporation, however, balances profit goals with social and environmental values. Some well-known benefit corporations include Ben & Jerry’s, Kickstarter, Patagonia and Warby Parker.

So what are the drawbacks? Benefit corporations are not an option in every state. They also come with increased reporting requirements, and investors may be wary of corporate ideals that cut into profits.

Considering a benefit corporation? Learn if they’re available in your state and what you’ll need to get started on our Benefit Corporation page.

4

Nonprofit corporation

Instead of a profit-driven purpose, a nonprofit corporation has a purpose that benefits the public or a group. Instead of issuing stocks or dividends to shareholders, a nonprofit corporation uses its revenue to further the purpose of the business. Some nonprofits can qualify for tax-exempt status, making tax savings a common consideration for starting a nonprofit.

However, qualifying for tax-exempt status is frequently a long, complex and expensive process. Additionally, nonprofits can face difficulty finding funding and are subject to increased reporting requirements, including public financial reports.

Churches, charities, HoAs, veteran organizations, alumni associations and social clubs are all commonly nonprofits. Museums like MoMA and the Art Institute of Chicago, public radio like NPR, educational organizations like the New York Public Library, and charitable organizations like the American Heart Association are some well-known examples of nonprofit corporations.

In our Nonprofit Guide, we take you step-by-step through the process of forming a nonprofit corporation.

5

Professional corporation

A professional corporation (PC) is a corporation made up of professionals that provide a regulated, state-licensed service. Examples of professionals include doctors, lawyers, accountants, architects, engineers, and veterinarians. All the professionals in the corporation must be licensed, and the corporation’s business purpose must be to provide that professional service.

Why form a PC? In most cases, professionals are limited as to the kinds of entities they can form. Professionals can’t just form a regular corporation or LLC because their services require regulation. Instead, professionals are limited to PCs or similar specialized entities, such as a PLLCs or LLPs.

PCs are subject to state oversight. At a minimum, professionals must submit proof of their current licensure to the state for incorporation. Additionally, professionals with multiple licenses (for example a lawyer who is also a licensed accountant) can only provide the professional service that matches the purpose of the business. There are also typically restrictions (or in some case, prohibitions) on non-professionals as owners, officers or directors.

To learn more about forming a PC in your state, check out our list of Professional Entity Requirements by State.

6

Closely-held corporation

A closely-held corporation (also called a “close corporation”) is generally used to describe a private corporation with only a few owners for the majority of stock. In this sense, most corporations in the US are close corporations. However individual states and the IRS have their own definitions as well.

Some states have statutes allowing for “statutory” close corporations. Corporations formed under these statutes (as indicated in their formation documents) are subject to specific rights and restrictions. While statutes vary state to state, most states set a hard limit for the number of shareholders and restrict share trading. Often, requirements for annual meetings and a separate board of directors can be waived. Without a board of directors, the shareholders would have the fiduciary duties and decision-making powers of directors—and keep the limited liability of shareholders. In short, statutory close corporations allow for more control and fewer formalities, but they can be more difficult to fund or sell due to share restrictions.

The IRS defines a closely-held corporation as any corporation in which 5 or fewer owners own at least half of all outstanding stock (but is not a personal service corporation). Corporations that fall in this category are subject to more restrictions, including the IRS’s “at risk” and “passive activity” rules, which limit the amount and kind of income that can be used to offset losses.

Note that close corporations aren’t necessarily small—just the number of owners is small. Cargill and Koch Industries are examples of billion dollar closely-held corporations, each with over 100,000 employees.

7

Publicly-held corporation

A publicly-held corporation lists outstanding shares on one of the major US stock exchanges, such as the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotations (NASDAQ). This allows the public at large to easily buy and sell shares of the corporation. Typically, corporations go public with an initial public offering (IPO) of shares, which has the potential to bring a huge influx of cash into the business.

Going public, however, is far from easy. The application process is expensive and time-consuming. Like any business venture, going public also has significant risks. For every successful IPO like HubSpot or Beyond Meat, there are corporations whose share values drop dramatically in the first day or week, like Uber or Vonage.

Curious what it takes to go public? Visit our page on How to Take a Corporation Public.

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Want to learn more about corporations in general? See our step-by-step Incorporation Guide.

Corporate Compliance
by Local Corporate Guides®