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Types of Corporations
Types of Corporations
When deciding on exactly which type of entity to form it is necessary to consider short and long term goals of the business, the nature of the business and the benefits associated with each type of entity. We do suggest that the selection of a business entity be done with the assistance of a professional, such as your tax or legal adviser, as they may be more familiar with your specific needs. For more information select one of the following types of corporations.
The “C” Corporation is still the most common form of ownership. It is a separate and legal entity that offers the greatest flexibility with respect to ownership and the free transferability of ownership interest. Although a “C” Corporation allows for many advantageous tax deductions and benefits, small business owners may be at a disadvantage due to the double taxation associated with a “C” Corporation. Income is first taxed at the corporate level at corporate tax rates. Then when the corporation issues dividends to its shareholders, the same money is taxed again at the shareholder level. The result is that the same income generated by the corporation is being taxed twice. Still, the popularity of the “C” Corporation is largely due to its overall recognition and acceptance in our society.
Advantages: Limited liability protection, unlimited life, easy to raise capital, complete flexibility of ownership, may have various classes of stock, free transferability of ownership and tax benefits allowing for certain health and life insurance deductions.
Disadvantages: Governmental regulations, double taxation, must maintain corporate formalities such as annual meetings and other resolutions.
A Subchapter S Corporation or “S” Corporation is similar to the “C” Corporation and operates primarily in the same manner. The main advantage associated with the “S” Corporation is that the income passes through to the shareholders, thus avoiding the double taxation of a “C” Corporation. However, the corporation must meet certain requirements to qualify for the “S” status under the current IRS rules. It also loses some of the tax deductions allowed to “C” Corporations.
Advantages: Limited liability protection, avoids “double taxation” and has an unlimited life.
Disadvantages: No more than 75 shareholders, limited ownership (Individuals, estates and certain trusts), limited to one class of stock, some tax deductions are lost as compared to “C” Corporation, subject to governmental regulations, must maintain corporate formalities such as annual meetings and other resolutions.
