What is a Corporation | Everything You Need to Know Before You Incorporate

Why Choose a Corporation for A Small Business?

Before deciding which type of business structure to create, it’s best to weigh out all options and determine the best fit for your business’s personalized needs.

For instance, does your business plan rely on investors? Are you planning to expand your business? Are you looking to protect yourself from liabilities? Having these questions in mind, choose a corporation if:

• You want to shield your personal assets from legal claims and lawsuits by getting limited liability protection.
• Your business plans mostly rely on investors.
• You want your business to continue to operate without any disturbance If a shareholder sells his/her shares or leaves the company.

LLC VS Corporation

Once you conceptualize a business idea and are ready to materialize it, one of the first decisions you’ll have to make is choosing an entity type.

Though many business structures provide limited liability protection, generally, entrepreneurs and start-ups choose to form a Limited Liability Company (LLC) or a corporation.

The following are some differences between LLC and corporation that will help you decide which structure you should opt for:

• LLCs are a low-cost way to form an entity than a corporation.
• Corporations can more easily obtain investment capital than LLC.
• An LLC can allocate different voting rights to members, but in corporations, the case is different.
• Some corporation types, such as S corp, have restrictions on ownership, while LLC does not have such restrictions.
• Corporations are also obligated to have more extensive record-keeping and reporting.
• Both Corporation and LLC have different management structures.
• Corporations have to go through more formalities and operational processes than LLC.

Types of Corporations

A corporation is a legal entity created by an individual (single shareholder) or a group of shareholders with a shared goal. Generating profit is not always the case.

Corporations are formed as for-profit corporations, the most common type of corporation, and not-for-profit corporations.

Corporations serve as a popular business model since it offers a lot of flexibility by having different types that can fit the personalized needs of business owners. Here are the types of a corporation:

1. C Corporation

C Corporation, aka C Corp, contains almost all of the attributes of a corporation and is the most prevalent type of corporation.

It can be a perfect choice for businesses that need to raise money, medium- or higher-risk businesses, or businesses that plan to “go public” or eventually be sold. Here is how C corp is different from the other types of corporations:

• C corps are subjected to double taxation, meaning that the taxing of business profits is at both personal and corporate levels. The corporation itself is taxed as a business entity, and shareholders are taxed on the profits they receive at the individual level. 
• Unlike S corporations, C corporations do not have any restriction on the number of owners. However, upon reaching specific thresholds, C corps must register with the SEC (Securities and Exchange Commission).
• C corporations can raise capital because they can raise funds by selling their stocks. 

2. S Corporation

S corporation, aka S corp, is formed in a similar way as a C corporation but is different in tax flexibility and owner limitation. The following points make S corp different than the other corporation types:

• An S corp has a limitation on the number of owners and can have up to 100 shareholders.
• S corp is not taxed as a separate entity. Instead, the profits and losses are passed through on the personal income tax returns of shareholders.
• S corps have to go through a different process from registering with their state to getting S corp status. They must file with the IRS to elect the entity as S corp.

3. B Corporation

B corporation, aka B corp or benefit corporation, is a for-profit corporation that many states in the U.S. recognize.

Based on the purpose, transparency, and accountability, B corps are different from C corps. However, B Corps are taxed the same as C corps. Some of the salient features of B corp are:

• B corps do not require third-party B corp certification services to be legally considered a B Corp in the states where the legal status is available.
• B corps are driven by both profit and mission. 
• In addition to a financial profit, shareholders hold the company accountable to produce some sort of public benefit. 
• In some states, B corps must submit annual benefit reports demonstrating their contribution to the public good.

4. Close Corporation

Close corporations are similar to B corps but enjoy the flexibility in the traditional corporate structure. Here is how close corporations are different from other corporation types:

• Many formalities that typically govern corporations and apply to smaller companies, close corporations are exempted from those. 
• Shares of close corporations are usually barred from public trading. However, rules vary from state to state.
• Close corporations can be run by a small group of shareholders without a board of directors.

4. Cooperative Corporation

A cooperative corporation, aka co-op, is a democratically run business whose members are also its owners.

A co-op is a business or organization owned by and operated to benefit those using its services. Here are prominent features of a cooperative corporation:

• Other types of corporations are owned by shareholders or stockholders, while cooperatives are owned by their members or the people using the services of the cooperative.
• Profits and earnings generated by the cooperative corporation are distributed among the members, aka user-owners. 
• Typically, a cooperative is run by an elected board of directors and officers. On the other hand, regular members of the cooperative have the voting power to control the direction of the cooperative. 
• By purchasing shares, members can become a part of the cooperative. Moreover, the amount of shares does not affect the weight of a regular member’s vote.

5. Non-Profit Corporation

Nor-profit corporations are also known as 501(c)(3) corporations. This structure is commonly used by charitable, religious, and educational organizations to operate without generating profits.

Nonprofit corporations need to follow organizational rules very similar to a regular C corp. Here is what make non-profit corporations different from for-profit corporations:

• A non-profit corporation is exempt from taxation.
• In addition to the state registration process, non-profit corporations must file with the IRS to get tax exemption. 
• Any donations, contributions, or revenue received by non-profit corporations are retained in the entity and are spent on expansion, operations, or future plans.
• Non-profit corporations, in addition to corporate rules, also need to follow special regulations related to the profits they earn. For instance, they can’t distribute profits among members or political campaigns.

The Day-to-Day Operations of a Corporation

The shareholders of a corporation generally get one vote per share. During the annual shareholders’ meeting, they elect a board of directors.

The selected board of directors hires and oversees the senior management responsible for running their corporation’s day-to-day activities.

The board of directors is responsible for executing the business plans of the corporation. It is essential to know that the board members are not personally liable for any debts incurred by their corporation. They do, however, have an obligation in care towards the corporation.

If board members neglect their duties, they may also face personal liabilities. Moreover, some tax statutes also provide for the personal liabilities of the board of directors.

Liquidating a Corporation

As you know, there are ups and downs in a business, and survival in such a competitive market is a huge challenge. Moreover, all business ties do not hold forever. So, like every other business, there is a chance that a corporation may terminate at some point.

Liquidation is a process through which a corporation’s legal existence can be ended. Corporation liquidation can be forced by the financial collapse of the corporation or maybe a voluntary decision to cease operations.

If a company fails to pay its bills, the creditors of that corporation usually trigger an involuntary liquidation. If the corporation cannot resolve this situation, the corporation files for bankruptcy.

Essentially, a corporation appoints a liquidator to sell the corporation’s assets. After that, the creditors are paid, and any remaining money is distributed to the shareholders.