Businesses come in all sizes and types. For example, sole proprietorships and general partnerships tend to be quite small, whereas limited liability companies (LLCs), professional limited liability companies (PLLCs), and corporations tend to be larger and more intricately run.
In this article, we’ll be going over what a corporation is, how many types there are, and how they work.
A corporation is a legal entity that is separate from its owners. A corporation can be considered a “legal person” under the law, meaning it can possess the rights and responsibilities of an individual. Corporations can take out loans, enter contracts, own assets, hire workers, pay taxes, and face legal issues like lawsuits.
Generally speaking, there are two types of corporations: C corporations (C corps) and S corporations (S corps). We’ll discuss these at length a little later.
All business entities have their fair share of benefits, and corporations are no different. Here are a few.
A corporation offers protection for its shareholders. It removes the liability of a shareholder from being responsible for any corporate-related debts.
Corporations tend to find it easier to attract investors since they have the ability to issue stock.
Corporations can continue to exist indefinitely thanks to “continuity of existence.” The company can continue doing business if its owners, shareholders, directors, or officers leave the company or die.
With a corporation, stock ownership is easily transferable, making it attractive for investors.
When running a corporation, you’ll have to consider plenty of factors and options so the business runs smoothly. A few of these considerations apply when creating the business while others apply after:
These are just a few, and this isn’t a closed list. You may run into other considerations, so do some research and make the appropriate decisions.
Earlier, we mentioned that corporations can be labeled a C corp or S corp. Here is what they are.
From a tax standpoint, a corporation is classified as a C corp by default. C corps provide full separation between the business and its owners. So long as the business follows all corporate formalities, the shareholders, officers, and directors won’t be held liable for company debts.
One thing to keep in mind is that C corps are subject to “double taxation,” meaning that taxes on the business’s revenue are collected at the corporate level. The shareholders also pay income taxes on the dividends from the company’s profits.
An S corp is more of a tax designation than it is a business type. A C corp can elect to identify itself as an S corp for tax purposes with the IRS, however, the process can be difficult. What differentiates an S corp from a C corp is that the former passes its income, deductions, losses, and other credits to the shareholders without having to pay corporate taxes. This avoids the double taxation clause that C corps have.
Corporations are everywhere, and we’re willing to bet that you’ve made countless purchases from a big-name corporation. Here are a few popular companies that are corporations:
Disclaimer: The content on this page is for informational purposes only, and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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