"Corporate" Forms of Businesses

Although there are other forms of corporations, the most popular corporate forms used by small businesses are the "S" corporation, the  "C" corporation and the limited liability company "LLC".  

"S" Corporation

The "S" Corporation, also known as a small business corporation, is one that is taxed based on rules in subchapter S of the Internal Revenue Tax code.  Most small business owners choose the S corporation filing option in order to lower the amount of taxes they will pay. (No double taxation as in the C Corporation). It is necessary to get approval from both the directors and shareholders to file as an "S" corporation.   

A corporation must have the following pre-requisites in order to choose "S" corporation status:

• The corporation has to be formed in the United States

• The corporation cannot exceed thirty five (35) shareholders

• Shareholders have to be individuals, estates or certain trusts

• Shareholders have to be U.S. Citizens or residents

• Only one class of stock is permissible

In an "S" corporation, shareholders can pass the losses to their personal tax return.  The corporation itself is not responsible for its own income tax.  Stockholders are liable to pay taxes on their personal returns, and can therefore receive a deduction on their taxes if the "S" corporation does not make a profit.  

"C" Corporation

The IRS categorizes all newly formed corporations as "C" corporations unless the corporation specifically chooses to file as an "S" corporation.  "C" corporations are governed by tax rules in subchapter C of the IRS tax code.  The "C" corporation is liable for its own Federal income tax.

Limited Liability Company

A limited liability company is a separate entity which offers limited liability protection to its owners but is taxed like a partnership i.e. the owners pay taxes on their individual tax returns.

• Income generated from the business will increase the personal income tax of owners

• Owners do not enjoy the fringe benefits available to "C" corporation owners

• It can be costly to form and requires more administrative duties than other forms of businesses

Advantages

• Owners are only responsible for the amount invested (limited liability)

• There is no limitation regarding the number of owners necessary to form a limited liability company

• It is easy to raise capital as owners can readily and easily sell their interest in the business

OTHER FORMS OF CORPORATIONS

In this type of company, professional services may only be rendered by individuals who are licensed to practice the profession in which the corporation is engaged. The ownership of corporate shares is limited to licensed individuals. 

Before incorporating a professional service corporation, a written consent must be received from the Division of Professional Licensing at the State Education Department.

Non Profit Corporation

This type of corporation organized by non-profit groups for mutual benefit purposes. This is a non-stock corporation and the profit generated by the corporation is not distributed to its members, except under special circumstances. Non-profit corporations are similar to "C" corporations, in that directors are appointed to manage the business activities. This type of corporation may sue or be sued, incur debts or acquire property. Directors are members and are not responsible for business debts.

Profit Corporation

This is a corporation that sells a large amount of shares by public subscription. These corporations are normally listed on the stock exchange and are highly regulated by governmental agencies.