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Types of Corporations
There are different kinds of corporations
available under state and federal law (and
corporate laws vary only slightly from
state-to-state). The different kinds of
corporations a business owner can choose from
include:
Regular ("C") Corporations: a
for-profit corporation whose profits are
taxed separately from its owners' under
subchapter C of the Internal Revenue Code and
whose owners enjoy limited liability. Because
the first $75,000 of profits retained in a C
corporation are taxed at a separate corporate
income tax rate that is lower than the
individual income tax rates of business
owners, owners who work for their corporation
can split business income between themselves,
individually, and their business. Owners can
use this technique, known as "income
splitting," to achieve overall tax savings. C
corporations also allow owners to deduct
fringe benefits as a business expense.
"S" Corporations: a
profit-making corporation, organized under
state law, whose shareholders have applied
for and received subchapter S corporation
status from the Internal Revenue Service.
Electing to do business as an S corporation
lets shareholders enjoy limited liability
status, as would be true of any corporation,
but be taxed like a partnership or sole
proprietor. That is, instead of being taxed
as a separate entity (as would be the case
with a C corporation), an S corporation is a
pass-through tax entity in which income taxes
are reported and paid by the shareholders,
not the S corporation. In this way, owners
can report their share of corporate profit or
loss on their personal tax and use corporate
loss to offset income from other sources. To
qualify as an S corporation, a number of IRS
rules must be met, such as having 75 or fewer
shareholders who are U.S. citizens. (Note:
aside from sole proprietorships, this is the
only business entity that limits the number
of owners.)
Nonprofit Corporations: a
legal structure, authorized by state law,
allowing people to come together to either
benefit members of an
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In 1967, Muriel Siebert became the
first woman to own a seat on the New
York Stock Exchange. Siebert
had also been the first woman to
serve as Superintendent of Banks for
New York state, as well as the
nation's first ever discount broker. |
organization (e.g., a club or mutual benefit
society) or for some public purpose (such as
a hospital, environmental organization or
literary society). Nonprofit corporations,
despite the name, can make a profit, but the
business cannot be designed primarily for
profit-making purposes, and the profits must
be used for either the benefit of the
organization or the purpose the corporation
was created to help.
When a nonprofit corporation dissolves, any
remaining assets must be distributed to
another nonprofit. As with for-profit
corporations, directors of nonprofit
corporations are normally shielded from
personal liability for the organization's
debts. Some nonprofit corporations qualify
for a federal tax exemption under §501(c)(3)
of the Internal Revenue Code, with the result
that contributions to the nonprofit are tax
deductible by their donors.
Professional Corporations: a legal
structure, authorized by state law, for a
fairly narrow list of licensed professions,
including lawyers, doctors, accountants, many
types of higher-level health providers, and
often architects. Unlike a regular
corporation, a professional corporation does
not absolve a professional for personal
liability for her own negligence or
malpractice. The main reason why groups of
professions choose this organizational
structure is that, unlike a general
partnership, owners are not personally liable
for the malpractice of other owners. (In some
states, limited liability partnerships offer
this same benefit and may be more desirable
for other reasons.) Tax benefits are also
available. |
