What is a Corporation?
In a general sense, a corporation is a business entity that is given many of the same legal rights as an actual person. Corporations may be made up of a single person or a group of people, known as sole corporations or aggregate corporations, respectively.
Corporations exist as virtual or fictitious persons, granting a limited protection to the actual people involved in the business of the corporation. This limitation of liability is one of the many advantages to incorporation, and is a major draw for smaller businesses to incorporate; particularly those involved in highly litigated trade.
A company is incorporated in a specific nation, often within the bounds of a smaller subset of that nation, such as a state or province. The corporation is then governed by the laws of incorporation in that state.
A corporation may issue stock, either private or public, or may be classified as a non-stock corporation. If stock is issued, the corporation will usually be governed by its shareholders, either directly or indirectly. The most common model is a board of directors which makes all major decisions for the corporation, in theory serving the best interests of the individual shareholders.
In the United States there are three major types of corporations: Close, C, and S.
Close corporations issue stock, but the amount of shareholders is greatly limited, usually to less than thirty. Given the small number of shareholders, normally all are involved in board-level decision making. Transfer and sale of stock is also tightly controlled.
C corporations are the most common type of corporation in the United States. They allow for theoretically unlimited amounts of stock to be issued, and usually have a smaller board of directors which make decisions. C corporations pay taxes both at the corporate level, and at the personal level, as shareholders pay taxes on their dividends.
S corporations are virtually identical to C corporations, save that they have a special tax status with the IRS. Instead of paying taxes at both levels, S corporations are required only to tax their dividends–the corporation itself does not need to pay taxes.
When registering a company, C corporation or C corp is the most common corporation type, but it isn’t always the top choice for small business owners. C corporations provide limited liability protection to owners, who are called shareholders, meaning owners are typically not personally responsible for business debts and liabilities. C corporations may also offer greater tax advantages because of an expanded ability to deduct employee benefits, which are most often used by growing businesses
C corporations typically provide a number of advantages:
- Limited liability protection. Owners are not typically responsible for business debts and liabilities
- Unlimited owners. C corps can have an unlimited number of shareholders
- Easy transfer of ownership. Ownership is easily transferable through the sale of stock.
- Unlimited life. When a corporation’s owner incurs a disabling illness or dies, the corporation does not cease to exist.
- Raise capital more easily. Additional capital can be raised by selling shares of stock.
- Credibility. Corporations may be perceived as a more professional/legitimate entity than a sole proprietorship or general partnership
- Lower audit risk. Generally C corporations are audited less frequently than sole proprietorships
- Tax deductible expenses. Business expenses may be tax-deductible.
- Self-employment tax savings. A C corporation can offer self-employment tax savings, since owners who work for the business are classified as employees
In order to register a company as a C corporation, Articles of Incorporation (sometimes called a Certificate of Incorporation, must be filed with the state and the necessary filing fees paid. Upon incorporation, C corporations are also required to adopt bylaws, hold an initial meeting of directors and shareholders, and issue shares of stock to owners.