SELECT YOUR TYPE OF CORPORATION

The C Corporation

The Most Popular Form of Corporation

The "C-Corporation" designation merely refers to a standard, general-for-profit, state-formed corporation. This is the most popular form of corporation.

To be formed, an Incorporator must file Articles of Incorporation and pay the requisite state fees and prepaid taxes with the appropriate state agency (usually, the Secretary of State – Corporations Division).

Separate Legal and Tax Life
A corporation, which is properly formed and operated as a corporation, assumes a separate legal and tax life distinct from its shareholders. A corporation pays taxes at corporate income tax rates and files its own corporate tax forms each year (IRS Form 1120).

Management and Control in Corporations
Normally, a corporation's management and control is vested in the Board of Directors who are elected by the shareholders of the corporation. To maintain a corporation’s good standing and thus receive the benefits that incorporation has to offer, individuals in a corporation must assume certain roles.

The illustration below presents a brief overview of the hierarchy of power observed in a corporation.

SHAREHOLDERS:

• Owners of the Corporation
• Elect and Remove Directors
• Possess Ultimate Power
• Possess NO Power in Daily Corporate Activities

DIRECTORS:

• Elected by Shareholders
• Responsible for Long=term Goals and Policy Decisions
• Serve for a Pre-determined Period, Usually 1 Year
• Appoint and Remove Officers
• NO Involvement in Daily Activities

OFFICERS:

• Appointed by Directors
• Responsible for Setting and Supervising Management
• Report Directly to Directors

MANAGEMENT:

• Supervise Daily Operations
• Reports to Officers

STAFF:

• Implements Policies
• Brings Concepts to Life
  

Number of Persons Required
In most states, one or more persons may form and operate a corporation. Some states, however, require that the number of persons required to manage a corporation be at least equal to the number of owners. For example, if there are two shareholders, there must also be a minimum of two directors.

Corporate Formalities
To retain the corporate existence, and thus the benefits of limited liability and special tax treatment, those who run the corporation must observe corporate formalities. Thus, even a one-person corporation must wear different hats depending on the occasion.

For example, one person may be responsible for being the sole shareholder, Director, and Officer of the corporation; however, depending on the action taken, that person must observe certain formalities: Annual meetings must be held, corporate minutes of the meetings must be
taken, Officers must be appointed, and shares must be issued to shareholders. Most importantly, however, the corporation should issue stock to its shareholders and keep adequate capitalization on hand to cover any "foreseeable" business debts.

Shareholder Liability for Corporate Debts
Where corporate formalities are not observed, shareholders may be held personally liable for corporate debts. Thus, if a thinly capitalized corporation is created, funds are commingled with employees and officers, stock is never issued, meetings are never held, or other corporate formalities required by your state of incorporation are not followed, a court or the IRS may "pierce the corporate veil" and hold the shareholders personally liable for corporate debts.

Fringe Benefits
Corporations may often offer their employees unique fringe benefits. For example, owner-employees may often deduct health insurance premiums paid by the corporation from corporate income. In addition, Corporate-defined benefit plans often afford better retirement options and benefits than those offered by non-corporate plans.

Avoiding Double Taxation
Generally, the corporation is taxed for its own profits; then, any profits paid out in the form of dividends are taxed again to the recipient as dividend income and the individual shareholder's tax rate. However, most small corporations rarely pay dividends. Rather, owner-employees are paid salaries and fringe benefits that are deductible to the corporation. The result is that only the employee-owners end up paying any income taxes on this business income and double taxation rarely occurs.

Duration of a Corporation
As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers, or directors or by transfer of its shares from one person to another.

Constitutional Protections for Corporations
Although a corporation is not a "citizen" under the U.S. Constitution, a corporation may exercise some of the constitutional protections granted to natural persons such as: Right to Due Process and Equal Protection, Freedom of Speech, Right to Counsel

S-Corporation
An S Corporation begins its existence as a general, for-profit corporation upon filing the Articles of Incorporation at the state level. A general for-profit corporation (also known as a 'C Corporation') is required to pay income tax on taxable income generated by the corporation.

However, after the corporation has been formed, it may elect "S Corporation Status" by submitting IRS form 2553 to the Internal Revenue Service (in some cases a state filing is required as well). Once this filing is complete, the corporation is taxed like a partnership or sole proprietorship, rather than as a separate entity. Thus, the income is "passed-through" to the shareholders for purposes of computing tax liability. Therefore, a shareholder's individual tax
returns will report the income or loss generated by an S Corporation.

The Limited Liability Company (LLC)
Because of its similarities to the corporate structure, the Limited Liability Company (LLC) is often considered by the general public to be a type of corporation. Legally, however, the LLC is not at all considered to be a corporation. In fact, most states have enacted a completely separate and
distinct set of statutes specifically regulating the LLC form of business structure.

The LLC is actually a hybrid between a Partnership and a Corporation. The most significant feature of the LLC is that it provides many of the features of the corporation while requiring fewer formalities.

One LLC Member Required.
Historically, most states require that a Limited Liability Company be comprised of at least two LLC members. Today most states and the IRS recognize the single-member LLC as a legitimate business structure.

Separate Legal Entity.
Like limited partnerships and corporations, the Limited Liability Company shares a similar advantage -- it is recognized as a separate legal entity from its "members."

Limited Liability.
LLC Members (owners) receive protection of personal assets in a manner very similar to that afforded to corporations

Fewer Formalities
If a corporation fails to observe corporate formalities, such as holding an annual meeting, individual shareholders may be held personally liable for the corporation’s business debts. In an LLC, however, fewer formalities exist. For example, in California, an LLC’s failure to hold an annual meeting is NOT grounds for holding the LLC’s members personally liable for an LLC’s business debts since an LLC's failure to hold meetings of members or managers is not
usually considered grounds for imposing the alter ego doctrine where the LLCs Articles of Organization or Operating Agreement do not expressly require such meetings.

Management and Control
Management and control of an LLC is vested with its members unless the Limited Liability Company's articles of organization provide otherwise.

Voting Interest
Ordinarily, voting interest in an LLC directly corresponds to interest in profits, unless the articles of organization or operating agreement provide otherwise.

Transferability
No one can become a member of an LLC (either by transfer of an existing membership or the issuance of a new one) without the consent of members having a majority in interest (excluding the person acquiring the membership interest), unless the articles of organization provide otherwise.

Duration.
Historically, an LLC was required to specify a date of dissolution in its articles of organization. Today, however, many states will allow an LLC to maintain a perpetual existence.

Formation
The existence of an LLC begins upon the filing of the Articles of Organization with the Secretary of State. The articles must be on the form prescribed by the Secretary of State. Among the required information on the form are the latest date at which the LLC is to dissolve and a statement as to whether the LLC will be managed by one manager, more than one manager, or the members.

To validly complete the formation of the LLC, members must enter into an Operating Agreement. This Operating Agreement may come into existence either before or after the filing of the Articles of Organization and, in many states, may be either oral or in writing.

Non Profit Corporation Similarities to “For-Profit” corporations
Many of the characteristics of the C-Corporation discussed herein apply to nonprofit corporations as well. Nonprofit corporations, however, have some very distinct features specific to this type of entity.

Tax Exemption under 501(c)(3)
In contrast to the other types of corporations discussed herein, under Federal Tax Code Section 501(c)(3), a tax-exempt corporation cannot pay dividends AND, upon dissolution, must distribute its remaining assets to another nonprofit group or certain other recipients as mandated by the statutes.

Miscellaneous Advantages

• Lower postal rates on bulk mail.
• Discounted advertising rates provided by organizations that support nonprofit entities.
• Discounted Internet Access rates.
• Discounted membership rates offered by national chain stores such as Costco.
• Federally subsidized job-training and work-study programs for nonprofit corporation employees.

The Burdens of Operating a Nonprofit Corporation

• Enormous paperwork and filing requirements to obtain tax exempt status
• Federal & State Filings required to obtain tax-exempt status
• Limitations imposed on the types of activities that may be conducted by the corporation.

Miscellaneous Limitations

Pursuit of the following corporate purposes only:

• Charitable
• Educational
• Religious
• Literary
• Scientific
• No distribution of financial gains to directors, officers or members.
• Corporate assets may only be distributed to another tax exempt organization upon dissolution of the nonprofit corporation.
• Participation in political campaigns for or against persons running for public office is prohibited.
• Substantial engagement in legislative political activities is forbidden.

Professional Corporation
Most Corporations are formed as General, For-Profit Corporations. However, where the corporation will be engaging in what your state might call "professional services," the Articles of Incorporation must bear special language and the corporation must be formed pursuant to certain statutory provisions. Thus a Professional Corporation.
"Professional Services" according to most states usually consists of the following activities:

• Professional Services
• Medical Services
• Legal Services and Representation
• Accounting and Financial Services
• Architectural Services
• Other services may be included in this list depending on your selected state of incorporation.

Seek Legal Advice!
This site STRONGLY recommends that you seek the advice of an attorney if you fall within the "Professional Services" statute of your state.

Please be advised: Most states vary in their requirements regarding licensing of professional activities.