Corporation means a separate legal business entity owned by stakeholders and stockholders. Any person or group of individuals operating a particular business may incorporate which is true for groups involved in non-profit, civil, charitable or religious endeavors.
Incorporating a valid business of any nature offers many benefits. There are various kinds of corporations suitable for different nature of business.
Consultation from a financial advisor is very important to choose the right form of corporation to enjoy the particular benefits it offers.
Types of Business Corporations
General Corporation is known to be the most common type of corporate structure which may have any number of stakeholders or stockholders. As this type is of separate nature, it offers the stockholders protection from the creditors.
All the personal assets belonging to the owner are protected from the business debt and liabilities. These corporations can be extended to an infinite period of time by the successors of owners. Ownership can be transferred through sale of stock without affecting the management as raising of capital is easier through selling of bonds and stocks.
More legal formalities are involved and more expensive than forming partnerships or proprietorship.
A close corporation type is most suitable for an individual starting a company with a few people or alone.
The significant difference between the General Corporation and Close Corporation is that close corporation is limited to a maximum of 30 to 50 stockholders. Also the shares must be offered to the existing stockholders before offering to the new stockholders.
S Corporation has the primary benefits as well as demerits of both general and close corporations along with an added benefit of special tax provision which avoids the “double taxation”. The standard corporations pay taxes on the profit and the dividend declared out of profit to the stockholders; it is liable for income tax.
Regulations for S Corporation
S Corporations are allowed to own more than 80 percent of the regular C corporation stocks. However, only the parent S Corporation can own 100 percent subsidiary stock. The S Corporations can issue one class of stock to its members who are citizens or residents of the native state. Non residents of the state are not allowed to become shareholders. The S Corporations are allowed to provide benefits to the employees along with deferred compensation plans.
LLC (Limited Liability Company)
An LLC is not considered as corporation, yet it offers many advantages similar to general corporations and close corporations.
LLC is preferred over partnership or sole proprietorship because of “pass through” taxation benefit. In addition to this, unlike in S Corporations, even foreign investors can become shareholders.
There is greater flexibility in management and LLC offers personal assets the protection from business debt. Profits are not considered to be personal income of owners.
LLCs have limited life not exceeding a period of 30 years in most of the states and requires minimum of two members to form an LLC in few states. LLCs do not have the stock since they are not corporations.