Corporation: Definition, Types, Pros, and Cons

What is a Corporation?

A corporation is an organization, usually a group of persons authorized by the state or a company recognized as a natural person (legal person under private and public law “born of the law”; the legal person in the legal context) and recognized as such in the law for certain purposes.

A corporation is a separate legal entity from its owners. It was created by individuals, shareholders, or shareholders with the aim of operating for profit. Corporations enjoy most of the rights and duties that individuals have: they can enter into contracts, borrow money, sue and be sued, hire employees, own assets, and pay taxes. Some refer to it as a “legal entity”.

Establishing a company involves a legal process known as incorporation, which involves preparing legal documents that state the primary purpose of the company, its name and location, and the number of shares and type of stock issued.

The incorporation process gives the business a specialty that protects its owners from being personally liable in the event of a dispute or legal claim.

All types of businesses around the world use corporations. While the exact legal status varies somewhat from jurisdiction to jurisdiction, the most important aspect of a company is limited liability. This means that shareholders can participate in profits through dividends and increases in the value of the stock, but are not personally liable for the company’s debts.

Almost all of the well-known companies are corporations, including Microsoft Corporation, Coca-Cola Company, and Toyota Motor Corporation. Some companies do business under their own names and also under company names, such as Alphabet Inc., known as Google.

Types of Corporations

The different types of corporations and business structures.

  • S Corporation
  • C Corporation
  • B Corporation
  • Close corporation
  • Non-profit corporations

1. S corporations

An S corporation is a business entity that passes almost all of its finances on to its shareholders. These finances include income and losses, as well as tax deductions and credits. By providing all of this finance to shareholders, S companies can be taxed like a partnership but gain corporate perks.

Specifically, this means that shareholders are responsible for income and losses. The S Corp pays specific corporate taxes that apply only to passive income and gains that are not held by shareholders. This enables S-Corps to avoid the double taxation often associated with C-Corps.

Suppose you have a C corporation with multiple shareholders who have all invested the same amount. Before these shareholders see their profits, your company must first pay corporation tax on the income generated. The already-taxed money is then paid out as profit to the shareholders, who report it in their personal tax return and pay tax again.

With an S Corp, the profits are passed on directly to the shareholders of the S Corp, which means that the shareholders are taxable. This allows the S company to bypass corporation tax as profits are taxed on a personal level if shareholders declare this on their income tax returns.

But, there’s a catch: any shareholders of an S Corp can’t be corporations, nor can they be partners with the company. This means that shareholders are generally part of a trust or estate, or are individuals and not for profit. This limits who can be a shareholder, but in many cases allows you to benefit from lower corporate taxes. You are also limited to no more than 100 shareholders, which can limit future growth.

S companies can be open partnerships, LLCs, or corporations, which makes them very flexible. While there are certain tax benefits, it’s worth noting that the IRS pays special attention to S companies. This is because the structure offers loopholes through which shareholders can attempt to evade taxes. For example, an S-Corp could claim that employee pay is actually a distribution and avoid taxes.

2. C corporations

A C-corporation is similar to an S corporation in that it can be a partnership, corporation, or LLC. A C Corp also enjoys certain tax advantages, the main reason being that the company’s profits are taxed independently of the owners’ profits.

Unlike S-Corps, a C-Corp can have any number of shareholders from any background. This means that C Corp shareholders can also be employees of the company itself. But a C Corp must-have board. The board of directors acts as the company’s decision-makers, while the shareholders act as more of financial backing.

However, C corporations may be subject to double taxation which occurs when the company’s profits are taxed at the company level and then back on the individual’s income tax return. This is often avoided by distributing profits to employees as gratuities, which allows the company to be taxed at a lower rate on a personal tax return. However, this complicated corporate structure often requires an account or financial advisor, which creates additional costs.

If you plan to grow your business and eventually sell it, a C corporation can be a great way to keep your personal assets as a separate legal entity from your professional company. The ability to have multiple shareholders in other companies also offers C-Corps great growth potential. Remember: you will likely be paying for financial advisor expenses, especially when it comes to tax time.

3. B corporations

A benefit corporation, sometimes referred to as a B-Corp, is a for-profit corporation recognized by the majority of the United States. B-Corps differ from C-Corps in terms of purpose, accountability, and transparency, but are no different in the way they are taxed.

B Corps are driven by both mission and profit. Shareholders hold the company responsible for generating public benefits in addition to financial gain. Some states require B-Corps to submit annual performance reports demonstrating their contribution to the public good.

There are several third-party B-Corp certification services, but none are required for a company to be legally considered a B-Corp in a state where legal status is available.

4. Close corporation

Close corporations are similar to B-Corps but have a less traditional corporate structure. These cover many of the formalities that typically govern corporations and apply to smaller companies.

State rules vary, but shares are usually barred from public trading. Close corporations can be run by a small group of shareholders without a board of directors.

5. Nonprofit corporation

Nonprofit corporations are organized to do charitable, educational, religious, literary, or scientific work. Because their work is for the benefit of the public, nonprofits can gain tax exemption status, which means they don’t pay state or federal income taxes on their profits.

Nonprofits must apply to the IRS for tax exemption, a different process than registering with their state.

Nonprofits must follow organizational rules that are very similar to those of a regular C corporation. They also need to follow special rules about what to do with the profits they make. For example, you cannot distribute profits to members or political campaigns.

Nonprofits are often referred to as 501 (c) (3) Corporations, a reference to the section of the Internal Revenue Code most commonly used to grant tax exemption status.

How Do Corporations Work?

A corporation exists as an independent legal entity that is separate from its owners. It can own assets and debts and has the rights of a person. A corporation protects its owners from personal liability for the company’s debts and liabilities.

A corporation must appoint a board of directors before it can commence operations, and the members of the board of directors are elected by shareholders at the annual general meeting. Each shareholder has one vote per share and is not obliged to participate in the company’s ongoing business. However, shareholders are entitled to be elected as members of the board of directors or the company’s management. 

The Board of Directors consists of a group of people who are elected to represent the shareholders. Their job is to make decisions about important matters that affect shareholders, and they also create policies that guide the management and day-to-day operations of the corporation.

A corporation owner’s personal assets are also protected from the company’s liabilities and obligations. An owner’s liability for a corporation’s debts and obligations is limited to the amount that he or she has invested in the company. In the event of the company’s bankruptcy or bankruptcy, the owner’s private assets cannot be used to settle the company’s creditors.

Management Structure of a Corporation

Corporations can have many structures, but the most standard structure consists of the:

  • Board of directors,
  • Officers,
  • Employees, and
  • Shareholders or owners.

There is no limit your corporation can have as many as are desirable or expedient to do business. At the other end of the spectrum, a person can be a sole shareholder, director, officer, and employee at the same time. You can have as many or as few people as necessary to conduct business in a corporation.

How Corporations are Taxed?

Corporations face double taxation. The corporation files its tax returns with the IRS once the company determines its taxable income after deducting salaries and other operating costs. A corporation can issue dividends to its shareholder from its after-tax profit.

Corporations face double taxation. The Corporations files its tax returns with the IRS once the company has determined its taxable income after deducting salaries and other business expenses. A corporation can distribute dividends to its shareholders from its after-tax profit.

Income from the corporations’ profits should be reported as dividends on each shareholder’s income tax return. The IRS taxes these at the shareholder’s personal income tax rate. However, shareholders can avoid double taxation by not drawing their income from the corporations

How Corporations Raise Money?

Corporations can raise capital by selling the company’s shares to investors. Once the board has set the price per share of the company’s share, investors can buy shares with money, property, or expertise. The profits paid out to a corporation’s shareholders are usually proportional to the value of their stake in the company.

Thus, a shareholder with 15 percent equity in a C Corp receives 15 percent of the corporation’s profits. Corporations can also issue share certificates to employees of the company, but first-time shareholders must receive their share certificates before starting business activities.

Regulatory Requirements of a Corporation

To protect the company’s corporate status, corporations must follow specific guidelines:

  • C Corporation shareholders and directors must hold at least one meeting each year.
  • The corporation must keep minutes of directors ‘and shareholders’ meetings to show its decision-making process.
  • The corporation must keep a company register listing the name of each shareholder and the percentage of the company they own.
  • A corporation must file annual reports and financial statements with the individual countries in which it operates.
  • The corporation must maintain written bylaws of the company’s rules and regulations at its primary business location.

What are the Advantages and Disadvantages of Corporation?

Advantages of a Corporation

  • Limited liability. The shareholders of a corporation are only liable up to the amount of their contributions. The corporation shields them from any further liability so that their personal property is protected. This is particularly beneficial if a company regularly takes large risks for which it could be held liable.
  • Source of capital. A public corporation, in particular, can raise significant amounts by selling shares or issuing bonds. This is especially beneficial if its stocks are traded on an exchange, where it is easier to buy and sell stocks.
  • Transfers of ownership. It is not particularly difficult for a shareholder to sell shares in a corporation, although it is more difficult to do when the company is privately owned.
  • Perpetual life. The lifespan of a company is indefinite, as ownership of it can extend to generations of investors.
  • Pass through. If the corporation is structured as an S corporation, profits and losses are passed on to the shareholders so that the corporation pays no income tax.

Disadvantages of a Corporation

The disadvantages of a corporation are as follows:

  • Double taxation. Depending on the type of corporation, it can tax its income, after which shareholders pay taxes on dividends received, so that income can be taxed twice.
  • Excessive tax filings. Depending on the type of company, the various income and other taxes payable can require significant paperwork. The exception to this scenario is S-Corporation, as mentioned earlier.
  • Independent management. When there are many investors who don’t have a clear controlling stake, a company’s management team can run the business without real owner supervision.

How Does a Corporation Dissolve?

The life of a corporation lasts until its statutes are changed or the purpose of its existence has reached its climax. A process called liquidation is used for transition supported by a liquidator.

The corporate assets are sold and the proceeds go first to the creditors for debt repayment. What is left is given to the shareholders. Involuntary liquidation is usually triggered by creditors of an insolvent or bankrupt company.

FAQs.

What is a Corporation?

A corporation is an organization usually a group of people or a company authorized by the state to act as a single entity (a legal entity recognized by private and public law “born out of statute”; a legal person in a legal context) and recognized as such in law for certain purposes.

What is the Definition of a Corporation?

A corporation is a single entity that may be comprised of individuals or a company but is separate from its owners. Along with limited liability, corporations possess the ability to own assets, enter contracts, sue or be sued, and borrow money.

What is a Corporation Meaning?

A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that individuals possess: they can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. Some refer to it as a “legal person.”

What are the Types of Corporation?

The different types of corporations and business structures.
1. S Corporation
2. C Corporation
3. B Corporation
4. Close corporation
5. Non-profit corporations

What are the Advantages of a corporation?

Advantages of a corporation include personal liability protection, business security and continuity, and easier access to capital.

What are the Disadvantages of a corporation?

Disadvantages of C Corporations:
1. Double taxation of corporate profits.
2. Forming a corporation costs more. Attorneys charge more to form a corporation.
3. States have higher fees.
4. More state and federal regulations and oversight.