13.2 Corporations
3 min read•june 25, 2024
Corporations come in various forms, each with unique characteristics and tax implications. C Corporations offer flexibility and unlimited growth potential, while S Corporations provide tax advantages for smaller businesses. B Corporations balance profit with social responsibility.
The choice between private and public structures impacts a company's funding options and regulatory obligations. Understanding these distinctions is crucial for entrepreneurs navigating the complex landscape of corporate formation and governance.
Types of Corporations
C, S, and B corporation comparisons
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Top images from around the web for C, S, and B corporation comparisons
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- C Corporations
- Most common default corporate structure in the US
- Operates as a separate legal entity distinct from its owners
- Allows for an unlimited number of from any country
- Subject to : corporate income tax on profits and personal income tax on distributed to shareholders
- No restrictions on ownership, allowing for diverse shareholder base (individuals, other businesses, foreign entities)
- protection for shareholders, protecting personal assets from corporate debts and liabilities
- S Corporations
- structure where profits and losses flow through to shareholders' personal tax returns, avoiding double taxation
- Limited to a maximum of 100 shareholders, all of whom must be US citizens or residents
- Shareholders are typically individuals, certain trusts, and estates
- Restricted to issuing only one class of stock, providing equal financial rights to all shareholders
- B Corporations (Benefit Corporations)
- For-profit entities with a legally binding social or environmental mission (improving local communities, reducing carbon footprint)
- Legally required to consider the impact of decisions on stakeholders (employees, customers, environment), not just shareholder profits
- Taxed like traditional C or S corporations, depending on their election
- Available in over 30 US states and several countries (Italy, Colombia), but not yet recognized at the federal level
Private vs public corporation distinctions
- Privately held corporations
- Shares are not traded on public stock exchanges (, )
- Typically owned by a small, select group of shareholders (founders, family members, private investors)
- Face less stringent regulatory and reporting requirements compared to public companies
- Raise capital through private investments, bank loans, or reinvesting retained earnings
- Publicly traded corporations
- Shares are bought and sold on public stock exchanges, accessible to the general public
- Owned by a large, diverse group of public shareholders (individual investors, institutional investors)
- Must comply with strict regulations and regular financial reporting requirements (quarterly and annual reports)
- Raise capital through initial public offerings (IPOs) and secondary stock offerings, allowing for greater access to funds
- May be subject to hostile takeovers, where an outside entity attempts to acquire control without management approval
Corporate Taxation
Corporate taxation systems
- C Corporations
- Subject to double taxation:
- Corporate income tax applied to company profits at the corporate tax rate (currently 21% in the US as of 2021)
- Personal income tax levied on dividends paid out to shareholders at their individual tax rates
- Profits retained within the company are only taxed at the corporate level
- Subject to double taxation:
- S Corporations
- Pass-through taxation structure:
- Company profits and losses "pass through" to shareholders' personal tax returns, proportional to their ownership stake
- Shareholders pay personal income tax on their allocated share of company profits at their individual tax rates
- Avoids the double taxation faced by C corporations
- Shareholders can offset other personal income with allocated business losses, providing potential tax benefits
- Pass-through taxation structure:
Corporate Structure and Governance
- : Legal document filed with the state to establish a corporation, outlining its basic structure and purpose
- : Elected group responsible for overseeing the corporation's activities and making major decisions
- Holds to act in the best interests of the corporation and its shareholders
- : System of rules, practices, and processes by which a company is directed and controlled
- Ensures accountability, fairness, and transparency in a company's relationship with its stakeholders
- : Legal concept that separates the actions of a corporation from those of its shareholders, protecting them from personal liability
Key Terms to Review (18)
Articles of Incorporation: The articles of incorporation are the fundamental legal document that establishes a corporation as a legal entity. This document outlines the corporation's purpose, structure, and governing rules, serving as the foundation for the company's operations and legal standing.
B Corporation: A B Corporation is a for-profit company that has been certified by the non-profit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency. B Corporations are committed to balancing profit with purpose and creating a positive impact on society and the environment.
Board of Directors: The board of directors is the governing body of a corporation that is responsible for overseeing the company's strategic direction, policies, and major decisions. It serves as the link between the company's management and its shareholders, ensuring the organization's long-term success and accountability.
C Corporation: A C corporation is the most common and traditional form of business structure, characterized by its own legal entity status separate from its owners or shareholders. C corporations are subject to corporate income tax and offer limited liability protection for their owners.
Corporate Governance: Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It encompasses the relationships between a company's management, its board of directors, its shareholders, and other stakeholders, and provides the structure through which the company's objectives are set and the means of attaining those objectives are determined.
Corporate Veil: The corporate veil refers to the legal principle that separates a corporation as a distinct legal entity from its shareholders, directors, and officers. This concept shields the personal assets of these individuals from the corporation's liabilities and obligations, providing them with limited liability protection.
Dividends: Dividends are cash payments made by a corporation to its shareholders. They represent a portion of the company's profits that are distributed to investors who own the company's stock.
Double Taxation: Double taxation refers to the situation where income or profits are taxed at both the corporate level and the individual shareholder level. This occurs when a corporation's earnings are first taxed at the corporate level and then again when those earnings are distributed to shareholders as dividends, which are also subject to individual income tax.
Fiduciary Duty: Fiduciary duty is a legal obligation to act in the best interest of another party, such as a client or shareholder, with the highest standard of care. It is a fundamental principle in various business and legal contexts, including entrepreneurship, corporate structures, and partnerships.
Hostile Takeover: A hostile takeover is a corporate acquisition in which the target company is taken over against the wishes of its management. It occurs when an acquiring company purchases a majority stake in the target company, often through a tender offer or proxy fight, without the consent or cooperation of the target's management.
IPO: An IPO, or Initial Public Offering, is the process by which a private company sells its shares to the public for the first time, transitioning from a private to a publicly-traded company. This event marks a significant milestone in a company's growth and development, providing access to public capital markets and increased visibility.
Limited Liability: Limited liability is a legal concept that protects business owners or shareholders from being personally responsible for the debts and liabilities of the business. This means that the maximum amount a person can lose is the amount they have invested in the company, and their personal assets are shielded from the business's obligations.
NASDAQ: NASDAQ is a major American stock exchange located in New York City, known for trading shares of technology and other growth-oriented companies. It is the second-largest stock exchange in the world by market capitalization, serving as a hub for innovative and high-performing public companies across various industries.
NYSE: The New York Stock Exchange (NYSE) is the world's largest stock exchange, located in New York City. It serves as a primary market for trading securities of publicly listed companies, allowing investors to buy and sell shares of stock in these corporations.
Pass-Through Taxation: Pass-through taxation refers to a tax structure where the income or losses of a business entity, such as a partnership, S corporation, or limited liability company, are passed through to the owners or shareholders and reported on their individual tax returns. This means the business itself is not subject to income tax, and the tax liability is passed through to the individuals who own the business.
S Corporation: An S corporation is a type of business structure that provides the limited liability benefits of a corporation while allowing the business to be taxed as a pass-through entity, similar to a partnership or sole proprietorship. This allows the corporation's income, losses, deductions, and credits to be passed through to the shareholders, who then report them on their personal tax returns.
SEC: The SEC, or the Securities and Exchange Commission, is an independent agency of the United States federal government that is responsible for regulating the securities industry, including the stock market, to protect investors, maintain fair and orderly functioning of securities markets, and facilitate capital formation.
Shareholders: Shareholders are the owners of a corporation, holding shares or stock in the company. They have a vested interest in the success and profitability of the business and are entitled to certain rights and responsibilities based on their ownership stake.