13.2 Corporations

Types of Corporations

Corporations are the most structured form of business entity, and they come in several varieties. Each type carries different rules around taxation, ownership, and purpose. Picking the right one affects how much you pay in taxes, who can invest in your company, and what obligations you take on.

C, S, and B Corporation Comparisons

C Corporations are the default corporate structure in the US. When you incorporate without making a special tax election, you get a C Corp.

• Operates as a separate legal entity distinct from its owners
• Allows an unlimited number of shareholders from any country, including individuals, other businesses, and foreign entities
• Can issue multiple classes of stock (common and preferred), which gives flexibility when attracting different types of investors
• Provides limited liability protection, meaning shareholders' personal assets are shielded from corporate debts
• Subject to double taxation: the corporation pays income tax on its profits, and then shareholders pay personal income tax again on any dividends they receive

S Corporations are designed to give smaller businesses the liability protection of a corporation without the double taxation problem. To become an S Corp, you file an election (Form 2553) with the IRS.

• Uses pass-through taxation, where profits and losses flow directly to shareholders' personal tax returns. The corporation itself doesn't pay federal income tax.
• Limited to a maximum of 100 shareholders, all of whom must be US citizens or permanent residents
• Shareholders can only be individuals, certain trusts, and estates. Other corporations and partnerships can't hold S Corp shares.
• Restricted to issuing only one class of stock, so every shareholder has equal financial rights

B Corporations (Benefit Corporations) are for-profit entities that build a social or environmental mission into their legal charter. Think of a company that commits to reducing its carbon footprint or investing in local communities as part of its core purpose.

• Legally required to consider the impact of decisions on all stakeholders (employees, customers, the environment), not just shareholders
• Taxed like a traditional C or S Corporation, depending on which election the company makes
• Available in over 30 US states and several countries (Italy, Colombia), but not yet recognized at the federal level
• Don't confuse the legal "Benefit Corporation" status (granted by the state) with "B Corp Certification" from the nonprofit B Lab, which is a separate third-party certification

Private vs. Public Corporation Distinctions

Privately held corporations keep ownership within a small group and avoid the scrutiny that comes with public markets.

• Shares are not traded on public stock exchanges (NYSE, NASDAQ)
• Typically owned by founders, family members, or private investors
• Face less stringent regulatory and reporting requirements compared to public companies
• Raise capital through private investments, venture capital, bank loans, or reinvesting retained earnings
• Founders generally maintain more control over decision-making

Publicly traded corporations sell shares on open stock exchanges, which gives them access to far more capital but also far more regulation.

• Shares are bought and sold on public exchanges, accessible to anyone
• Owned by a large, diverse group of shareholders, from individual retail investors to institutional investors like pension funds
• Must comply with strict SEC regulations, including quarterly (10-Q) and annual (10-K) financial reports
• Raise capital through initial public offerings (IPOs) and secondary stock offerings
• The transition from private to public typically happens through an IPO, which is expensive and time-consuming but unlocks significant funding
• May be vulnerable to hostile takeovers, where an outside entity attempts to acquire control without management's approval

Corporate Taxation

How C Corp and S Corp Taxation Works

C Corporation taxation involves two layers of tax, which is why it's called double taxation:

1. The corporation pays federal income tax on its profits at the corporate tax rate (currently a flat 21%).
2. When the corporation distributes those after-tax profits as dividends, shareholders pay personal income tax on those dividends at their individual tax rates.

If the corporation retains its profits instead of distributing them (to reinvest in the business, for example), only the corporate-level tax applies. This is one reason some C Corps choose to reinvest heavily rather than pay dividends.

S Corporation taxation uses a pass-through structure that avoids that second layer:

• Company profits and losses "pass through" to each shareholder's personal tax return, proportional to their ownership stake
• Shareholders pay personal income tax on their allocated share of profits at their individual rates, even if the money isn't actually distributed to them
• There's no corporate-level federal income tax
• Shareholders can use allocated business losses to offset other personal income, which can be a real advantage in a company's early years when losses are common

Corporate Structure and Governance

Every corporation has a formal structure that separates ownership from management. Understanding these components matters because they define who has power, who has responsibility, and what protects you legally.

• Articles of incorporation: The legal document filed with the state to officially create the corporation. It outlines the company's name, purpose, number of authorized shares, and registered agent. This is your corporation's birth certificate.
• Board of directors: An elected group responsible for overseeing the corporation's major decisions and long-term strategy. Directors hold a fiduciary duty, meaning they're legally obligated to act in the best interests of the corporation and its shareholders, not their own personal interests.
• Corporate governance: The system of rules, practices, and processes that direct and control a company. Good governance ensures accountability, fairness, and transparency in how the company relates to all its stakeholders.
• Corporate veil: The legal separation between the corporation and its owners. This is what gives shareholders limited liability. However, courts can "pierce the corporate veil" if owners mix personal and business finances, commit fraud, or fail to treat the corporation as a separate entity. When that happens, shareholders lose their liability protection.