By: Barry E. Haimo, Esq.
August 09, 2016
What Are the Different Types of Corporations?
Understanding how to structure and label your business in a legal and tax-favorable way can be the hardest part of getting off the ground. There are so many options out there! How do you choose between them? If you choose wrong, will it destroy your business?
As an experienced Florida business planning attorney, I know just how scary and complicated this process can be – especially if you have no clue what you’re doing! Even if you’ve been there and done that before, changes to laws and additional options can complicate things. That’s why I created this guide to different types of corporations. Use this as an overview to narrow down your options, and if you still have questions, feel free to reach out.
Corporations in General
Generally, corporations enjoy similar benefits (see “What’s a Corporation”):
- Limited personal liability of the shareholders
- Separate legal entity
- Centralized management
- Potential tax benefits
- Ability to raise investment capital
- Ease of developing creative compensation structures
- Perpetual existence
- S Corp. Often seen as the most “desirable” option, the S corporation offers protection both from liability and taxation. Structuring your business as an S Corp lets you avoid “double taxation” with respect to distributions to shareholders. Like any corporate entity, an S Corp also separates your company from your personal debt and assets, making it a highly lucrative and stable choice for many businesses. In order to enjoy these benefits, you have to follow strict requirements, including having scheduled meetings and minutes, creating by-laws, record maintenance, stock transfers, and paying market value to any shareholders also employed in the business. There are also numerous restrictions on eligibility of shareholders, which must be understood before creating this type of entity, such as number and type of shareholders. I.e. S corps are typically only used for corporations with a relatively few amount of shareholders. We will further explore this in a subsequent post.
- Closely held Corp or a Closed Corp. Not much different from a S Corp, a Closed Corporation is a corporation that has only a few shareholders who control the business through the election of directors, who in turn appoint officers. You typically find these types of corporations in the context of family businesses. Often, the patriarch or matriarch is the founder and initial shareholder. The children may end up working in the business and owning shares as a result. Ultimately, a business and estate succession plan must be utilized to ensure that the business transfers both seamlessly and smoothly, as well as properly pursuant to the founder’s intent. These types of business have complex family dynamics to navigate and must be handled delicately.
- General Corporation. This is the most common type of incorporation, probably because it is the “simplest.” Essentially, general incorporation means that you can have unlimited shareholders and they invest in your business as a “separate entity.” Like Not much different from an S Corp, a C Corporation enjoys the abovegeneral benefits. Unlike S corps, C corps are not limited to number and type of shareholders. C corps are the type of corporation you will want to use for certain employee compensation plans and health care plans. They are also used for raising capital and going public. However, distributions to shareholders are considered dividends, and are subject to the “double taxation” referenced above. This means that the amount received by the shareholder has already been taxed at the corporate level and will again be taxed at the personal level. The effects of double taxation may not be insubstantial. more
- Professional Corporation. A professional corporation is a special type of corporation that you form if your type of service requires a license. For example, attorneys, CPAs, physicians, therapists and counselors that are licensed to practice would form this type of entity. It enjoys the same benefits as mentioned above. Often these entities elect to be treated as S corps, but that is NOT always advisable.
This is a basic overview, so keep in mind that there are certain restrictions based on the structure of your business, tax requirements, and the general purpose of your business that affect your ability to qualify for certain types of incorporation. There are also state and federal regulations, expenses, and shareholder specifics to take into account, as well as restrictions on profits and income made with certain options. To fully understand the best option for you and your business, speak to an estate planning and business planning attorney today.
Barry E. Haimo, Esq.
Strategic Planning With Purpose
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