A corporation is a legal business entity created by filing a certificate of incorporation or Articles of Incorporation with a state. It is a popular business structure because it provides liability protections for business owners and offers them the ability to raise money by issuing shares of stock.
Because corporations issue stock, they are owned by shareholders (stockholders) and are not considered a sole proprietorship. In a corporation, shareholders usually do not have personal liability for company obligations such as debt. Though they can be non-profit or for-profit, most corporations are designed to return a profit to company shareholders, which can include founders, employees, and investors.
Key characteristics of a corporation
They file their own tax returns and pay taxes to the IRS. This is in contrast to limited liability companies (LLCs), a similar business structure in which taxes can be “passed through” to shareholders rather than paid by the legal entity itself.
They are subject to corporate governance requirements of their state of incorporation. Corporations elect a board of directors to uphold corporate bylaws, hold board and shareholder meetings, and maintain record-keeping.
They exist perpetually. A corporation lives on until legally dissolved.
Types of corporations
There are several different types of corporations:
The most common type of corporation is a C-corporation, or C-corp. This corporate structure is popular because it provides legal liability protection for shareholders and allows them to issue stock options to employees and preferred stock to investors. One potential disadvantage is that, unlike LLCs, C-corps are subject to double taxation—profits may be subject to corporate taxes and shareholders may also be taxed.
An S-corp, is a type of corporation that allows for “pass-through” taxation, a tax advantage that means shareholding individuals and not the S-corp itself pay income taxes. On the downside, S-corps can only issue one type of stock, and only to a limited number of individual people and certain kinds of trusts and estates. This can make it harder to raise venture capital funds.
A B-corp designation is an extra certification that a company is meeting high standards for social, environmental, and governance practices. But that’s not a structural or tax definition—a company can have a B-corporation designation as an LLC, an S-corp, or a C-corp.
How to start a corporation
The Carta Incorporation Resources can help you choose the right way to set up your business.
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