Six Common Types of Corporations

Author: NCH Internal Editorial Team
Reviewed by Cort W. Christie, MBA
Cort W. Christie, MBA is the Founder of Nevada Corporate Headquarters (NCH) and a nationally recognized entrepreneur, executive, author, and speaker. Mr. Christie has spent over 32 years helping business owners structure, protect, and scale their companies.

This article has been reviewed by Mr. Christie to ensure accuracy and value for today’s entrepreneurs. Jump to...

Choosing the right type of corporation is crucial to your business's success. Each structure has advantages and disadvantages that could significantly impact how you raise capital and the taxes you'll have to pay.

That said, you must understand your options and learn the legal protections and level of control they offer. Below, we'll unpack the six most common types of corporations and their differences.

We'll equip you with the knowledge needed to make informed decisions about the future of your business.

What is a Corporation?

Corporations are legal entities owned by shareholders or stockholders created to raise profit. This business structure separates owners from their businesses, meaning they can't be held personally liable for any debt the corporation incurs.

In addition, they can be created by a single shareholder or multiple shareholders.

Types of Corporations

There are six common types of corporations:

C Corporation (C Corp.)

C corporations offer unlimited foreign and domestic shareholders, making them the perfect structure for businesses that need to raise capital.

This corporation type is one of the most common entities businesses use when incorporating. The only drawback is that C corps are subject to double taxation.

Double taxation happens when a corporation's profits are taxed at the individual and corporate levels. The IRS taxes the corporation itself, and when its profits are distributed as dividends, the IRS also taxes the shareholders who receive them.

This tax election can significantly impact a company's bottom line, especially if it is still in the early stages, where reinvesting profits is crucial.

S Corporation (S Corp.)

S corporations avoid double taxation by structuring themselves as pass-through entities. Everything they earn and lose goes straight to their shareholders, who then have to report those earnings and losses on their personal income tax returns.

This eliminates the tax burden that traditional corporations typically have. However, the IRS only grants this special tax treatment to corporations who meet the following requirements:

• Must be a domestic corporation.
• Must have no more than 100 shareholders.
• Must have only one class of stock.

Nonprofit Corporations

Nonprofit corporations share similarities with traditional corporations, but their primary purpose is fundamentally different. While traditional corporations are created to generate profits for their shareholders, nonprofit corporations are established to address a social cause.

Any profit they generate will not be distributed to its shareholders or owners. Instead, it will be reinvested into the organization to further its mission.

Since nonprofit corporations are focused on public benefit instead of private gain, they can qualify for the IRS tax-exempt status. This means they no longer have to pay income tax returns on their earnings.

Benefit Corporations (B Corp.)

Benefit corporations are for-profit entities that aim to positively impact society while generating income for their shareholders. These organizations strive to balance purpose and profit, ensuring they use their business for both profit and good.

The only caveat to this type of corporation is that it's relatively new. As of this writing, only 38 states allow B corporations. So, if you're interested in starting a B corporation, we suggest you consult your Secretary of State to confirm its availability.

Closed Corporation

Closed corporations are entities with a specific number of shareholders, typically fewer than 35. These companies are held privately by managers, owners, and sometimes families.

Unlike traditional corporations, closed corporations are not publicly traded. Therefore, they won't be available for investment on the open market. This setup gives shareholders greater control and flexibility in ownership.

One notable disadvantage of a closed corporation is its strict bylaws on selling and transferring shares. For example, some shareholders can only pass their shares to the corporation or other existing shareholders. These stringent rules could prevent the company from getting the capital it needs to grow.

Professional Corporation (PC)

Professional corporations are established by certain licensed professionals such as attorneys, architects, engineers, accountants, and dentists.

Like traditional corporations, PCs protect their shareholders from the company's liability and other shareholders' actions.

If one of the shareholders were found guilty of malpractice, the other stakeholders would not be liable for any damage they caused.

Some states restrict the type of professionals who can create a PC, so we suggest you consult your Secretary of State before doing anything else.

Five Factors to Consider When Choosing a Type of Corporation

When it comes to choosing the right type of corporation for your business, there are four factors you must consider:

1. Tax Treatment

The type of corporation you choose determines the amount of tax savings you can get in the long run.

If you want your business to have lower tax liabilities, you'll need to choose an entity that will help you effectively avoid double taxation, like S corporations.

2. Ability to Raise Capital

Your business's ability to raise capital significantly affects its growth, especially during its early stages. Funding allows you to invest in critical areas of your business, like product development, marketing, and hiring.

You should understand the legal requirements of each type of corporation and determine which best aligns with your business's goals and needs.

3. Transfer of Ownership

Transferring ownership is another important factor you must consider. It plays a critical role in ensuring the longevity of your business.

Unlike sole proprietorships, whose existence is tied to their owners, corporations can continue their operations even if their owners leave the company.

You must understand the process and legal implications of transferring a specific corporation type.

4. Ease of Formation

Some corporation types are much easier to form than others. If you don't want to deal with hundreds of paperwork, you want to look for an entity that's easy to establish.

5. Ease of Maintenance

Truthfully, corporations are hard to maintain. Corporations have the most compliance requirements out of all the different types of business entities you can adopt. For example, they must hold annual shareholder meetings and maintain accurate record-keeping practices.

If a corporation fails to meet these requirements, it could face penalties and serious legal consequences, such as dissolution.

Before you finalize the type of corporation you want to form, carefully study its compliance requirements. This way, you'll gauge if this is something that you can commit to for years to come.

Remember, forming a corporation is only half the battle. You must ensure your business stays compliant with federal and state regulations.

How to Incorporate Your Business

The business incorporation process varies depending on your state and the type of corporation you want to establish. But, it typically involves the following steps:

Choosing a Name

The first thing you must do when incorporating your business is to think of a unique name. Most states require you to use a name that's yet to be registered.

You can use your state's business name search tool to check if the name you want to use is available.

Appoint a Registered Agent

All states require corporations to have a registered agent, an individual, or a company assigned to receive legal correspondence on their behalf.

You can appoint anyone to be a registered agent if they have a mailing address in your home state.

File your Articles of Incorporation

Articles of incorporation, or certificates of incorporation in other states, are the primary documents you must submit to form your corporation.

They typically include basic information about your business, such as:

• Name of the business
• Name and contact information of the registered agent.
• Name and contact information of the stakeholders.
• Name and contact information of the officers.
• Purpose of incorporation.
• Stock information.

Draft Your Bylaws

Corporations are governed by their bylaws, which act as the roadmap for shareholders and officers. These rules and guidelines dictate the corporation's operations and decision-making processes.

Corporate bylaws are designed to meet a corporation's specific needs and goals. However, they typically include crucial information such as shareholder rights, voting procedures, and quorum requirements.

Get Your Employer Identification Number (EIN)

Lastly, you must obtain an Employer Identification Number (EIN) from the IRS. Your corporation needs an EIN to pay taxes, open business bank accounts, and hire employees.

You can get your EIN online, via the IRS website, or by mail.

Hold Your First Meeting

Once you successfully incorporate your business, you must meet with your stakeholders first. Before you start operating, you must discuss the bylaws you've drafted and address other important matters.

Remember, your first meeting could set the tone for your entire organization. So, take the time to plan and prepare your first official meeting carefully.

Find The Right Type of Corporation Today

Ultimately, your business's right type of corporation will depend on your goals. By taking the time to understand the advantages and disadvantages of each structure, you'll be able to determine which entity will propel your business toward sustainable success.

If you're still unsure which type of corporation is best for your startup, consult one of NCH's experienced business advisors today.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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