Which Type of Incorporation Is Right for Me?
A corporation is the most well known type of business entity, as explained by the Citizen Media Law Project website. Most large businesses, such as Kraft and Apple, operate as corporate entities, due in large part to the limited liability protection provided to directors and owners of the business. Your company goals and business type play a large part in determining which kind of corporation you should form and operate.
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Regular Corporation
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A regular corporation, also known as a C corporation, appears as the most common type of corporate entity, as explained by the More Business website. Any number of shareholders can participate as owners of a regular corporation. A regular corporation provides benefits such as limited liability protection from the company's debts and obligations, as well as the ability to raise money by issuing multiple classes of stock to potential investors. If you want to avoid double taxation, do not form a regular corporation. The company's profits get taxed twice in a regular corporation, with the first tax occurring when the company pays taxes as an entity. The second tax occurs because shareholders have to report dividends received from the company on their personal tax return. Dividends received from the company get taxed at a shareholder's personal income tax rate.
S Corporation
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S corporations have a special designation granted by the Internal Revenue Service that allows the company's shareholders to pass their share of profits and losses to their personal income tax return. Unlike a regular corporation, S corporations do not pay federal taxes as a business entity. If you plan to open an insurance company or a bank, you cannot incorporate the business as an S corporation. In addition, if you plan to have more than 100 shareholders in the company, you cannot operate as an S corporation. Foreign investors, limited liability companies and other corporate entities cannot own shares of an S corporation. This means you should avoid forming an S corporation if you plan to seek investors in foreign markets, or if you plan to allow other businesses to have ownership interest in your company.
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Close Corporation
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If you intend to incorporate on your own or with a limited number of people, you may want to consider forming a close corporation. Regular corporations and close corporations have many similarities, except that a close corporation allows no more than 50 shareholders, depending on the state where the company forms. A disadvantage of a close corporation concerns the fact that some states do not recognize this type of corporate entity. However, operating as a close corporation allows shareholders to get actively involved in the company's daily affairs, or the shareholders may choose to limit their involvement in the company's activities. Close corporations do not require a board of directors to manage the company, and the company does not have an obligation to hold annual meetings.
Professional Corporation
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You should consider forming and operating a professional corporation, if you provide professional services such as an engineer or an architect. Owners of a professional corporation act as employees of the company, by providing the service that corresponds with the purpose for forming the business. As a professional corporation, you can deduct fringe benefits provided to the company's employees such as dependent care and life insurance. Professional corporations can exist forever, just like a regular corporation. Furthermore, as a shareholder-employee of the company, you do not have personal liability for another employee's negligent acts.
Non Profit Corporation
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A non-profit corporation forms and operates to fulfill a charitable, scientific, religious or educational purpose. Popular non-profit corporations include groups like the Red Cross. Unlike a for-profit corporation, no owners exist in a non-profit corporation and the revenue generated by the organization gets used to fulfill the company's purpose. Non-profit corporations that want tax-exempt status under section 501(c)(3) of the Internal Revenue Code, need to file Form 1023 with the Internal Revenue Service. Donations to a 501(c)(3) non-profit corporation are 100 percent tax-deductible to the donor. The terms not-for-profit corporation and non-profit corporation often get used interchangeably. However a not-for-profit corporation refers to an activity or hobby like reading, while non-profit corporation refers to the organization itself, as explained by the Idealist website.
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