Whether you want to start a new company, or you just bought an existing one, it’s important to decide what type of company is suitable for you. Naturally, each of them has its own perks and disadvantages. For this reason, today we are going to analyze various types of corporations and what are they best suited for.
Types of Corporations You Need to Know About
1. DBA (Doing Business As)
Also called an assumed or fictitious business name, the DBA refers to a company that transacts business by using a different name. Generally, it occurs at a county level, but some states allow for state-level filings. When it comes to general partnerships and sole proprietorships, if you don’t file a DBA, the company will have the same name as the owner(s). Meanwhile, a corporation or an LLC can also file a DBA if they want to use a different name than the one they registered with.
2. General Corporation
This is perhaps the most popular structure you can find on the market. It’s a separate legal entity, owned by various stockholders. It can have an unlimited number of stockholders that are protected from the creditors of this business thanks to the separate legal nature of this structure. Usually, the stockholder’s personal liability is limited to the amount of investment they had in the corporation.
You should choose this type of corporation if you want to protect the owner’s personal assets from liability and business debt. Moreover, this type ensures an unlimited life, beyond the cases of illness or death of one of the owners.
3. Close Corporation
There are a couple of differences between the general type and the close corporations:
- Close corporations are limited to 30 – 50 stockholders;
- Their directors must offer the shares to the current stockholders before giving them to new ones.
As such, the close one of the list with the types of corporations is a better choice for a group of individuals. Some of them will be involved in the management, while others will have a limited or indirect style of involvement. You can choose this option if you want the company earnings to remain within your business or a certain flexibility to spread the earnings or to set the salaries. Moreover, as an owner, you can enjoy some flexibility in offering health and medical benefits, as well as other fringe benefit programs for education, transportation, or life insurance.
4. S Corporation
The S corporation type has become very wanted for corporate tax purposes. Some say this isn’t even one of the different types of corporations. It is, in fact, a special tax designation that is granted by the IRS to the structures that are already formed. You can go for this option if you want to combine the advantages of a sole proprietorship, partnership, and corporations.
The problem with the corporations is the fact that when a standard one makes a profit, they pay a federal corporate income tax on it. If they declare a dividend, then the shareholders declare it as personal income and then pay more taxes. With an S corporation, you avoid the double taxation because you only report the income and the loss as personal tax returns of the shareholders. However, the latter are exempt from any personal liability for the business debt.
Here, you can also enjoy a certain degree of flexibility when it comes to setting salaries or to choosing account methods.
5. Limited Liability Company (LLC)
This has been for a long time a traditional form of corporation in Europe, as well as in Latin America. They first appeared in the U.S. in 1977, in Wyoming. In 1988, the IRS authorized for pass-through taxation, just like the S corporations and partnerships. With an LLC, you as an owner can have a corporate liability protection for your personal assets from business debts. At the same time, you enjoy the same tax advantages as an S corporation or a partnership. It’s just an S corporation structure, but without the restrictions imposed by the IRS.
You should choose an LLC if you want your profits or losses to pass through to the personal income tax returns belonging to the owners. You will have great flexibility when it comes to managing and organizing the business as well. If you’re a foreign investor, then this is probably the best option for you.
6. Professional Corporation
This is a group of professionals that are licensed practitioners in a certain field. Just imagine dentists, lawyers, doctors, or accountants. They can get together and form a corporation so that they can enjoy the benefits that come with this structure, for example:
- Liability protection;
- Shareholder protection;
- Centralized management;
- Continuity of life separate to owners and members, etc.
The shares in a professional corporation can only be transferred to individuals who are licensed in the same field as the proprietary shareholders. For example, a dentist’s office can’t trade shares with another person who is not a dentist.
7. Nonprofit Corporation
The last entry on our list with types of corporations you can choose from is the nonprofit one. It is, in fact, an organization that serves the public. They don’t have a certain structure or goals that gravitate around making a profit. However, if they want to stow the tide of operating losses, they have a tax-exempt status. Despite this, if you decide to set up a nonprofit corporation, you will still need to meet strict requirements and criteria. Even after you get your tax-exempt status, your activity will be limited by the law.
Check out this clip explaining how to choose the best option for you:
As you can see, there are plenty of types of corporations you can choose from. It’s important to analyze the pros and cons of each one and then see which one fits your business better. Some of them, like the S corporation, enjoys special tax benefits, so keep that in mind when choosing. Others are specific to a certain category of people, such as the professional one. Make sure you qualify for the structure you choose and then file the right papers for it.
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