Corporate and Business Law > Types of Corporations

Overview  |  General Corporation  |  Close Corporation  |  Subchapter S Corporation

Overview

A corporation is a legal entity created through the laws of its state of incorporation. State corporation laws require articles of incorporation to document the corporation's creation and to provide provisions regarding the management of internal affairs including adoption of bylaws to define the rights and obligations of officers, persons and groups within its structure. States also have registration laws requiring corporations that incorporate in other states to request permission to do in-state business. The law treats a corporation as a legal "person" that can sue and be sued. The legal independence of a corporation prevents shareholders from being personally liable for corporate debts and gives the business perpetual life. Corporations are taxable entities and both corporate profits and shareholder dividends are taxed.

General Corporation

A general corporation, also known as a "C" corporation, may have unlimited number of stockholders and is usually chosen by those companies planning to have more than 30 stockholders or large public stock offerings.

Close Corporation

A close corporation limits stockholders to a maximum of 30. Many close corporation statutes require that the directors must first offer the shares to existing stockholders before selling to new stockholders. Close Corporations are not recognized by all states.

Subchapter S Corporation

A Subchapter S Corporation is a general corporation that has elected a special tax status with the IRS after the corporation has been formed. Subchapter S corporations are most appropriate for small business owners and entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners. S Corporations avoid "double taxation" because all income or loss is reported only once on the personal tax returns of the stockholders. To get S Corporation status, all stockholders of the corporation must be citizens or permanent residents of the United States. The maximum number of stockholders for an S Corporation is 75. A financial institution that is a bank, an insurance company taxed under Subchapter L, a Domestic International Sales Corporation (DISC) and certain affiliated groups of corporations are not eligible for S Corporation Status.