What is a corporation?
A corporation is a business structure that allows owners to establish their company as a separate legal entity. Incorporated companies enjoy “corporate personhood,” meaning that, like a person, they have the right to enter into contracts, loan and borrow money, sue and be sued, and so on.
Because of this, the owners and shareholders of a corporation are not held personally liable for its debts and obligations.
Corporations have a two-level structure. The first level is the ownership level. Typically, shareholders are the ones who own a corporation. The second level is the active management level, which features a board of directors and corporate officers.
Shareholders are responsible for electing members of the board of directors, who are then responsible for choosing the corporate officers, including the Chief Executive Officer (CEO), Chief Marketing Officer (CMO), Chief Financial Officer (CFO), and so on.
Officers and directors do not necessarily have to be shareholders, although they can be. Typically officers and directors may double as shareholders in smaller firms, but not in larger firms.
The most basic corporation is known as a C corporation . C corporations can have unlimited shareholders and may become public and listed on the stock exchange. This means that members of the public can purchase shares of the company, thereby making them partial owners.
The ability to sell shares of ownership is often particularly attractive to companies seeking significant investments from multiple investors.
However, registering as a C corp does not mandate that a company exists publicly. They could still issue stock privately, at which point other owners would have more control over who purchases shares.
The other type of corporation available is an S corporation. An S corp is unique because it’s not a type of business structure. Instead, it’s a type of elected tax status.
The Internal Revenue Service defines S corps as “corporations that elect to pass corporate income, losses, deductions, and credits to their shareholders for federal tax purposes.” Electing S corp status allows owners to pass-through business income to their personal tax returns, avoiding double taxation.
So when setting up a corporation, owners do not need to choose between a C corp or an S corp. All businesses begin as a C corporation. After registering as a C corp with their state’s Secretary of State’s Office, owners can then elect to become an S corp by filing IRS Form 2553, Election by a Small Business Corporation.