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Types of CorporationsCorporations have been with for a very long time. The types of corporations one can use for a business have remained fairly limited given the time passed. The earliest corporations are believed to have come to us from English law, although the Greeks and Romans are known to have used similar structures to one extent or another. Regardless, the corporate business entity has been around for a very long time. In the United States, corporate law is controlled by the states for all intensive purposes other than in relation to taxes. As such, California defines corporations in different ways and with a different scope than, for instance, Colorado does. This can lead to obvious conflicts between state law, but that is a subject for another time. The corporation is based on what is known as a legal fiction. The fiction is the fact the corporation is viewed as a “person” with the rights of any other living person. It can enter into contracts, make investments, succeed and fail. People who invest in the corporation only risk their investments so long as the entity is run correctly. The most basic type of corporation is the generic “C” corporation. When you think of large companies such as Google, General Electric and Ford, you are thinking of “C” corporations. These entities have stock that is actively traded on the public stock markets. The entity pays taxes on its earnings and then distributes salaries and distributions to employees and stockholders who also pay taxes on theirs. The “S” corporation is the second most popular type of corporation. It is similar to the C corporation, but is intended to be used by smaller businesses. The number of people that can be owners are limited to 75. In exchange for this, the corporation does not have to pay double taxes. The profits are simply passed through to the individual shareholders who report them on their personal tax returns. This is per section “S” of the tax code in questions, which also gives the entity its name. In California, the professional corporation is another common type of corporation…unfortunately. California law is completely out of whack when it comes to determining what is a professional corporation and what is not. A section of code known as the Business and Professions Code essentially says that a shocking wide variety of businesses that requiring licensing must form professional corporations if they decide to incorporate at all. They cannot file LLCs, in other words. The professional corporation is not particularly a friendly piece of work for businesses. The application to each niche of business is different, but it often will not protect you from liability for the debts of the business that arise from performing the services you are licensed for. I, as a lawyer, can file a professional corporation. If I commit malpractice, however, the corporation will not provide me with protection from the resulting lawsuit. Not a very useful entity, eh? There are other types of corporations available in California as well, but many are not used often. If you would like to incorporation or form an LLC, feel free to drop me a line. |
