13.2 Corporations

Corporations come in various forms, each with unique characteristics and tax implications. C Corporations offer flexibility and unlimited growth potential, while S Corporations provide tax advantages for smaller businesses. B Corporations balance profit with social responsibility.

The choice between private and public structures impacts a company's funding options and regulatory obligations. Understanding these distinctions is crucial for entrepreneurs navigating the complex landscape of corporate formation and governance.

Types of Corporations

C, S, and B corporation comparisons

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• C Corporations
  • Most common default corporate structure in the US
  • Operates as a separate legal entity distinct from its owners
  • Allows for an unlimited number of shareholders from any country
  • Subject to double taxation: corporate income tax on profits and personal income tax on dividends distributed to shareholders
  • No restrictions on ownership, allowing for diverse shareholder base (individuals, other businesses, foreign entities)
  • Limited liability protection for shareholders, protecting personal assets from corporate debts and liabilities
• S Corporations
  • Pass-through taxation structure where profits and losses flow through to shareholders' personal tax returns, avoiding double taxation
  • Limited to a maximum of 100 shareholders, all of whom must be US citizens or residents
  • Shareholders are typically individuals, certain trusts, and estates
  • Restricted to issuing only one class of stock, providing equal financial rights to all shareholders
• B Corporations (Benefit Corporations)
  • For-profit entities with a legally binding social or environmental mission (improving local communities, reducing carbon footprint)
  • Legally required to consider the impact of decisions on stakeholders (employees, customers, environment), not just shareholder profits
  • Taxed like traditional C or S corporations, depending on their election
  • Available in over 30 US states and several countries (Italy, Colombia), but not yet recognized at the federal level

Private vs public corporation distinctions

• Privately held corporations
  • Shares are not traded on public stock exchanges (NYSE, NASDAQ)
  • Typically owned by a small, select group of shareholders (founders, family members, private investors)
  • Face less stringent regulatory and reporting requirements compared to public companies
  • Raise capital through private investments, bank loans, or reinvesting retained earnings
• Publicly traded corporations
  • Shares are bought and sold on public stock exchanges, accessible to the general public
  • Owned by a large, diverse group of public shareholders (individual investors, institutional investors)
  • Must comply with strict SEC regulations and regular financial reporting requirements (quarterly and annual reports)
  • Raise capital through initial public offerings (IPOs) and secondary stock offerings, allowing for greater access to funds
  • May be subject to hostile takeovers, where an outside entity attempts to acquire control without management approval

Corporate Taxation

Corporate taxation systems

• C Corporations
  • Subject to double taxation:
    1. Corporate income tax applied to company profits at the corporate tax rate (currently 21% in the US as of 2021)
    2. Personal income tax levied on dividends paid out to shareholders at their individual tax rates
  • Profits retained within the company are only taxed at the corporate level
• S Corporations
  • Pass-through taxation structure:
    • Company profits and losses "pass through" to shareholders' personal tax returns, proportional to their ownership stake
    • Shareholders pay personal income tax on their allocated share of company profits at their individual tax rates
  • Avoids the double taxation faced by C corporations
  • Shareholders can offset other personal income with allocated business losses, providing potential tax benefits

Corporate Structure and Governance

• Articles of incorporation: Legal document filed with the state to establish a corporation, outlining its basic structure and purpose
• Board of directors: Elected group responsible for overseeing the corporation's activities and making major decisions
  • Holds fiduciary duty to act in the best interests of the corporation and its shareholders
• Corporate governance: System of rules, practices, and processes by which a company is directed and controlled
  • Ensures accountability, fairness, and transparency in a company's relationship with its stakeholders
• Corporate veil: Legal concept that separates the actions of a corporation from those of its shareholders, protecting them from personal liability