Corporation Types

A company may start its operations as a corporate entity, or may incorporate itself into a sole proprietorship or partnership later. The main reason behind forming incorporation is that such an entity has access to a larger amount of capital. A corporation has a lot more shareholders and hence, the equity capital available to this business entity is much more as compared to a sole proprietorship or a partnership. So, if the heads of a business realize that they will need more capital than what they have, to expand a lucrative business, they will choose to incorporate their organization. Conversely, if the promoters of a business realize that the running a profitable enough business model requires a lot more start-up capital than what they can afford, they will choose starting a business as a corporation itself. Thus, we can see that incorporation is done based on the specific needs of the business.

Different Types of Corporations
Now, the type of business corporations also depends upon the specific needs of the business. The business partners or promoters will choose the corporation that best suits their need. There are 4 types to choose from.

General Corporation: It may have unlimited shareholders, who are the owners of the company. Since they can sell and buy the shares on the stock market, the ownership of a corporation is said to be transferable. The advantage of this type is that the liability of the owners, i.e. shareholders is limited to the value of their shares. This means, that if such a company goes bankrupt, the shareholders stand to lose only their share in the company and no more. Creditors cannot ask them to sell their personal assets to recover money.

Close Corporation: A close corporation is similar to a general corporation. The only differences between the two types is that shareholding of a close corporation can only be between 30-50 people. Hence, many close corporations may have a lower capitalization than the general corporations. But there is an advantage that the original promoters of the organization retain control over the organization. The persons with a majority stake in the company can exercise more pull over making decisions. In a general corporation, the promoters may lose their majority stake to an outside party. This cannot happen in case of a close corporation as the majority stake can be controlled by the promoters.

LLC Corporation: The United States laws allows forming a special type of corporation, known as a Limited Liability Company (LLC). What an LLC basically means is that, it is a sole proprietorship company that enjoys some benefits. The benefits of an LLC corporation are that the liability of the owner is limited to the extent of his/her share in the company. Also, the owner of the LLC only has to pay tax on his personal earnings (profit) and no tax is paid by the company. An LLC enjoys perpetual existence too and will not end with the death of the promoter. The only disadvantage of an LLC corporation is that it does not enjoy high capitalization that a corporation does.

S Corporation: With the Tax Reform Act of 1986, existing corporate bodies in the United States were given an offer to convert themselves into 'S Corporations'. This new type of corporation enjoyed advantages related to the payment of taxes. But, there are also several restrictions on this type of organization with respect to number of shareholders, classes of stock, types of shareholders (business entities are not allowed as shareholders, only particular individuals) and the type of business operations that they can run.

Now you can see which type of corporation suits your needs best before you start your organization.