Types of Corps - Edgar Palacios

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Types of Corps



Types of Corporations

The most common of all corporate structures is the General Corporation. The General Corporation, like all other corporations, is a separate legal entity that is owned by stockholders (shareholders, i.e. investors). A General Corporation may have an unlimited number of stockholders. Due to the legal nature of the corporation, stockholders are protected, personally, up to the amount of their investment, from the creditors of the corporation.


 Personal assets are protected from business debt and liability
 Corporation is perpetual (life extending beyond the illness or death of the owners)
 Insurance, travel, and retirement plan deductions are TAX FREE benefits
 The ownership of the corporation is easily transferable
 Ownership will not affect current management
 Raising capital through the sale of stocks and bonds is simplified

 More Expensive to form than proprietorship or partnerships
 Legal formality
 Must abide by state and federal rules and regulations


A Close Corporation has a few minor differences as compared to General Corporations. In most states where they are recognized, Close Corporations are restricted as to the number of shareholders, usually between 30 - 50. The shares of stock upon sale are to be offered to existing shareholders first. Generally a Close Corporation is particularly suited for the entrepreneur looking to run a "one-person" corporation or for a small group of individuals who will all actively participate in the operation of the business.


S Corporations have the same basic advantages of General or Close Corporations with a major distinction of tax liability. Where as the previous corporation file and pay federal taxes on profits of the corporation, the Sub-S Corporation eliminates Federal Corporate Income Tax. The IRS allows all profits to "pass through" all profits to the shareholders personal tax return.

Sub Chapter S Corp. Restrictions

 Can only be a domestic corporation
 Only one class of stock is permitted
 No more than 75 stock shareholders
 Only individuals can be stockholders
 Each stockholder must be a citizen of the US

Note: 95% of all corporations our company helps file are Sub Chapter S

Advantage of Corporations

When it comes to forming a corporation, it would appear that for many business owners the advantages may far exceed the disadvantages:

1. Sole proprietorship and partnerships are subject to unlimited personal liability when it comes to business debt. Creditors of the business can hold the owners of the business personally liable for debt and can move to seize the proprietor's or partner's home, savings or other personal assets. The shareholder of a corporation has only the money he has put into the company to lose, and usually no more.

2. A corporation has the most enduring legal business structure. If a sole proprietor or partner dies the business ends or it may become involved in various legal entanglements. Since a corporation has a life of its own, it may continue on regardless of what may happen to its individual officers, managers or shareholders. Also, ownership of the business may be transferred, without disrupting operations, through the sale of stock.

3. Capital can be more easily raised with a corporation. This may be accomplished through the sale of stock or other equity interests. With sole proprietorships and partnerships, investors are much harder to attract because of the personal liability issue. For example, if the investor in a sole proprietorship (or some forms or partnerships) wants a share of the business for his capital contribution, he could become subject to a demand on his personal assets from creditors if the business becomes insolvent.

4. With partnerships each individual general partner may bind the business to arrangements that may result in serious financial difficulty. A corporation's shareholders cannot legally commit the company by their acts simply because they have invested in it.

5. Corporations can offer anonymity to its owners. For example, if a business person wants to open an independent small business of any kind and does not want their involvement to be public knowledge, their best choice is to incorporate. If they open as a sole proprietorship they will clearly be identified as the owner. Also, if they are involved in a partnership this will most likely become a matter of record.

6. Corporations offer the advantage of allowing tax-deductible benefits such as health and life insurance, travel and entertainment deductions as well as providing an increased tax shelter for retirement plans.

Disadvantage of Incorporating

While it would appear that the argument for incorporating is strong, it is not always the business structure for everyone. You may decide not to incorporate due to one of the following reasons:

1. Maintaining a corporation requires more paperwork and record keeping than sole proprietorships. Each individual state has its own legal procedures and regulations for forming and maintaining a corporation in good standing. Also, it is usually more costly to set up a corporation than any of the other major business structures. If you incorporate with a lawyer, fees could run between $2,500 to $3,500 or more. (Please see how you can have Edgar N Palacios P.A. & Co. form your corporation in any state for much less.)

2. If the profit from the business is not significant there may not be enough income to take advantage of the tax and other benefits of a corporation.

S Corporation

With the Tax Reform Act of 1986, the S Corporation became a highly desirable entity for corporate tax purposes. An S Corporation is not really a different type of corporation. It is a special tax designation applied for and granted by the IRS to corporations that have already been formed. Many entrepreneurs and small business owners are partial to the S Corporation because it combines many of the advantages of a sole proprietorship, partnership and the corporate forms of business structure.
S Corporations have the same basic advantages and disadvantages of general or close corporation with the added benefit of the S Corporation special tax provisions. When a standard corporation (general, close or professional) makes a profit, it pays a federal corporate income tax on the profit. If the company declares a dividend, the shareholders must report the dividend as personal income and pay more taxes.
S Corporations avoid this "double taxation" (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the shareholders. However, like standard corporations (and unlike some partnerships), the S Corporation shareholders are exempt from personal liability for business debt.

S Corporation Restrictions

To elect S Corporation status, your corporation must meet specific guidelines. As a result of the 1996 Tax Law, which became effective January 1, 1997, many of these qualifying guidelines have been changed. A few of these changes are noted below:

Prior to the 1996 Tax Law, the maximum number of shareholders was 35. The maximum number of shareholders for an S Corporation has been increased to 75.

Previously, S Corporation ownership was limited to individuals, estates, and certain trusts. Under the new law, stock of an S Corporation may be held by a new "electing small business trust." All beneficiaries of the trust must be individuals or estates, except that charitable organizations may hold limited interests. Interests in the trust must be acquired by gift or bequest -- not by purchase. Each potential current beneficiary of the trust is counted towards the 75 shareholder limit on S Corporation shareholders.
S Corporations are now allowed to own 80 percent or more of the stock of a regular C corporation, which may elect to file a consolidated return with other affiliated regular C corporations. The S Corporation itself may not join in that election. In addition, an S Corporation is now allowed to own a quot;qualified subchapter S subsidiary." The parent S Corporation must own 100 percent of the stock of the subsidiary.

Qualified retirement plans or Section 501(c)(3) charitable organizations may now be shareholders in S Corporations.
All S Corporations must have shareholders who are citizens or residents of the United States. Nonresident aliens cannot be shareholders.

S Corporations may only issue one class of stock

No more than 25 percent of the gross corporate income may be derived from passive income.
An S Corporation can generally provide employee benefits and deferred compensation plans.
S Corporations eliminate the problems faced by standard corporations whose shareholder-employees might be subject to IRS claims of excessive compensation.

Not all domestic general business corporations are eligible for S Corporation status

These exclusions include:

A financial institution that is a bank;
An insurance company taxed under Subchapter L;
A Domestic International Sales Corporation (DISC); or
Certain affiliated groups of corporations.

Keep in mind, these lists of qualifying S Corporation aspects are not all-inclusive. In addition, there are specific circumstances in which an S Corporation may owe income tax. For more detailed information about these changes and other aspects regarding S Corporation status, contact your attorney or local IRS office

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