Overview
In our daily lives, we all interact with lots of different businesses. We might go to the gas station, get groceries, use a website, and scroll through social media - all of these are run by different individuals and businesses. This article will discuss the different types of corporations (basic business structures) and their pros and cons.
It is important to start by realizing that corporations aren't just limited to s, b, & c corporations. In fact, other types of businesses, including Nonprofits, are filed with the government as Non-Profit Corporations. The word Corporation means “a company or group of people authorized to act as a single entity (legally a person) and recognized as such in law.”
Sole Proprietorships (Yes, these are also corporations!)
Sole proprietorships are possibly one of the easiest options for all things business but also come with the most amount of risk. Ever started a lemonade stand? Guess what, you automatically became a sole proprietor! Sole Proprietors don’t have any registration or applications to fill out, instead, they are purely based on you as an individual. This brings a lot of ups and downs with it, which can either be worth it or very risky. Let’s dive in!
Other than the fact that owners of sole proprietorships don’t have to file business registration and other documents, they also get the advantage of being able to file business expenses/taxes with their own taxes. However, as sole proprietorships are so deeply embedded in each individual’s own being (you are basically the sole proprietorship itself), in the case that your business comes across some debt that cannot be paid off by the seizing and possession/sale of your business equipment, creditors may also come after your own personal belongings including your house, car, even furniture! This is quite risky and can turn a lot of people down, which is why a lot of small business owners file for the creation of an LLC or Limited Liability Corporation.
Sole Proprietorships are normally not able to open commercial bank accounts in most cases, and when you file to protect intellectual property, every now and then there may be a confusion between if you as in a living & breathing individual, own the property, or if you as in your business, owns the property. If you also try to get certain types of funding, a lot of people may not be willing to fund a sole proprietorship, as much as they would be willing to fund other types of corporations.
Limited Liability Corporations
You have probably heard of them, and might even know family members that have their own for small businesses they run. As one of the most popular types of corporation which is created, Limited Liability Corporations (or LLC’s) have a lot of benefits and some minor restrictions which make them perfect for small business owners. Let’s take a closer look!
To begin with, LLC’s don’t cost much to form (file the documentations for and to become official). Additionally, owners of the LLC are not responsible for the company's debts and legal obligations. This becomes useful as in the case that their business goes south, creditors will not be able to come after the owner's personal assets (which is not something that sole proprietors allow for). The owners of an LLC are also allowed to file the companies financial results on their own personal tax filings which removes a burden of having to file separately. However one major con with LLC’s is that normally there will be additional state filing fees, paperwork, etc. that will have to be filled out that partnerships and sole proprietorships don’t have to fill out. However, for a lot of people, the minor cost of filing this extra paperwork is greatly outweighed by the enormous benefits and protections of an LLC.
S-Corporations
S-Corporations, mix the benefits of multiple types of corporations into one. Like LLC’s, income can be passed directly to investors/shareholders without the corporation itself having to worry about paying corporate taxes. However, S-Corporations are limited to having 100 shareholders, and can only issue one class of stock (learn about the different types of stock in an upcoming article), the shareholders have to be US citizens, US residents, trusts, estates, or certain tax-exempt organizations. This can feel quite restrictive, but in most cases companies are not fully affected by these rules, and at the point where they meet and need to go over these restrictions, most find it more beneficial to transfer to a C-Corporation structure.
C-Corporations
As the common choice of many large companies and new thriving companies / start-ups, C-Corporations are truly individual corporations which have their own personal identity. As a corporation, it is required to pay corporate taxes, appoint/have a board of directors, issue annual reports, etc. However, it allows for money to be raised more easily as it is strongly favored by investors as the corporation itself has to pay taxes and the taxed profits which are distributed among investors, will not require investors to pay taxes again (this is called a pass-through status). This is a big draw to companies seeking funding as it reduces major headaches and extra work that investors may face. As with most other types of corporations, a C-Corporation also protects investors better from creditors as regardless of what happens to the corporation, no one is allowed to come after the investors in the case of an outstanding balance to still be paid.
B-Corporations
As the newest type of corporation in town, B-Corporations are sometimes confused with Benefit Corporations.
Certified Benefit Corporations are (legally recognized) businesses that have either met or exceeded quite high standards of verified social / environmental performance, legal and financial accountability, public transparency, and are corporations which have made a truly positive impact on the community, customers, staff, stakeholders, etc.
B-Corps on the other hand are not legally recognized but instead certified by B Labs. The certification process for these corporations, although seemingly easy to get through, is actually quite tough as it checks over several major and minor aspects of businesses to see if they truly qualify for the status.
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