In this article, we see some corporation examples and the different types as they have become prominent in our present world. Most of these businesses started as other forms of business entities such as sole proprietorships and partnerships and were later converted into corporations. This conversion usually takes place by liquidating or dissolving the current business entity and transferring its ownership over to the corporation.
What is a corporation?
A corporation refers to a business organization that is owned by its shareholders who elect a board of directors to oversee the activities of the organization. The corporation is liable for the business’s actions and finances, not the shareholders.
This form of business organization can be for-profit just like other businesses and can also take the form of a nonprofit organization just like the typical charitable organization. They possess many of the same or similar legal rights and responsibilities as individuals.
A corporation, also known as a legal person, is a legal entity that is separate from its owners, and under the law, they possess many of the rights and responsibilities of individuals. They can enter contracts, loan and borrow money, sue and be sued, own assets, hire employees, and pay taxes.
A corporation, regardless of its type, is required to name a board of directors before commencing operations and during the annual general meeting, the board of directors is elected by the shareholders. Each shareholder has an entitlement to one vote per share and they are not expected to participate in the daily running of the entity. However, shareholders have the eligibility to be elected as members of the board of directors or executive officers of the corporation.
The board of directors consists of a group of individuals who are elected to be elected to represent shareholders and they are saddled with the responsibility of making decisions regarding major issues affecting the shareholders and they also formulate policies to guide the management as well as the daily operations of the corporation. The elected members of the board of directors owe the duty of care to the shareholders and they are expected to act in the best interests of the shareholders and the corporation.
The precise legal definition of a corporation varies across jurisdictions as well as their types. However, a critical element of a corporation is a limited liability which implies that its shareholders do not take personal responsibility for the debts of a company but can partake in the profits through dividends and stock appreciation. In other words, shareholders do not incur any loss beyond their investments in it. Also, the entity can either be created by an individual or a group of people who share a common goal.
Almost all large businesses such as Microsoft Corp, Coca-Cola Co, and Toyota Motor Corp, are examples of corporations. Some of these entities do business under their names and also under separate business names such as Alphabet Inc which famously does business as Google.
This form of a business entity is created usually by a group of shareholders who share ownership of the organization which is usually represented by their stockholding and pursue a common goal. Most corporations have the goal of returning a profit to their shareholders. However, some take the form of charitable or fraternal organizations which are usually nonprofit or not-for-profit organizations.
Types of corporations
- C corporations
- S corporations
- Nonprofit organizations
The above-mentioned are the three common types of corporations.
The most common type of corporation among business entities is the C corporation which is also known as C-corp. It contains almost all the distinguishing characteristics of a corporation. Owners receive profits and are usually taxed on an individual basis while the corporation itself is taxed as a separate entity, in other words, it is subject to corporate income taxation. So, this simply says that it is a legal structure for a business corporation whereby the owners or shareholders are taxed separately from the entity. In essence, the system of taxation brings about a double taxation system.
Owners and shareholders enjoy the right or liberty to frame legal structures in order to safeguard their assets and interest. C-corps have permanent existence as well as improved credibility in the market. Even as owners change and members of the management are replaced, the business continues to exist.
They can be compared with the S type of corporations and LLCs which also separate a company’s assets from its owners but have different structures and tax treatment. It is important to note that C-corps make corporate tax payments on earnings before distributing their profits to shareholders in the form of dividends. Although double taxation is an unfavorable outcome, the ability to reinvest profits in the company at a lower corporate tax rate is advantageous.
It is required for a C corporation to hold at least one meeting yearly for shareholders and directors and minutes are required to be maintained in order to display transparency in carrying out business operations. It must also keep voting records of the company’s directors as well as a list of owners’ names and their percentages of ownership. The business must further have company bylaws on the premises of the primary business location, they usually file annual reports, financial disclosure reports, and financial statements.
Although a C-corp has many members, it is required to register with the Securities and Exchange Commission (SEC) upon reaching specific thresholds. The ability of the corporation to offer shares of stock allows it to obtain large amounts of capital which may fund new projects as well as future expansions.
This type of corporation, however, has drawbacks. One of these is that the filing of articles of incorporation can be more expensive than other business structures and it incurs greater legal fees. Also, they are subject to greater legal fees and they are also subject to greater regulatory scrutiny which has the capacity to increase the company’s legal expenses.
As seen above, there are also tax considerations, and the profits for this type of business entity are taxed twice. First is when the company files its income taxes and second is when the profits have been distributed as dividends. Unlike an S corporation, shareholders cannot deduct business losses on their tax returns.
An S-corp is a business structure that has the permission under tax code to pass its taxable income, credits, deductions, and losses directly to its shareholders. This type of corporation provides it with more certain advantages over the C corporation.
The S corporation type is only available to small businesses that have 100 or fewer shareholders and should have only one class of stock. It is usually an alternative to the limited liability company also known as LLC. With this, both this business entity and the limited liability companies are known as “pass-through entities” because they do not pay corporate taxes but rather pay their shareholders who take responsibility for the taxes due.
Having said this, S-corporations derive their name from Subchapter S of the Internal Revenue Code, under which they have elected to be taxed. Because of its nature, it is given special tax benefits under 2017’s Tax Cuts and Jobs Act. It is however liable on the corporate level for taxes on specific built-in gains and passive income. Aside from its status, it is similar to any other corporation. It is a for-profit company that is incorporated under state corporation laws as well as governed by the same.
Just like a C-corp, the S-corp provides similar liability protection, ownership, and management advantages. Also, it is required to observe internal practices and formalities which include having a board of directors, writing corporate bylaws, conducting shareholders’ meetings, and keeping minutes of significant company meetings. The shareholders of S corporations report income, gains, and losses from the entity on their individual tax returns and they pay taxes at their ordinary income tax rates.
The fact that the money comes to them free of corporate tax makes it possible for them to avoid double taxation on any income or earnings from the corporation which is a big advantage. Another advantage attached to the S-corp is the fact that saving money is beneficial, especially in cases whereby the business is in its early years. Also, the status of this entity has the capacity to lower the personal income tax tab for business owners as well.
By characterizing the money they receive from the business in the form of salary or dividends, the owners of S corporations often lower their liability for self-employment tax. The corporation’s status generates deductions for business expenses and wages paid to its employees. Shareholders can also be employees of the company, earn salaries, and receive corporate dividends that are free of tax if the distribution does not exceed their stock basis. If the dividends exceed the stock basis of a shareholder, the excess will be taxed as capital gains, however, these are taxed at a lower rate than ordinary income.
Other advantages attached to the S-corp include the ability to transfer interests or adjust property basis without having to face adverse tax consequences or having to comply with accounting rules that are complex. The status of such business entities may also establish credibility with potential customers, employees, suppliers, and investors by showing the owner’s formal commitment to the company.
One of the drawbacks of this type of corporation is that the Internal Revenue Service scrutinizes how they pay its employees. This is because of the fact that they can disguise salaries as corporate distributions to avoid paying payroll taxes. Also, it must pay reasonable salaries to shareholder-employees for the services they rendered before making any distributions. When it comes to making distributions to stakeholders, it is required for the S corporation to allocate profits and losses strictly on the basis of the percentage of ownership or number of shares that each individual shareholder has.
On rare occasions, the internal revenue service may terminate the Subchapter S status of an S-corp if it either fails to properly allocate profits and losses or makes other noncompliance moves such as mistakes in carrying out an election, consent, notification, stock ownership, or filing requirement However, a swift rectification of noncompliance errors has the capacity to avert any adverse consequences.
One critical thing to note is that the business of setting up an S-corporation type requires time and money. It is compulsory for the business owner to submit articles of incorporation with the secretary of state in the state where their company is based. It is also required for the corporation to obtain a registered agent for the business and pay other fees that are associated with incorporating itself. In many states, owners make payments of annual fees, a franchise tax as well as other miscellaneous fees. These charges are, however, not expensive and may be deducted as the cost of doing business or operating expenses.
All investors receive dividends and distribution rights irrespective of whether the investors possess voting rights. The limits placed on the number and nature of shareholders might prove burdensome for a rapidly growing business that wants to attract venture capital or institutional investors.
The third type of corporation is the nonprofit corporation. It refers to an organization formed with the purpose of serving the public good rather than purely for the creation of profit itself as businesses aim to do. This is mostly used by educational, charitable, and religious organizations to operate without a profit-generating motive. With this, a non-profit organization is exempted from tax payments which is the greatest advantage of choosing to set up this form of an organization. This gives it an advantage over the other types of corporations and with this, any contributions, donations, or revenue received are retained in the entity to spend on operations, expansions, or future plans.
The most common tax exemption for the not-for-profit type of corporations comes from Internal Revenue Service (IRS) Code Section 501(c)(3), it is for this reason that such organizations are usually called 501(c)(3) corporations. The process of creating a nonprofit corporation reflects that of starting a business corporation for profit purposes. However, there are unique advantages and disadvantages that have to do with choosing this form of legal structure.
One of the advantages is that there are no federal or state taxes on the income earned by a nonprofit. Another advantage is that it receives donations from members of the general public. It can apply for grants as well as receive them especially free money to support its cause.
Also, the members of the board of directors of this corporation type are exempt from personal liability for corporate debts just as it is with other corporations that are established with the profit-making aim. In cases whereby the building is bought or sold, there are no real estate taxes applied. It is possible to air public service announcements (PSAs) for free on TV and radio stations that are willing to accept them.
While the advantages are significant, there are disadvantages as well and one of them is that members of the board of directors cannot receive payment for their service, they have to be volunteers. Also, if such an organization shuts down or is closed down, its assets will not be distributed among its board members but rather have to be given to another nonprofit.
Essentially, the management and creation of a nonprofit corporation are done much like a for-profit corporation. The exception is that instead of dividing the profit at the end of the year among the employees or shareholders as public corporations do through dividends, nonprofit corporations reinvest any money earned back into their own operations to serve more people.
Examples of the nonprofit corporation include legal aid societies, labor unions, some governmental agencies, volunteer organizations, public clinics, and hospitals.
C corporation vs S corporation
Both S-corps and C-corps are created in the same way but the area of difference is in owner limitation and tax purposes. Before looking at the differences, both C corporations and S corporations offer limited liability protection and their process of incorporation is similar and these two types of corporations are established with profit motive.
As stated above, one major disadvantage that the C-corp has is the fact that profits are taxed twice, that is at the corporate level and after shareholders have received their dividends. On the other hand, an S-corp is a pass-through entity meaning that it is not subject to corporate income taxes, profits are rather taxed at the shareholder level.
Another difference between these two types of corporations is that for S-corps, there are greater restrictions on ownership (100 or fewer shareholders) while a C-corp can have an unlimited number of shareholders. Also, an S-corp cannot be owned by a C-corp, other S-corps, or an LLC.
- J.P. Morgan Chase
- Domino’s Pizza
- Exxon Mobil
- General Motors Corporation
The above-listed are some corporation examples, we give a brief explanation of each below.
Amazon is a corporation example that came into existence in 1994 and it has become a world leader in e-commerce as it has provided facilities to order products at home. This company provides millions of products on its website that consumers can order and these ordered products can be delivered to their doorstep. With this, the company has become the largest retailer as well as one of the favorite stocks on the exchanges. Amazon is a C corporation.
J.P. Morgan Chase
Another example of a corporation is JP Morgan Chase & Co. which is said to be one of the oldest financial institutions in the USA and started in 1799. It has an annual revenue that is worth more than $105 billion and it boasts of maximizing the value of shareholders and a return on assets ratio at a maximum of 1.01% in the financial sector. Also, this firm is said to cater to the needs of customers which includes both retail banking and corporate banking, trading desks, underwriting, risk management, investment management, and others.
Microsoft is an example of a C Corporation that was started by Bill Gates started in 1975 and built a software called Windows, which we use today. The company went ahead to build Microsoft Office (MS Word, Excel, Powerpoint, Outlook) and other software that almost every company in the world as well as professionals make use of. Currently, Satya Nadela is leading the company and it is said to have earned a revenue of $110 billion in 2018 with a 14.28% revenue growth.
The founder of this company, Bill Gates, and his spouse Melinda Gates have been involved in many social causes worldwide through their foundation known as the Bill and Melinda Gates Foundation. They work towards uplifting people from hunger, poverty, and health problems. We can see this foundation as an example of a nonprofit corporation because it is a charitable organization aimed at reaching out to the less-privileged.
The popular Google is another corporation example, it is a multinational technology company that is mainly known for its search engine, Gmail, google maps, youtube, etc. It has a number of products including advertising services, cloud computing, cloud computing, and software. Sergey Brin and Larry Page founded the company in 1998. Although Google is said to be a limited liability company, it is an S corporation.
In April 1976, Steve Jobs founded Apple which has become a tech giant and millions of people around the world make use of its products such as Mac, Ipad, iPhone, and other smart devices so much that tech enthusiasts await the launch of the new product. Apple, is another example of a C corporation that recorded the highest revenue of $265 billion in 2018. The company is currently experiencing expansions in sales and revenue on a yearly basis with the presence of over 500 stores worldwide.
3M, also an example of corporations, started in 1902 and was built through innovation and need-driven products for consumers. It is a company known for its many products and patents, located in Minnesota with worldwide revenue of $23 billion. The products of 3M include reflective materials like circuits in printers and cellphones, dental supplies, medical-related products, safety products, and industrial materials such as tapes and adhesives.
Domino’s Pizza started in 1960 in Michigan has over 8,300 stores worldwide which includes company-owned and franchised stores, and it has a revenue worth more than $2.7 billion.
This is said to be the world’s largest oil company as well as one of the largest publicly traded companies. Exxon Mobil as a an example of business corporation is involved in the exploration, production, transportation, and supply of oil and gas. The company’s oil refineries have the capacity to produce 6 million barrels daily to be transported to about 100 countries and operate under different brands such as Exxon, Esso, and Mobil. Exxon Mobil is a C corporation example.
General Motors Corporation
General Motors Corporation started in 1908 in Detroit, it is also known as GM. Looking at this corporation example, it specializes in automobiles and is ranked among the top 10 fortune 500 companies. It manufactures vehicles in 37 countries with sales of over 10 million vehicles. Also, they have several brands such as Chevrolet, GMC, Isuzu, Buick, Cadillac, Opel, and Holden.
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