Updated: Mar 7, 2021
In the last business article, we discussed small businesses, but the larger, more well known businesses have a different structure. Another type of business is a corporation. In this article, we will be talking about the basics of corporations.
How They Work
Corporations are businesses that have a separation between employees of the company and shareholders. This means that neither of the groups have authority over the other. The employees may run the company, but have no say in ownership affairs. In contrast, shareholders and investors have control of the ownership of the company, but have little control over daily operations.
In corporations, there are two structures of shareholder ownership: private companies and publicly traded companies. Private companies offer shares to a private group of investors. Theses companies are privately funded and run by their investors. Although shareholders are involved, private companies are not listed on public stock exchanges. On the contrary, publicly traded companies offer shares to the public in a stock market. This gives companies a greater amount of funding due to the larger market. However, investors and shareholders have significantly less power in a company when compared with private companies.
C Corps And S Corps
There are a few kinds of corporations, but we will talk about three of them: C Corps, S Corps, and Limited Liability Companies.
The first one is a general incorporation, or a C Corp. The main takeaway from C Corps is the company is taxed separately from the owners. They are the most common type of corporations. The second one is a S Corp. It is favored by smaller businesses since it combines aspects of sole proprietorships, partnerships, and corporations.
Both C and S Corps also provide limited liability. This means that business owners are not personally responsible for any debts or financial burdens that the company carries.
The main difference between C and S corps are the way that they are taxed. Company revenue and shareholder dividends, or earnings distributed to the shareholders. are taxed separately in C Corps. On the other hand, company revenue and shareholder dividends are taxed together in S Corps.
The third type of corporation is a Limited Liability Company. LLCs combine aspects of both partnerships and corporations. As noted by the name, LLCs also offer limited liability. The biggest advantage of LLCs is they are cheaper to create and run. Also, the way they are taxed varies, unlike C and S Corps.
In summary, corporations are businesses where shareholders are separate from employees. Three types of corporations are C Corps, S Corps, and Limited Liability Companies. Each have distinct characteristics that define the company.
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