Corporations are one of the most commonly used business entities in the world. Properly set up, corporations limit the liability of the owners (or shareholders) to their investment in the corporation. Without this liability protection, business owners’ personal assets are subject to the debts of the business.
Corporations come in three primary tax forms: C corps, S corps and Not for Profit.
For profit corporations are automatically C corps unless they elect otherwise. C corps are usually larger corporations and are subject to double taxation. That is, the corporation is taxed on its profits, and then the shareholders are taxed on their dividends.
S corps are by far the most common type of corporations. A for profit corporation must make a small business election to be treated as an S corp. To make this election, the corporation must meet certain criteria which primarily have to do with it’s size. An S corp. is treated as a pass-through entity and is not taxed. The shareholders of an S corp. pay taxes on the profits of the corporation on their personal tax returns thus eliminating the double taxation of the C corp.
Not for profit corporations, as the name implies, are formed for purposes other than generating a profit for its owners. These primarily are used for charities and other types of associations.