Corporation Types

A company may start its operations as a corporate entity, or may incorporate itself into a sole proprietorship or partnership later.

The main reason behind incorporation is that such an entity has access to a larger amount of capital, has a lot more shareholders and hence, the equity capital is much more as compared to a sole proprietorship or a partnership.

So, if the heads of a business realize that they will need more capital than what they have to expand a lucrative business, they will choose to incorporate their organization.

Conversely, if the promoters of a business realize that the running a profitable enough business model requires a lot more start-up capital than what they can afford, they will choose starting a business as a corporation itself. Thus, we can see that incorporation is done based on the specific needs of the business.

Now, the type of a business corporation model also depends upon the specific needs of the business. The business partners or promoters will choose the model that best suits their need.

It may have unlimited shareholders, who are the owners of the company. Since they can sell and buy the shares on the stock market, the ownership of such a corporation is said to be transferable.

The advantage of this model is that the liability of the owners, i.e. shareholders, is limited to the value of their shares. This means, that if such a company goes bankrupt, the shareholders stand to lose only their share in the company and no more. Creditors cannot ask them to sell their personal assets to recover the lost money.

This type of an entity is similar to the general type. The only differences between the two types is that shareholding of this entity can only be between 30-50 people.

Hence, many close corporations may have a lower capitalization than the general ones. But there is an advantage, the original promoters of the organization always retain control over the organization. The persons with a majority stake in the company can exercise more pull over the board decisions.

In the general model, the promoters may lose their majority stake to an outside party. This cannot happen in case of a close model as the majority stake can be controlled by the promoters.

The United States laws allow forming a special type of corporation, known as a Limited Liability Company (LLC). What an LLC basically means is that, it is a sole proprietorship company that enjoys some benefits.

The benefits of an LLC model are that the liability of the owner is limited to the extent of his/her share in the company. Also, the owner of the LLC only has to pay tax on his personal earnings (profit) and no tax is paid by the company.

An LLC enjoys perpetual existence too and will not end with the death of the promoter. The only disadvantage of it is that it does not enjoy high capitalization that a normal corporation does.

With the Tax Reform Act of 1986, existing corporate bodies in the United States were given an offer to convert themselves into an 'S Corporation'.

This new type of model enjoyed advantages related to tax payments. But, there are also several restrictions on this type of organization with respect to the number of shareholders, classes of stock, types of shareholders (business entities are not allowed as shareholders, only particular individuals), and the type of business operations that they can run.