When forming a corporation, you have several options beyond the basic corporate structure. Each type offers different tax treatments, ownership rules, and operational requirements. Understanding the differences between S-Corps, C-Corps, B-Corps, and other corporate forms helps you choose the structure that best fits your business goals.
Overview of Corporation Types
| Type | Best For | Key Feature |
|---|---|---|
| C-Corporation | Growth-focused businesses seeking investors | Unlimited shareholders, double taxation |
| S-Corporation | Small businesses wanting tax savings | Pass-through taxation, ownership limits |
| B-Corporation | Mission-driven companies | Certified social/environmental commitment |
| Benefit Corporation | Legally mandated social purpose | Stakeholder consideration required by law |
| Close Corporation | Family businesses, small groups | Fewer formalities, restricted stock transfers |
| Professional Corporation | Licensed professionals | Practice-specific liability protection |
| Nonprofit Corporation | Charitable organizations | Tax-exempt status, no private ownership |
C-Corporation
A C-Corporation is the default corporate structure in the United States. When you incorporate without making special elections, you form a C-Corp.
Key Characteristics
- Separate tax entity: The corporation pays taxes on profits at the corporate rate (21% federal)
- Double taxation: Shareholders also pay taxes on dividends received
- Unlimited shareholders: No restrictions on the number or type of owners
- Multiple stock classes: Can issue common and preferred shares
- Foreign ownership: Non-U.S. citizens and entities can own shares
Best For
- Businesses planning to raise venture capital
- Companies with IPO aspirations
- Businesses needing complex ownership structures
- Companies wanting to retain earnings for growth
Example
A tech startup planning to raise Series A funding from venture capitalists would typically form a C-Corp. VCs prefer this structure because they can receive preferred stock with special rights and liquidation preferences.
S-Corporation
An S-Corporation isn’t a different type of corporation—it’s a tax election. Any eligible C-Corp or LLC can elect S-Corp status by filing IRS Form 2553.
Key Characteristics
- Pass-through taxation: Income passes to shareholders, avoiding corporate-level tax
- Self-employment tax savings: Distributions aren’t subject to self-employment tax
- Ownership restrictions: Maximum 100 shareholders, U.S. citizens/residents only
- Single stock class: Only one class of stock permitted
- Calendar year: Must generally use a calendar tax year
Best For
- Small businesses with steady profits
- Owner-operated companies looking to reduce self-employment taxes
- Businesses with simple ownership structures
- Companies planning to distribute most profits to owners
Example
A consulting firm earning $200,000 annually with two partners might elect S-Corp status. The owners can pay themselves reasonable salaries and take the rest as distributions, potentially saving thousands in self-employment taxes.
B-Corporation (Certified B-Corp)
A B-Corporation is a certification granted by B Lab, a nonprofit organization. It’s not a legal structure but a certification that any type of corporation or LLC can pursue.
Key Characteristics
- Third-party certification: Must meet rigorous social and environmental standards
- B Impact Assessment: Score of 80+ points required across governance, workers, community, environment, and customers
- Transparency: Required to publish annual impact reports
- Recertification: Must recertify every three years
- Annual fee: Based on company revenue ($1,000 to $50,000+)
Best For
- Mission-driven companies wanting third-party validation
- Businesses competing for socially conscious consumers
- Companies attracting impact investors
- Organizations building brand differentiation through values
Example
Patagonia is a certified B-Corp, using the certification to validate its commitment to environmental sustainability and fair labor practices.
Benefit Corporation
A Benefit Corporation is a legal corporate structure available in most U.S. states. Unlike B-Corp certification, it’s an actual entity type recognized by state law.
Key Characteristics
- Legal structure: Registered with the state as a Benefit Corporation
- Stakeholder governance: Directors must consider impact on all stakeholders, not just shareholders
- Public benefit: Must pursue a general public benefit alongside profit
- Benefit report: Annual report on social/environmental performance required
- Legal protection: Directors protected when balancing profit and purpose
Best For
- Entrepreneurs who want purpose embedded in corporate DNA
- Companies wanting legal framework for stakeholder consideration
- Businesses seeking protection for mission-driven decisions
- Organizations planning to remain mission-focused long-term
B-Corp vs Benefit Corporation
| Feature | B-Corp (Certification) | Benefit Corporation (Legal Structure) |
|---|---|---|
| Type | Third-party certification | State-recognized legal entity |
| Requirements | B Impact Assessment (80+ score) | State filing, benefit purpose |
| Cost | Annual fee ($1,000-$50,000+) | State filing fee only |
| Verification | B Lab audit | Self-reporting in most states |
| Availability | Any eligible business | States with benefit corp laws |
Note: A company can be both a Benefit Corporation (legal structure) and a Certified B-Corp (certification).
Close Corporation
A Close Corporation (also called a Closely Held Corporation) is designed for small groups of shareholders who want simplified governance.
Key Characteristics
- Limited shareholders: Typically capped at 30-50 shareholders (varies by state)
- Restricted stock transfers: Shares cannot be freely sold to outsiders
- Relaxed formalities: May operate without a board of directors
- Shareholder agreements: Often governed by agreements similar to partnership
- No public trading: Stock cannot be listed on exchanges
Best For
- Family-owned businesses
- Small groups of investors operating together
- Businesses wanting partnership-like flexibility with corporate protection
- Companies that want to restrict outside ownership
Example
Three siblings inheriting their parents’ manufacturing business might form a close corporation. They can operate informally while maintaining liability protection and preventing outside parties from acquiring ownership.
Professional Corporation (PC)
A Professional Corporation is designed specifically for licensed professionals in certain fields.
Key Characteristics
- Licensed owners only: Shareholders must hold appropriate professional licenses
- Practice-specific: Limited to certain professions (varies by state)
- Liability nuances: Owners protected from others’ malpractice, not their own
- State variations: Requirements differ significantly by state
- Special designations: Uses “PC,” “P.C.,” or “Professional Corporation”
Professions Requiring PCs
Depending on state law, these professions often must use professional corporations:
- Physicians and surgeons
- Dentists
- Attorneys
- Accountants (CPAs)
- Architects
- Engineers
- Veterinarians
- Psychologists
Liability Protection
Professional corporations provide unique liability protection:
- Protected from: Business debts, other professionals’ malpractice in the firm
- Not protected from: Your own professional negligence or malpractice
Example
Three doctors forming a medical practice would create a Professional Corporation. Each doctor is protected from personal liability if a partner commits malpractice, but remains personally liable for their own professional negligence.
Nonprofit Corporation
A Nonprofit Corporation is formed for purposes other than generating profit for owners, typically charitable, educational, religious, or scientific purposes.
Key Characteristics
- No private ownership: No shareholders or stock
- Tax-exempt potential: Can apply for 501(c)(3) or other tax-exempt status
- Mission-driven: Must operate for stated exempt purpose
- No profit distribution: Surplus must be reinvested in the mission
- Public benefit: Assets must remain dedicated to exempt purposes
Best For
- Charitable organizations
- Religious organizations
- Educational institutions
- Social welfare organizations
- Trade associations
501(c)(3) Status
Most nonprofits seek 501(c)(3) status for:
- Federal income tax exemption
- Tax-deductible donations for contributors
- Potential state tax exemptions
- Access to grants restricted to nonprofits
Choosing the Right Corporation Type
Consider Your Goals
If you want to raise investment capital:
- C-Corporation for venture capital or IPO plans
- S-Corporation if keeping it small with U.S. investors
If you want tax efficiency:
- S-Corporation for pass-through taxation and self-employment savings
- C-Corporation if retaining earnings and providing extensive benefits
If you have a social mission:
- Benefit Corporation for legal stakeholder commitment
- B-Corp certification for third-party validation
- Nonprofit if no private ownership is intended
If you’re a licensed professional:
- Professional Corporation as required by state law
- Professional LLC where permitted
If you want simplified operations:
- Close Corporation for small ownership groups
- S-Corporation for smaller businesses
Decision Flowchart
- Are you a licensed professional? → Consider Professional Corporation
- Is your purpose charitable/educational? → Consider Nonprofit Corporation
- Do you plan to raise VC or go public? → C-Corporation
- Do you have a strong social/environmental mission? → Benefit Corporation or B-Corp
- Do you want pass-through taxation? → S-Corporation
- Is your business family-owned with few owners? → Close Corporation
- None of the above? → Standard C-Corporation or LLC
State-Specific Considerations
Corporation types and requirements vary by state:
- Close corporations: Not available in all states; rules differ where available
- Benefit corporations: Available in about 40 states plus D.C.
- Professional corporations: Regulated professions vary by state
- S-Corp elections: State tax treatment may differ from federal
Always check your state’s specific requirements before choosing a corporate structure.
Converting Between Types
Common Conversions
| From | To | Process |
|---|---|---|
| C-Corp | S-Corp | File IRS Form 2553 |
| S-Corp | C-Corp | Revoke election or violate requirements |
| Corporation | Benefit Corporation | Amend articles, shareholder approval |
| LLC | Corporation | Formal conversion or merger |
Important Considerations
- Tax implications of conversions can be significant
- Some conversions require shareholder approval
- State filing requirements apply
- Timing matters for tax elections
Frequently Asked Questions
Can a corporation be multiple types?
Some combinations are possible. For example, a company can be a C-Corp, a Benefit Corporation, and a certified B-Corp simultaneously. However, you can’t be both an S-Corp and C-Corp.
Which type of corporation pays the least taxes?
S-Corporations often provide the best tax treatment for small business owners due to pass-through taxation and self-employment tax savings. However, the best choice depends on your specific situation.
Do I need a lawyer to form a corporation?
While not legally required, consulting an attorney is advisable, especially for professional corporations, benefit corporations, or complex ownership structures.
Can I change my corporation type later?
Yes, most conversions are possible, though they may have tax consequences and require specific procedures. Planning ahead is more efficient than converting later.
Next Steps
- Identify your priorities: Growth, taxes, social mission, or simplicity?
- Check state requirements: Rules vary significantly by state
- Consult professionals: An attorney and accountant can provide personalized guidance
- File formation documents: Register with your state
- Make necessary elections: File Form 2553 for S-Corp status if desired
Choosing the right corporation type is a foundational decision that affects taxes, liability, governance, and growth potential. Take time to understand your options and select the structure that aligns with your long-term business objectives.