Classification of Corporations

The classification of a corporation depends on its location, purpose, or ownership characteristics.

3. Domestic and foreign corporations:

– A domestic corporation is an entity that does business within the state where it was incorporated: established, headquartered or based. The same corporation would be considered a foreign corporation in all other states or countries.

– A corporation formed in one state but doing business in another is referred to in that other state as a foreign corporation. A foreign corporation does not have an automatic right to do business in a state other than its state of incorporation. It normally must obtain a certificate of authority in any jurisdiction in which it plans to do business. Once the certificate is issued, the powers conferred on a corporation by its home state can be exercised in the other state.

Corporations formed in foreign countries are also called alien corporations.

4. Public and private corporations:

– A public corporation is one formed by the government to meet some political or governmental purpose.

– Private corporations, however, are created either wholly or in part for private benefit. Most corporations are private. Although they may serve a public purpose, such as a public utility does, private corporations are owned by private persons rather than by the government.

5. Publicly held or closely held corporations:

– A publicly held corporation is one whose shares are owned by a large number of people and are widely traded.

– A closely held corporation – one that is owned by a small number of shareholders, who may be subject to restrictions in the transfer of their shares to others.

6. For-profit and nonprofit corporations:

– A for-profit corporation is a corporation that is intended to operate a business which will return a profit to the owners.

– Corporations formed without a profit-making purpose are called nonprofit or not-for-profit corporations. A nonprofit corporation is a corporation formed to carry out a charitable, educational, religious, civic, artistic, literary or scientific purpose. A nonprofit can raise funds by receiving public and private grant money and donations from individuals and companies. Unlike regular corporations, however, nonprofit corporations do not have shareholders or owners. Nonprofits are owned by no one person or group of persons and cannot be sold.

7. S corporations and C corporations. The Subchapter S of the Internal Revenue Code (relating to small business corporations) divides corporations into two groups: S corporations, which have elected Subchapter S treatment, and C corporations, which are all other corporations.

8. Every corporation, when it is first organized is a C corporation. Then certain corporations can choose to qualify under Subchapter S of the Internal Revenue Code (IRC) to avoid the imposition of income taxes at the corporate level while retaining many of the advantages of a corporation. Among the requirements for S corporation status, the following are the most important:

– the corporation must be a domestic corporation;

– the shareholders of the corporation must be individuals; certain trusts and corporations can also be shareholders under certain circumstances;

– the corporation must have no more than one hundred shareholders;

– the corporation must have only one class of stock, although not all shareholders need have the same voting rights;

– no shareholder of the corporation may be a nonresident alien;

– the corporation must not be a member of an affiliated group of corporations;

– in addition, the corporation must agree to a calendar fiscal year to correspond with the tax year for individual tax returns.

If a business is eligible to qualify under Subchapter S of the IRC, then within 90 days of when it was formed, or within 90 days of the next fiscal year, the C corporation must file its S corporation election.