5/19/2023
In the United States there are several types of organizations, businesses and corporations, and it is important to know their characteristics. Today we will talk a little about what a corporation is and its basic aspects.
What is a corporation in the USA?
Within the legal context of the United States, a corporation represents an entity in which the shareholders are the owners and the board of directors gives the orders.
This organizational structure has the same rights as natural persons. That is, they can borrow or lend money, hold assets, enter into contracts, and sue or be sued.
SMEs (small and medium-sized enterprises) and other similar businesses use the figure of the corporation to increase external investment and provide protection with limited liability.
This means that the shareholders do not have to respond with their assets when there is a debt that must be repaid or in case the company goes bankrupt. This is what is known as LLC (Limited Liability Company).
Why do corporations attract investors?
The attractiveness of a corporation lies in the taxation system for those who participate in this entity. This means that investors only have to file based on the dividends they receive.
For example, in a Limited Liability Company (LLC) the investor must make a tax contribution according to the percentage of ownership he/she owns. This does not change if the investor in question does not receive any kind of monetary distribution.
You may be interested in: What is the Tax ID Number (TIN)?
LLCs can be organizational structures with some challenges for investors who have the need to pass the interests earned within the partnership itself. On the other hand, holding shares in a corporation facilitates that process.
Composition of a U.S. corporation
Corporations are distinguished from other legal forms by the following aspects:
- Bylaws
- Board of Directors
- Tax options
- Stock and shareholders
- Complex regulations and protocols
- 21% corporate tax rate
Below, we will review some of these elements:
Bylaws
Bylaws are the rules that define how the company will be managed. We can see it as the constitutive document of a company. Its purpose is that those involved have clear procedures and priorities.
These bylaws serve to complement the regulations established by the federal or local government.
Board of Directors
When you form a corporation in the United States, you must choose the number of directors required by state law until the first shareholders' meeting.
The corporate director is in charge of the adoption, amendment and rejection of the operating bylaws. He is also in charge of the election, supervision and removal of officers.
After the legal installation of the corporation, the initial director who has been designated in the formation documents should schedule a meeting. At this first meeting, the director will officially elect the board of directors or key executives (CEO, COO, CIO, CMO, CFO, CTO, etc.).
Shares and shareholders
The share or stock is the unit of ownership within a corporation. Each share represents a percentage of ownership in the company.
Shares may also be structured into classes. Each of these classes has different rights and privileges. A corporation may have multiple classes of stock, each of which may include any number of these assets.
Tax options
We think it is important for you to know that there are 3 types of corporations and each of them is taxed differently.
If you register a non-profit model, it will be designated as such at the state level where you reside. Through this type of corporation, you can apply for tax-exempt status with the IRS under section 503(c).
There is also the C corporation, which includes default taxation by the Internal Revenue Service. This class of organization must contribute a minimum of 21% of its income and dividends received by shareholders must also be declared.
Likewise, a corporation can choose a model S, which allows the owner to avoid double taxation. Unlike the former, this tax option prohibits investors from making a profit, so it is best suited for an LLC.
Differences between an S corporation and a C corporation
In a C or S corporation, taxes are imposed on corporate salary income or dividends received. In terms of differences, we find that:
- S-corporations can only have one type of stock, while C-corporations can have several.
- S corporations cannot be owned by C corporations, other S corporations (with exceptions), LLCs, many trusts or partnerships.
- S corporations have a limit of 100 U.S. shareholders (citizens or residents), while C corporations do not restrict who can be an owner.
Now that you know what a U.S. corporation is, we invite you to ask us about your questions on this topic and many others that we have at Busconomico.
Español: ¿Qué es una corporación en los Estados Unidos?