Special Types of Corporations

Closely Held and Close Corporations

The terms “closely held corporation” and “close corporation” are frequently used interchangeably to refer to a corporation with only a few shareholders and a more relaxed style of governance. Shareholders often serve as both directors and officers of the corporation. Stock of such a corporation is not publicly traded, and many states allow shareholders to do away with many of the corporate formalities.

Foreign Corporation

A Foreign Corporation is a corporation that is incorporated in another state. To do business in a state other that its state of incorporation, a corporation is required to register with that state and receive a “certificate of authority.” Failure to do so prevents the foreign corporation from suing, but not from being sued, in state courts until registered. However, it does not impair the validity of corporate acts or contracts or prevent the corporation from defending any proceeding within the state. Many actions, such as holding board meetings, maintain bank accounts, and selling through independent contractors, do not constitute doing business within a state.

Professional Corporation

A Professional Corporation is a corporation with a purpose that is statutorily limited to the rendering of a professional service. A shareholder in a professional corporation must be a member of the applicable profession. In addition, a professional corporation does not shield an employee from liability arising from her own malpractice. However, it may provide protection against vicarious liability arising from malpractice by other professionals in a corporation.

S Corporation

A corporation is usually subject to tax as a “C corporation,” which is a separate taxable entity from its shareholders, causing the corporation to face double taxation. The corporation pays taxes first on profits and again as shareholders on distributions received from the corporation. However, a corporation may elect to avoid double taxation as an “S corporation,” in which the income and expenses of the corporation are passed through to shareholders (who are then taxed on such items directly). 26 U.S.C. § 1361, et seq.

To become an S corporation for federal tax purposes, a corporation must file Internal Revenue Service (“IRS”) Form 2553, and the IRS must approve the application. Companies that file as S corporations can have no more than 100 shareholders. Only individuals, estates, certain exempt organizations, or certain trusts may be shareholders, and the shareholders must all be either U.S. citizens or resident aliens (nonresident aliens are not permitted). The S corporation may not have more than one class of stock. Each shareholder must consent to the S corporation election for a corporation to become an S corporation.

Benefit Corporation

Many states have enacted benefit corporation acts. A benefit corporation is a for-profit entity with the corporate purpose of creating a general public benefit. Such benefits may include providing services to low-income or underserved individuals or communities, improving human health, preserving the environment, and promoting the arts, sciences, or advancement of knowledge.

It is beneficial to retain experienced and professional attorneys in order to properly incorporate your company. Please call Aziz Legal by phone at (408) 203-4627 or email us at abid@azizlegal.com.

This article is merely informational and is not intended to be used as legal advice. Use of any information from this article is for general information only and does not represent personal legal or tax advice, either express or implied. Readers are encouraged to consult Aziz Legal, or another attorney, for any specific legal matters.