Different Types of Corporations and Incorporating Your Startup

In this blog, we’ll discover the essential types of corporations and a clear roadmap for incorporating your startup, along with some significant challenges.

Incorporating a startup is a crucial step in starting your business. The process often focuses on filling out documents, paying a fee, and ensuring it is subjected to specific laws and regulations.

However, one thing that makes startup incorporation more challenging is choosing the legal structure that best suits your startup. There are several types of corporations out there and each has its own set of benefits and drawbacks.

Choosing a suitable corporate structure for your startup goes beyond paperwork — it's about strategically navigating legal and tax obligations that help your business in the long run. So, are you prepared to strategically position your business for long-term success from the outset?

Let’s explore the different corporation types for your business and choose the right one to maximize profits and enhance outcomes.

What is a Corporation?

A corporation can be defined as a legal entity created by an individual, a group of individuals, or shareholders to grow their business and operate for profit. A typical corporation can own assets and resources, have business ideas, hire employees, sign confidential contracts, and exercise individual and corporate rights.

The creation of a business corporation includes a legal process known as startup incorporation (or simply incorporation). In this process, legal documents comprising the primary purpose, objective, name and location, types and number of stocks issued, etc., are specified and drafted. But how many types of corporations are there? Let’s find out in the next section.

What Are the Different Types of Corporations?

There are primarily six types of corporations that business owners can find in the United States. It includes:

1. Limited Liability Company (LLC)

The next corporation type in the list is a Limited Liability Company, or LLC. This type of business startup focuses on the separation of people in the company and their liabilities. An LLC business can choose almost any legal structure based on its needs. Simply put, it can have a board of directors, imitate an equal partnership, or have features of both.

Some of the prominent advantages of opting for LLC include:

• The startup incorporation cost is relatively low.
• You get to record the financial results of the company in your tax filing.
• Owners of an LLC are not liable for legal obligations or debts of the company.

Besides benefits, there are some drawbacks to incorporating an LLC, too. Here are its disadvantages:

Most likely, you will be paying self-employment taxes.
Losing a member can dissolve an LLC.
It’s rather tough to find investors for startups in an LLC setup.

2. S-Corporations (S-corps)

S-Corporations (or S-Corporations) are primarily small businesses that provide you the advantage of startup incorporation with the tax-exempt privileges of partnerships. Similar to an LLC business, you can transfer income directly to shareholders without worrying about federal corporate taxes.

While S Corps enjoy certain tax benefits, they must remain cautious as the IRS often pays extra attention to these types of businesses. If any startup corporation wishes to convert their business into S corp with the ‘IRS consent’, they must submit Form 2553 to the IRS and wait to receive their approval.

Also, certain types of businesses, specifically companies in the insurance domain and certain other financial verticals, can not become S corporations. Some of the notable drawbacks of opting for S corporations include:

Some of the notable drawbacks of opting for S corporations include:

• An S Corp can only issue one class of stock. However, they may have differences in voting rights associated with the shares, not affecting the single-class stock rule.
• This type of business can only comprise 100 shareholders. These shareholders must be individuals, certain trusts, or estates but cannot be partnerships, corporations, or non-resident alien shareholders.
• S Corps are only open to US-based shareholders, meaning only US residents, specific trusts, organizations, and estates.

3. C-Corporations (C-corps)

Today, many startups incorporate their business based on C corporations (or C Corps). The same business structure is used by several big corporations in the United States, including Apple, Google, etc. However, the outcomes of adopting C-corps can result in different outcomes for different businesses.

This type of business is a completely separate legal entity responsible for issuing annual financial reports and paying corporate taxes. Besides, C-corporations also need to appoint a board of directors for smooth business functioning.

It is one of the types of corporations that might appear complex. However, for businesses looking for funding options for startups, a C Corp is typically the most suitable option. This is one of the reasons many successful business owners often recommend establishing C Corp as a startup corporation as early as possible.

4. Nonprofit Corporations

This type of corporation is similar to the traditional corporation structure. A board of directors and donors usually runs them. Contrary to donors, the board of directors typically have control over the functions and decisions of the company. However, these corporations don’t generate profit like the above ones.

Their motive is to invest whatever money they have — whether leveraged from donors or by selling products or services — in societal or environmental welfare. In return, they are exempted from taxes.

These corporations are typically used for charitable, educational, environmental, scientific and religious objectives. They have to follow organizational rules similar to a regular C corporation. 

5. B-Corporations (B-Corps)

B corps certified companies go through and pass an assessment process to review their impact on workers, community, customers, and environment. The certification is intended to provide companies with a concrete framework, especially for companies, that are committed to benefitting the society. These companies have shareholders that are focused on making the society a better place while earning profits in parallel.

To summarize, basically, B Corps are different from traditional businesses in that they focus on positive impact and sustainability as integral parts of their business model, rather than as secondary considerations.

6. Closed Corporations 

Closed Corps, or Closely Held Corporations, are companies that have their shares held by a limited number of people in the group. These members often are either family members of founders, or some investors brought on board through networking.

Unlike public corporations, closed corporations do not sell their stock to the general public via public exchanges. One of the key characteristics of a closed corporation is that there are restrictions on the transferability of shares to preserve the closed nature of the corporation.

Closed Corporations also do not have to adhere to strict regulations like publicly traded companies. This simplifies running businesses in terms of governance compliance.

What Are the Benefits of Incorporating a Startup?

When business owners pick one option from different corporation types and incorporate startups based on their innovative approach, they get substantial benefits. Below are some of the advantages of incorporating a startup.

1. Limited Liability

The major benefit of incorporating a startup is that your business and personal assets are kept separate. In case businesses face any legal issues or incur high debts, personal assets, such as house property and personal savings, are typically secured. This is specifically crucial for startup businesses as over 90% of new startups in the US fail and almost 3,200 went down in 2023 alone.

2. Seamless Transfer of Ownership

One of the best things about incorporated businesses is that they can easily and conveniently change ownership and add more co-owners. These different types of businesses offer legal structures that allow seamless issuance of shares. Consequently, businesses get a flexible way to transfer ownership stakes, reward employees based on stock-based compensation, and increase capital by selling shares to investors.

3. Easy Access to Capital

Owning a corporation type of business makes it easier to raise the capital. Investors seem more interested in putting money into a corporation than an individual entity. Finding angel investors for startups becomes easier when your business falls under one of the types of corporations. Also, financial institutions find it less risky to put money into an incorporated entity.

4. Tax Benefits

Another benefit of choosing any one of these types of businesses is that the business income of incorporated startups is treated more favourably in terms of corporate taxes. Apart from this, businesses in these types of corporations can show a hefty amount of expenses as deductions.

5. Credibility

Adding “LLC” or “Inc.” in your startup’s business name can add a layer of legitimacy to your corporation. This can immensely help gain the trust of your potential clients, partners, and customers and increase your brand loyalty. This is one of the prominent marketing techniques for startups that incorporated businesses often follow.

6. Formal Structure and Longevity in Business

Apart from sole proprietorship and general partnerships, almost all types of corporations have a set organizational structure. It means they usually have a board of directors that helps simplify the decision-making and strategic planning. Also, even if the owner leaves an incorporated business or dies, the corporation thrives easily with a legalized and set organizational structure.

Challenges of Incorporating a Startup

Incorporating a startup is not a complex process. Several startup businesses find it relatively convenient and straightforward to establish their business as a legal entity in the United States. However, still many entities face obstacles to incorporating startups. 

Below are some of the challenges they usually face:

1. Initial Expenses

As a new business with a minimal fixed budget, it could be tough to spend hefty amounts of money on filing fees. Moreover, they need legal consultation, especially in the initial phase of business incorporation which can further add to the initial costs. That’s why often VCs help startup founders during this phase.

2. Excessive Paperwork

The initial process of startup incorporation comprises a good deal of paperwork and administrative responsibilities. It also includes analyzing compliance reports and filing initial articles of incorporation, increasing the further burden of the new players.

3. Tax Complexity

As already mentioned, incorporating a startup in the United States comes with several benefits. However, the tax filing process also introduces businesses to more complex requirements. This makes startup companies hire an accountant to file and manage taxes, incurring additional expenses for them.

4. Legal and Corporate Regulations

Companies are subject to a set of local, state, and federal rules and regulations to do business in the US. This compliance management can be complicated and time-consuming. Also, if mishandled, it can lead businesses to serious legal troubles or hefty penalties.

5. Public Scrutiny

Depending on the type of corporation your business has invested in, you may need to disclose information related to finances and other sensitive records. These unexpected disclosures can lead to increased public scrutiny, which is harmful to businesses.

6. Employee Benefits

Offering certain benefits to employees, such as stock options and retirement plans can increase the additional burden on the startups. To take care of these issues, extra administrative efforts are required which can be a complex undertaking.

How to Incorporate a Startup?

Incorporating a startup focuses on the steps that help establish businesses as a separate entity as per legal norms. Below is the step-by-step process that answers your “how to incorporate a startup business query”.

1. Research and Decide on the Most Suitable Type of Business Structure

Based on the business requirements and financial considerations, the decision-makers of a startup need to choose a suitable one. To name four types of corporations — sole proprietorship, limited liability company, S crops, and C corps — any of them can work best for the corporations.

2. Pick a Business Name

The next step is choosing your startup corporation name. However, this step needs additional attention as the selected name must be available in the US State. They also check for a specific domain name if they want a business website in the future.

3. Name and Trademark Registration

Once a name has been picked, the business must register it with the specific US government agencies. Apart from this, they also need to file for a trademark registration to secure their business name.

4. Appoint a Reliable Agent

No matter what type of business you opt for, you must appoint a legal representative to collect and check official documents on behalf of the corporation.

5. Draft and File Corporation Articles

There is a specific set of documents that authorize a business as a corporation in the chosen US State. They must be filed with the office of the Secretary of State or another suitable state agency.

6. Get an EIN

In the United States, an EIN (or Employee Identification Number) is the business equivalent of an SSN (Social Security Number). An incorporated startup will need an EIN to open a business bank account and tax-filing purposes.

7. Open a Business Bank Account

Personal expenses must be kept separate from business finances. For this purpose, it is crucial to open a bank account that is solely used for business transactions.

8. Establish Ownership and Issue Stocks

To signify ownership in a corporation startup, you need to issue shares to your shareholders. You can also hire a financial consultant or advisor to maintain accurate records of the same.

9. Hold an Initial Meeting with the Board of Directors

This meeting plays an imperative role in the establishment of a startup business. From appointing officers to approving bylaws and setting the fiscal year, all the crucial tasks take place within this meeting.

10. Obtain Necessary Licenses and Business Permits

This is another crucial part that deals with a profound research of federal, state and local licenses and permits to run a business successfully. Therefore, it is essential to get them before initiating your business activities.

11. Check and Register for State and Local Taxes

Although these different types of corporations get several tax-related benefits, it is important to check and register for any state or local taxes that apply to their business. It can include sales tax, employee withholding tax, etc.

12. Set Up Advanced Accounting and Record-keeping Systems

Up-to-date, accurate, and convenient bookkeeping is key. For this, businesses can keep a professional accountant or use advanced software to monitor income, cash flows, expenses, and taxes.

13. Maintain Corporate Compliance

To ensure that your business stands in good and healthy legal standing, make sure to keep accurate and updated records, comply with legal requirements, file taxes timely, and hold annual meetings.

Best Practices to Incorporate Your Startup

The process of startup incorporation can become easy and seamless by following the right practices. Below are some of the best practices to incorporate startup businesses.

1. Choose the Right Entity

Pick a legal structure that aligns with your set and specific business goals. Ensure it provides maximum liability protection. This decision profoundly impacts the legal and financial aspects of your business. Different structures include sole proprietorship, partnership, LLC, S corporations and C corporations. 

2. Build a Robust Business Plan

Outline your objectives in the beginning and define your target market. Present financial projections aligning with these objectives to guide growth effectively. These elements will steer your corporate strategy and help thrive your business. 

3. Secure Funding

To grow your business, it’s imperative to explore funding options such as investors, loans, or grants for your startup. These can help finance your business ideas and operations effectively. Finding the right funding source is important for sustainable growth. Evaluate each option carefully based on your business needs and goals.

4. Comply with Regulations

Ensure legal compliance with local, state, and federal regulations. Avoid penalties by following all required guidelines. This approach safeguards your business operations effectively. It ensures smooth functioning and mitigates potential risks.

5. Protect Intellectual Property

Protect your business ideas, projects, products, or services with authorized patents, trademarks, or copyrights. Safeguarding your intellectual property ensures complete legal ownership and prevents unauthorized use of your business resources.

When to Incorporate a Startup Business?

Well, the answer to this question is as soon as possible.

The earlier businesses incorporate startups, the better their chances of getting protected against personal liability. When your business turns into a corporation, it presumes this risk beforehand. As a result, your finances most likely, will remain safe and not be impacted by any third-party claims.

When Do You Need Investors for Your Startup Business?

You need investors at almost every step of your business. From business initiation to innovating a product, investors help you get all the resources and financial assistance you want during a specific process.

But they also need trust and credibility to invest in a new startup business. That’s why, they often insist — from angel investors to venture capitalists — to incorporate. Moreover, your business idea must be impactful enough to entice investors to invest in you.

For instance, to find app investors to raise money for your mobile application startup, your concept must be unique and appealing. Especially when the mobile app domain is thriving at an unprecedented rate, this becomes a crucial aspect.

Three Successful Startups That Transitioned Into Corporations

Thousands of startup businesses turned into big companies, below are examples of successful startups that transitioned into established corporations.

1. Uber

Uber started in 2009 as a startup, aiming to revolutionize taxis with a ride-sharing app. It expanded globally, offering a convenient alternative to traditional taxis. Uber's model disrupted transportation, leading to rapid growth. Today, Uber is a major corporation, providing ride-sharing, food delivery, freight, and more worldwide. Uber's success story highlights how innovative tech solutions can reshape entire industries. 

2. Groove

Groove started small, focusing on customer support tools. Its flagship product, a user-friendly help desk software, gained popularity for efficiency. Groove's commitment to small businesses' customer support led to its success. Over time, it evolved into a comprehensive platform used globally by thousands of businesses. Groove's growth reflects its dedication to improving customer service solutions continuously.

3. Dropbox

Dropbox was founded in 2007 to simplify file sharing and storage. Initially targeting individuals and small teams, it offered seamless cloud storage solutions. Its user-centric approach quickly attracted millions, leading to rapid expansion into business services. Today, Dropbox is a major player in cloud storage, serving individuals and enterprises with diverse productivity tools. Over the years, it has evolved into a well-established corporation known for its reliability and innovation in digital storage solutions.

Wrapping Up

If you have made it to this point, you have probably understood how many types of corporations there are, their benefits and drawbacks, and the process of incorporating a startup. Choosing the right business structure not only helps initiate your corporation business but also assists you in hiring members, building a team, and making strategies.

Besides, opting for one from different types of corporations is important to get sorted with taxation and liabilities. However, it is crucial to conduct thorough research before settling on a type of corporation. With varying types of businesses and their own set of merits and demerits, decide carefully which one aligns with your business goals and requirements.

Also, if you have made up your mind and decided which type of corporation startup you will go with, follow the step-by-step process given in this blog to incorporate a startup. Undoubtedly, running a startup is challenging, but with complete knowledge and the right strategy, even that can become attainable.