Question: There are several forms of corporations, each designed to meet the specific needs of its stockholders. The appropriate form is generally dependent on the size of the business and may be changed as the business grows.
1. General Corporations. Corporations that have more than 30 stockholders or offer to sell stock to the public must organize as a general or "C" corporation. These corporations must have a board of directors, conduct annual stockholders meetings, and publish financial reports with certain government agencies, such as the Securities and Exchange Commission. Large, well-known companies, such as Wal-Mart and General Motors, are C Corporations.
2. Close Corporations. In some states, corporations having fewer than 30 stockholders may elect to be a close corporation. This form of corporation reduces the governance requirements of a C Corporation. For example, a board of directors or annual stockholder meetings may not be required. Less than half of the states recognize this form of corporation. 3. Subchapter S Corporation. Named for the related section of the Internal Revenue Code, the Subchapter S or "S" Corporation is a special tax status available to C corporations. Unlike with C Corporations, distributions of earnings are not taxed to the stockholders, thus eliminating the "double taxation" of corporate earnings and distributions. Having 75 or fewer stockholders is the primary requirement for electing S corporation status.
Critical Thinking
1. You plan to expand your small proprietorship with an investment from several family members who will be stockholders. Which form of corporation would you probably use?
2. Considering your answer to question 1, what is the advantage to you? To your investors?