What Is a Corporation (Corp) in the U.S.? Understanding How It Works

If you’re thinking about starting a business in the United States or simply want to understand how business structures work in this country, you’ve probably heard of “corps” or corporations.

This term isn’t just a label—it represents a specific legal, tax, and operational framework that defines how a company functions. In this article, we’ll explain what a corporation is, the types that exist, their pros and cons, legal requirements for formation, and much more.

What Is a Corp or Corporation?

A corporation—often abbreviated as "corp"—is an independent legal entity created to conduct business. Most importantly, a corporation is legally separate from its owners. This means it can own assets, take on debt, file lawsuits, and pay taxes in its own name.

In the U.S., corporations are recognized at the state level, so you must register your business in one of the 50 states, even though you can operate nationwide.

Key Characteristics of a Corporation

• Separate legal personality: The corporation has rights and responsibilities like an individual person.
• Limited liability: Shareholders are not personally responsible for the company’s debts or legal obligations.
• Transferable ownership: Shares can be bought and sold easily.
• Perpetual existence: The corporation continues to exist even if the owner or shareholders leave or pass away.
• Taxation: The corporation pays taxes on its income. In some cases, shareholders also pay taxes on dividends (double taxation).

Types of Corporations in the U.S.

In the United States, there are primarily two types of for-profit corporations: C Corporation and S Corporation. There's also the Nonprofit Corporation. Each type has distinct characteristics.

1. C Corporation (C Corp)

This is the most common corporate structure for large businesses.

Main features:

• Pays corporate taxes on its income.
• Can have an unlimited number of shareholders.
• Can issue multiple classes of stock.
• Subject to double taxation: profits are taxed at the corporate level and again when distributed to shareholders as dividends.

Advantages:

• Easier access to capital.
• Ideal for businesses that plan to go public.
• Strong credibility with investors and banks.

Disadvantages:

• Double taxation.
• Higher administrative and compliance costs.

2. S Corporation (S Corp)

An S Corp is a special tax designation available to small businesses.

Main features:

• Does not pay corporate taxes. Profits, losses, deductions, and credits are passed through to shareholders.
• Limited to 100 shareholders.
• Can issue only one class of stock.
• All shareholders must be U.S. citizens or permanent residents.

Advantages:

• Avoids double taxation.
• Shareholders can use company losses to offset other income.

Disadvantages:

• Restrictions on the number and type of shareholders.
• Greater IRS scrutiny.

3. Nonprofit Corporation

Nonprofit corporations are designed for charitable, educational, religious, or scientific purposes. They are exempt from federal taxes if they meet specific IRS requirements.

How to Form a Corporation

Here’s a general step-by-step guide to forming a corporation in the U.S. (note: procedures may vary slightly depending on the state):

Step 1: Choose a Name

The name must be unique and meet state requirements. Some states require you to include words like “Corporation,” “Incorporated,” “Company,” or an abbreviation of these.

Step 2: File Articles of Incorporation

This document is filed with the Secretary of State and includes:

• Business name
• Address
• Registered agent’s name
• Number of authorized shares
• Business purpose

Step 3: Appoint Directors and Draft Bylaws

The bylaws define the internal rules for how the corporation will operate.

Step 4: Get an Employer Identification Number (EIN)

This is like the company’s Social Security Number and is required to open bank accounts and file taxes.

Step 5: Comply with State and Local Requirements

Depending on your state and city, you may need additional licenses or permits.

Step 6: Hold the Initial Organizational Meeting

During this meeting, the board adopts the bylaws, issues shares, and makes key decisions.

Benefits of a Corporation

• Personal asset protection: Thanks to limited liability.
• Investor appeal: Through share offerings.
• Credibility: Corporations are seen as more stable and professional entities.
• Perpetual existence: The business isn’t tied to the life of its founders.

Tax Obligations of a Corporation

C Corporation:

• Pays federal corporate income tax (21% as of 2018).
• May also pay state taxes.
• Dividends are taxed again at the shareholder level.

S Corporation:

• Does not pay federal income tax as a business entity.
• Profits are passed through to shareholders, who report them on their personal tax returns.

State Taxes:

Each state has its own tax rules. Some states—like Nevada or Wyoming—have business-friendly tax policies.

When Should You Choose a Corporation?

Forming a corporation is ideal if you:

• Plan to seek external investors.
• Want to protect your personal assets.
• Plan to scale your business.
• Are ready to comply with more formal regulations.

Corporation vs. Other Legal Structures

FeatureCorporationLLCSole ProprietorLegal EntitySeparateSeparateNot separateLiabilityLimitedLimitedUnlimitedTaxationCorporate or pass-throughPass-throughPersonalFormalitiesHighMediumLow

Final Thoughts

Forming a corporation in the U.S. can be a strategic move for entrepreneurs who want to grow, attract investors, and protect their personal assets. While it comes with additional legal and tax responsibilities, the long-term benefits can far outweigh the challenges—if managed properly.

If you're exploring opportunities to sell in the U.S., our team at Openbiz is here to help. Book a free consultation today and discover which corporate structure is right for your business.

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