Additionally, corporations have to pay double taxation, which means that the corporation is taxed on its profits, and shareholders must then pay taxes on their own share of the profits earned from dividends and capital gains.
There are also stricter regulations on corporations, and the government requires that they follow conventions like shareholder meetings, board of directors meetings, and keeping records of pertinent events, which become a direct cost to running the business.
What kinds of corporations are there?
There are two kinds of corporations: S corporations and C corporations.
An S Corporation is something like a hybrid between a sole proprietorship and a corporation; they must have fewer than 100 shareholders, only one class of stock, and are not subject to double taxation since each shareholder pays their own taxes. An LLC is also allowed to request to be taxed as an S Corp.
A C Corporation is what most investors think of as a corporation and provides the features that make it easy for a company to raise money and attract investors. C corporations can issue stock options and multiple classes of stock, helping to retain voting rights for founders. Stock options can also help attract talent. C Corps also have perpetual existence, meaning it’s easy to transfer ownership if the owner dies. C Corps also must hold annual shareholder meetings and take notes at them.
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