Types of corporations: How to choose the best fit for your business
You’re making money, landing clients, and thinking about making your first hire. Then someone asks, “Are you incorporated?” It sounds like an administrative formality, but it’s not. Choosing the right corporation type can fuel your growth, win the trust of investors, and give you more control over how and when (or if) your business pays taxes.
In this guide, we break down the most common types of corporations, from LLCs to B Corps, and walk you through the pros and cons of each. You’ll learn how taxation, liability, ownership structure, and long-term goals all factor into the decision, and when a startup should consider incorporating. We’ll also look at examples of corporations to help you see how each structure works in practice.
What is a corporation?
A corporation is a legal business entity that exists separately from the people who own or manage it. It can enter into contracts, hold assets, and face lawsuits in its own name, independent of the individuals behind it.
This separation offers key advantages: limited liability shields shareholders’ personal assets, and perpetual existence means the business doesn’t dissolve if the owner leaves or dies. In the eyes of the law, a corporation is its own person, structured for longevity, accountability, and growth.
How does the corporation type affect your business?
Your legal structure sets the tone for everything about your business, from internal decision-making to how the IRS and your state expect you to operate. Some corporation types offer simplicity but limit your options. Others unlock growth potential but come with extensive oversight. The structure you choose affects how profits are taxed, who’s liable when something goes wrong, and what kind of compliance is required to stay in good standing with state and federal regulators.
These details may seem technical at first, but they shape how easily you can raise money, bring on partners, or pivot when needed. Choosing the right structure goes beyond checking a box on a form. It’s a critical business decision that can impact your ability to grow and adapt without constantly needing to rebuild or reorganize, especially if you’re already thinking about how to scale a business.
What are the different types of corporations?
Businesses can take multiple forms, but most fall within the following six classifications. Each comes with its own rules around profit distribution, liability, and long-term governance. Understanding the different types of businesses can help you choose a structure that supports your goals and your needs, whether that’s simplicity, rapid growth, public benefit, or eligibility for tax exemptions.
1. C corporation (C Corp)
The most common type of corporation, a C Corp, gets its name from Subchapter C of Chapter One of the Internal Revenue Code, which sets out the general tax rules for corporations and their shareholders. Revenue is reported on Form 1120 and taxed at the corporate level, separate from the shareholder who may also pay tax on dividends.
C Corps can have as many shareholders as the board approves and issue multiple kinds of stock, which makes them a good fit for institutional and public funding. On the other hand, profits from a C Corporation are taxed at both the corporate and individual levels, and some smaller businesses may struggle to keep up with the strict regulatory requirements and ongoing filing obligations.
2. S corporation (S Corp)
Technically, an S Corporation isn’t a distinct legal entity. It’s a specific taxation status available to C corporations and LLCs that want to avoid double taxation. Businesses that opt for this taxation system file Form 2553 with the IRS, indicating that income, losses, and credits will flow through shareholders’ personal returns.
This can help small businesses reduce their overall tax burden while still benefiting from the structural advantages of a corporation, but it comes with strict eligibility rules. An S Corp can issue only one type of stock, and the number of shareholders cannot exceed 100. If you plan to expand rapidly or court different tiers of investors, these limitations might prove cumbersome in the long run.
3. B corporation (Benefit Corp)
A benefit corporation, or B Corp for short, is a for-profit corporate structure that legally embeds a public or environmental mission in the business alongside for-profit goals. Beyond signaling commitment to your mission, incorporating as a B Corp offers extra legal protection for decisions that prioritize social or environmental outcomes. Your ultimate accountability, however, remains to your shareholders, which means you’ll need to balance business goals with the interests of other stakeholders. They also aren’t recognized in all states and don’t enjoy tax benefits at the federal level.
4. Nonprofit corporation
A non-profit corporation follows the same structural rules as a for-profit business but operates for a public or charitable purpose and is exempt from federal income tax. Qualifying organizations, such as education programs, humanitarian groups, or religious institutions, can apply for tax-exempt status by filing Form 1023 with the IRS to request tax exemption under Section 501(c)(3) of the Internal Revenue Code.
Because nonprofit corporations typically act to promote the public good, the IRS also allows them to collect charitable donations and offers a higher standard of asset protection in case of financial difficulty. Nonprofit corporations must reinvest any profits into the organization and file Form 990 annually with the IRS to maintain their tax-exempt status.
5. Limited liability companies (LLCs)
An LLC is a state-formed business structure that offers smaller operators protection for personal assets against business debts. By default, it uses pass-through taxation—profits, losses, and LLC expenses are reported on the owner’s Form 1040. An LLC can also choose to be taxed as a corporation; however, if the business owner files Form 8832 with the IRS. It’s a flexible structure designed to offer many of the same protections that larger corporations enjoy, without the administrative burden that can weigh down solo operators or smaller teams. For entrepreneurs and businesses just starting out, it’s an ideal first step.
6. Sole proprietorships
Technically, a sole proprietorship isn’t a corporation. In fact, it’s actually defined by its unincorporated status. A sole proprietorship is what exists by default when an individual decides to operate a business without forming a separate entity. The owner and the business are legally the same, with income and losses reported on Schedule C of the owner’s personal tax return and no liability protections.
It’s an easy way to stay on the right side of the law if you have a lucrative hobby or side hustle, but it offers no protection for your personal assets in case of a business dispute. For anything beyond low-risk, small-scale work, consider a move to an LLC or another structure that provides limited liability and clearer financial separation.
6 factors to consider when choosing a corporation type
Before you choose a business structure, step back and take a look at the big picture. The legal form you choose will influence a number of factors, including how decisions get made, how profits are shared, and what kind of oversight you need to maintain. Some types of legal entities offer simplicity, others bring order to large operations. The six factors below can help you narrow the field and choose the type of corporation that fits where you are now and where you’re headed.
Taxation preferences
Every business structure handles taxes differently. Some pass income straight through to the owners, while others file separate tax returns and pay at the corporate level. This distinction is especially important in the C Corp vs S Corp conversation, where choosing the wrong fit could mean unnecessary taxes or missing out on investor opportunities. Your choice affects not just how much you pay, but when and how you pay it. This goes double if you’re balancing paying a salary with distributions or reinvesting profits.
Ownership structure and number of shareholders
Not all entities handle ownership the same way. S Corps, for example, have strict limits on the number and type of shareholders, while C Corps allow multiple classes of stock and broader ownership flexibility. If you plan to bring in partners or give equity to employees, this can be a make-or-break factor.
Fundraising plans
If outside fundraising is part of your growth roadmap, your business entity needs to support it. Investors typically expect a C Corp structure because it’s designed for stock issuance and clear equity tracking during startup funding rounds. Other structures, like LLCs, may raise questions or require restructuring down the line.
Liability and risk tolerance
One of the key reasons to incorporate? Protection of your personal assets from business creditors. Both LLCs and corporations offer a degree of limited liability, which means your home, savings, and other personal assets are generally off-limits in a legal dispute with your business. Depending on your industry and contracts, however, you may prefer the stronger shield a corporation offers.
Compliance and administrative burden
Some entities require fewer man-hours to manage than others. A basic LLC comes with comparatively minimal red tape: no required shareholder meetings, board of directors, or complex filings. A corporation demands tighter compliance and more consistent record-keeping, but the transparency can help you build credibility with lenders, investors, and potential partners who value formal oversight.
Long-term growth strategy
Where you want the business to be in five years should, in part, guide the structure you choose today. A solo founder with modest goals may favor the ease of an LLC, but if you’re aiming for fast growth, stock options, or eventual acquisition, incorporating as a C Corp may better match your trajectory.
When should you incorporate your startup?
Timing your incorporation depends on where you are in the startup journey. If you’re testing ideas or bootstrapping solo, staying informal can help keep startup costs low and paperwork minimal until you’ve got proof of concept. But once you get to the point of building a team, talking to inventors, or earning real income, startup incorporation becomes a must. Early incorporation can lock in limited liability, create a clean capitalization table, and help you manage taxation before things get complicated.
How to incorporate a startup: 7 steps
Turning a startup into a real legal entity means jumping through a series of formal hoops that transform your concept into a recognized business structure. This isn’t just a paperwork exercise; it’s the framework that allows you to operate legally, protect your personal assets, and potentially raise capital. Each step plays a role in establishing accountability, clarity, and a firm foundation that supports growth. You can treat this process as a working business startup checklist to make sure nothing critical slips through the cracks as you move through the formalization process.
Step 1. Choose your corporation type
Your choice of legal entity shapes everything from your taxation to when (or if) you bring in investors. Whether you go with an LLC, C Corp, or S Corp, each option comes with trade-offs around liability, compliance costs, and long-term goals. If you haven’t yet made a choice, don’t rush this decision. It’s worth getting it right from the start.
Step 2. Pick a business name and check availability
Your name goes beyond branding. It’s a core part of your business’s legal identity. You’ll need to make sure the name you prefer is available in your state and double-check to confirm no conflicts with existing trademarks. Most states maintain databases through the office of the Secretary of State that allow you to run a name search online before filing.
Step 3. Appoint directors and draft corporate bylaws
If you decide to form a corporation, most states will require you to name a board of directors early on. You’ll also need to draft and file bylaws that lay out how the business will run day-to-day and make decisions.
Step 4. File articles of incorporation
This step makes your incorporation official. You’ll file articles of incorporation with your state, which includes basic information like your business name, address, and purpose. Some states may ask about shareholders or whether you plan to issue stock.
Step 5. Apply for an EIN and register for taxes
An EIN is like a Social Security number for your business. You’ll need it to hire employees, open accounts, or file a tax return. You can apply for one for free through the IRS. Depending on your location and structure, you may also need it to register for state and local taxes.
Step 6. Open a business bank account
Mixing personal and business finances is a recipe for legal and tax headaches. A separate business account helps keep your income, expenses, and financial records clear. Most banks will ask for copies of your incorporation documents and your EIN when you apply.
Step 7: Maintain compliance and corporate records
Once you’ve successfully incorporated, you need to stay that way. That means filing annual reports, keeping minutes of important meetings, and tracking any changes to your ownership or structure. Good records don’t just keep regulators happy, they also protect you with a clear paper trail in the case of internal questions or conflicts.
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Types of corporations FAQs
What is the difference between an LLC and an S Corp?
An LLC is a type of business structure, while an S Corp is a taxation status you can elect with the IRS. If you’re looking to save on self-employment taxes by splitting your income between salary and dividend distributions, opting to tax your LLC as an S Corp might be the best choice if you meet the regulatory requirements. If, on the other hand, you want more flexibility in ownership or profit-sharing, you may prefer a standard LLC taxed as a sole proprietor or partnership.
What is the difference between an LLC and a C Corp?
The biggest difference between an LLC and a C Corp lies in how they’re taxed and managed. An LLC is a flexible business entity with pass-through taxation and fewer formalities: no articles of incorporation, board of directors, or annual meetings required. A C Corp is a more structured business entity, with formal governance requirements, separate taxes, and the ability to issue stock and pay dividends to shareholders. If you’re weighing options, think about how much oversight you’re comfortable with and whether you plan to raise capital from investors.
What role do taxes play in choosing a corporate structure?
Taxes play a major role in choosing a business structure. A sole proprietorship or LLC often means pass-through taxation, which means you report your business profits and pay taxes through your personal income tax return. A corporation files its own tax return, but you may be subject to double taxation unless you opt for S Corp status. The decision about which corporate structure to use depends on how you plan to pay yourself, grow the business, and file tax returns. When in doubt, consult a qualified tax advisor or attorney.
This blog is based on information available to Rippling as of June 16, 2025.
Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.
