F.A.Q. Part 2

Classes and kinds of corporations.

1. Aggregate or Sole.
2. Public or Private.
3. Quasi-Public.
4. Profit or Non-Profit.
5. Stock or Non-Stock.
6. Parent and Subsidiaries; Holding Companies.
7. Close Corporations.
8. Professional Service Corporations.
9. Thin and Collapsible Corporations.
10. "Special Situations" Corporation.

Corporations fall into broad classifications, as follows:

1. Aggregate or Sole, aggregate "corporations aggregate consist of many persons united together into one society, and are kept up by a perpetual succession of members, so as to continue forever…" , "… Corporations sole consist of one person only and his successors…"

2. Public or Private, public are created for public purposes only, connected with the administration of the government. Private corporations are created for private as distinguished from purely public purposes. The character of a corporation is as public or private is determined by the terms of its charter and the general law under which it is organized and the characteristics of its stockholders or the number of persons engaged in the enterprise.

3. Quasi-public is sometimes applied to otherwise private corporations engaged in the business of providing goods and services of a peculiarly public nature.

4. Profit or non-profit, according to whether they are incorporated for the purpose of earning profits for their members or not, into business corporations of eleemosynary corporations. A corporation for profit is primarily a business corporation. Eleemosynary corporations are those a devoted or a charitable purpose or for those support by charity.

4.1 The words profit or non-profit have no definite meanings or general application, but must be construed in reference to the particular facts and circumstances under which used.

4.2 Generally, the test is to be applied to determine whether a given corporation is organized for profit is whether dividends or other pecuniary benefits are contemplated to be paid to its members. However, according to some cases "profit" does not necessary mean direct return by way of dividends, interest, capital accounts, or salaries. For example, profit may be dispensed to members of a corporation in the form of a saving of expense or the obtaining of a service at a lower price. On the other hand, the fact that a corporation receives fees or compensations for its services does not necessarily make it a corporation organized for profit, and the fact that an organization which desired to conduct an exempt activity (under the tax laws) organized under the general business corporation laws, rather than under the laws relating to charitable, educational, or non business corporations, does not preclude a finding that it was organized exclusively for exempt purposes. In a number of cases the nonprofit character of various corporations has been upheld while the nonprofit character of various other corporations has been denied. Local statues, will usually define accepted purposes for nonprofit.

5. Stock or non-stock, a corporation may be classified into stock and non-stock or membership corporations.

5.1 A stock corporation is generally defined as a corporation organized to make a profit for its shareholders. Further, some statues define having shares of stocks authorized by law to distribute dividends to holders thereof.

5.2 Non-stock or membership corporation is not organized to make a profit. It is organized to provide its members a particular service under a plan, which eliminates any profit motive. Members may have an interest similar to that of stockholders in ordinary corporations.

5.3 Shareholders may not strictly speaking, withdraw from a stock corporation, a member may withdraw, resign, or abandon his membership from a membership corporation. Organization, which will hold property such as a country club, should organize as a stock corporation. Although they may not make a profit, the shares have value and may be sold to transfer.

6. Parent and subsidiaries and holding companies, a parent corporation is one, which has working control through stock ownership of its subsidiary corporations. A subsidiary corporation is one, which is controlled by another corporation. Holding Corporation is a term used in various senses ranging from a company operated for the sole purpose of controlling stock in other corporations to that of an ordinary operating company, which quite incidentally owns stock in another corporation. A holding company has been defined as a super corporation, which owns or at least control such a dominant interest in one or more other corporations. Such a dominant interest in one or more other corporations that it is enabled to control or materially influence the management of one or more corporations. The terms "conglomerate" a company that controls a group of other companies engaged in unrelated activities.

Personal holding companies, as defined by IRS are corporations to which high income backer individuals transfer stocks bonds or other investment income to which collect dividend, interest, and other similar income at low tax rates and do not distribute the income until they liquidate, with the owners paying only a capital gain tax at a time.

7. Close corporations, are corporations formed in their operation and in relation to stockholders to each other, resemble partnerships more than traditional corporations. This relationship among stockholders must be one of trust, confidence and absolute loyalty and that they owe one another the same fiduciary duty in operation of the enterprise that partners owe one another. Resolving disputes among stockholders of close corporations, court has applied partnership law. Courts further distinguish between close and public-issue corporations when confronted with the problems relating to either. Statues authorize, provisions in articles of incorporation, charters or bylaws, or agreements among stockholders, the effect of which is to modify the traditional corporate structure to fit the needs of a closely held business. Certain restructuring is permitted of the corporate mold to meet the needs of the closely held enterprise.

8. Thin and collapsible corporations, differ from ordinary business corporations in that only licensed professionals can be member or stockholder. Its members are subject to the same supervision by appropriate statue regulatory agencies as individual practitioners.
Checklist to prove a professional corporation is organized and operates correctly (page to be provided).

9. Thin and collapsible corporations,

9.1 "Thin" Corporations - IRS penalizes corporations in which ration of shareholders lending equity is high, by generally treating some or all of the loans as in fact capital contributions, with the result that the corporation cannot deduct the interest payments and the repayments of loans involved to the shareholders will be considered dividends to them. Certain test apply, to whether certain advances are debts or equity contributions, such as: the names given to the certificates evidencing the indebtedness, presence or absence of a maturity date, the source of payments, the right to enforce the payment of principal or interest, principation management, a status equal to or inferior to that of regular directories; intent of the parties, "thin" or adequate capitalization, identity of interest between creditor and stockholders, payment to interest only out of "dividend " money, and the ability of the corporation to obtain loans from outside lending institutions.

9.2 IRS also penalizes the shareholders of a so called collapsible corporation, which is a corporation formed or availed of principality for: the manufacture, construction or production of any property, or the purchase of specified property which is held less than three years by the corporation, or the holding of stock in a corporation formed or availed of principally for the purpose above and such a company is formed or availed of with a view to the sale or exchange of stock (or liquidation or otherwise), or a distribution to the stockholders, before the company has realized a substantial part of the taxable income to be derived from the property described above and with a view to the realization by the stockholder of gain attributes to the property. The stockholders are penalized by having the gain to them on the liquidation or sale of stock taxed as ordinary income.

10. "Special situation" corporations, certain categories or kinds of corporations are provided for or recognized under federal IRS Code. The classifications are generally not relevant for the purpose of state corporation statues.

10.1 One of these is an S corporation, which is closely held and that have elected to be taxed under Subchapter S of the code. This results (with some exceptions) that its income is not taxed at the corporate level but is passed through and taxed to tie shareholders, in a similar fashion as a partnership. Generally, items of income, loss, deduction, and credit will be passed through to the shareholders and included in their tax returns in the form received, paid or incurred by the corporation. A Sub S must meet the following requirements: It must be domestic corporation, it must not have more than 35 shareholders, and they must be US citizens or have residence and or certain estates and trusts and the corporation must have only one class of stock. See S Corporation yes or no.

10.2 The code also grants tax benefits to certain domestic corporations doing business abroad within US possessions (except US Virgin). See Foreign Sales Corporation or FSC.

10.3 Certain corporations that are organized under a state law are specially recognized or given tax benefits under the IRS code.
One is the small business investment corporation, see SBIC's. Also recognized by IRS are business development corporations, see BDC.


About Us | Site Map | Privacy Policy | Contact Us | 1993 - 2016 Inc Legal Services

  Inc Legal Services