Types of Corporations
"General, Close, or Professional Corporation"
There are different types of corporations. On the Articles of Incorporation form, there are three options: General (T.11A), Professional (T.11,Ch.4), and Close corp (T.11A,ch.20). The first option is for those who want to form a standard, Vermont corporation. The second option is for those who want to form a professional corporation. The third option is for those who want to form a Close corporation as a variation from the standard, Vermont corporation. The parenthetical references identify the statutes which authorize the creation of the corporation. While it is easy to fill-out this part of the form, this is probably one of the most important decisions a person can make when forming a corporation.
There are many issues to consider before choosing one of the above three options, S and C status for a corporation is a federal, IRS tax status. General, Professional, and Close are Vermont state-law classifications that relate to the type of corporation being formed under state law. Read on!
"Close Corporation"
A Close corporation is a Vermont corporation that is either an S or C corporation for federal tax purposes that, provided certain conditions are met, dispenses with the formality of having decisions approved by both shareholders and corporate directors. The Close corporation is ideally suited for small businesses where the people who own the corporation's stock also run the business. A Close corporation makes sense when the shareholders are also the people who serve as the corporation's board of directors and corporate officers. In a Close corporation, all management decisions are made by the shareholders (providing there will be no more than 35 shareholders and none of the corporation's shares will be publicly traded) because they are typically the people who are in charge of running the business.
Governance of a close corporation differs from that of a general corporation in several ways. For example, as a close corporation, corporate bylaws are not required if the information otherwise required by law to be contained in bylaws is already contained either in the Articles of Incorporation or in an authorized shareholder agreement. Close corporations are not required to have an annual meeting unless one is requested in writing by one or more shareholders. Perhaps the most significant feature of a close corporation is that the corporation may choose to operate through a shareholder agreement. Shareholder agreements allow the corporation to eliminate the board of directors, restrict the discretion or powers of the board, or create a relationship among the shareholders or between the shareholders and the corporation that would otherwise be appropriate only among partners in a partnership. The process for obtaining a certificate of incorporation as a Close corporation is similar to that of a general corporation.
While the Close corporation offers many advantages, it may not be appropriate for all start-up businesses, especially if the goal is to immediately build a business where shares of stock will be offered to the public. In that case, the standard "General" corporation may be the right choice.
"Professional Corporation"
T.11,Chapter 4Effective July 1, 2002, T.11, Chapter 4, is added to the professional corporation law.
Incorporation of a PC after 07/01/02 will come under T.11, Chapter 4. Existing professional corporations will have the option to remain under chapter 3 or to amend and migrate to the new chapter 4 rules. Migration to the new chapter will simply require the filing of articles of amendment.
The new PC chapter: (1) broadens the ownership of a professional corporation and will allow various professions to join together; (2) permits existing PCs to remain under Chapter 3 of T.11, or to migrate to the new rules; (3) allows references to general corporation law for specific authorities and prohibitions; (4) ensures that a professional complies with the licensing requirements of that profession; (5) authorizes any "licensing authority" to further restrict PC behavior in the interest of public protection; (6) sets out general procedures, including the acquisition and disposition of the shares of a professional member; (7) affirms the status of confidentiality between professionals and clients; (8) details procedures for mergers, voluntary and involuntary dissolutions; (9) ties PCs back to state licensing and registration obligations; and (10) details specific obligations of foreign PCs.
The professional corporation law allows certain professionals such as health care, financial, legal, and real estate appraisers to operate as a corporation. The key to the professional corporation is the fact that this corporate form, while granting professionals the benefits of the corporation for the business aspects of their practices, does not prevent a person employed by the corporation from being held liable for damages arising out of professional service. This means if a lawyer or doctor commits malpractice, that person can still be held liable for damages, even though they operate as a professional corporation. Only licensed professionals may incorporate as a professional corporation.
"C" Corporation
The "C corporation" is a standard Vermont corporation that is subject to subchapter C of the federal corporate income tax law. The C corporation is taxed apart from its owners, that is, its shareholders. This means that income generated by the C corporation can be taxed twice; first at the corporate level as corporate income, and second at the shareholder level as personal income if after-tax corporate income is distributed as a dividend to the shareholders.
"S" Corporation
An S corporation is a standard Vermont corporation that is subject to subchapter S of the federal corporate income tax law. An S corporation is essentially a C corporation, except that if certain conditions are met, the shareholders can decide to not be taxed as a separate entity as is the case with a C corporation. This means that the income or loss of an S corporation is "passed through" directly to the shareholders and is taxed at the shareholder level, but not at the corporate level. Instead of paying corporate income tax, and then shareholders paying personal income tax on dividends, all taxes are paid by the shareholders as part of their own income taxes. While not taxed as a C corporation, an S corporation is still subject to the same corporate formalities of a C corporation, even where the owners of the S corporation's stock are also the directors and officers of the corporation.
Seek Advice
The decision to create a corporation, and whether to be an S, C, Close, or professional corporation is a significant decision. The factors to consider include the issues of personal liability, stock ownership, ability to raise capital, differentiation of business and personal finances, taxes, legal formalities, costs, and professional association. Because of this, it makes sense to seek professional help before you get started.