This is “Classifications of Corporations”, section 14.4 from the book The Law, Corporate Finance, and Management (v. 1.0). For details on it (including licensing), click here.


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14.4 Classifications of Corporations

Learning Objectives

  1. Distinguish the “public,” or municipal, corporation from the publicly held corporation.
  2. Explain how the tax structure for professional corporations evolved.
  3. Define the two types of business corporations.

Nonprofit Corporations

One of the four major classifications of corporations is the nonprofit corporationA corporation in which no part of the income is distributable to its members, directors, or officers. (also called not-for-profit corporation). It is defined in the American Bar Association’s Model Non-Profit Corporation Act as “a corporation no part of the income of which is distributable to its members, directors or officers.” Nonprofit corporations may be formed under this law for charitable, educational, civil, religious, social, and cultural purposes, among others.

Public Corporations

The true public corporation is a governmental entity. It is often called a municipal corporationA governmental entity; also called a public corporation., to distinguish it from the publicly held corporation, which is sometimes also referred to as a “public” corporation, although it is in fact private (i.e., it is not governmental). Major cities and counties, and many towns, villages, and special governmental units, such as sewer, transportation, and public utility authorities, are incorporated. These corporations are not organized for profit, do not have shareholders, and operate under different statutes than do business corporations.

Professional Corporations

Until the 1960s, lawyers, doctors, accountants, and other professionals could not practice their professions in corporate form. This inability, based on a fear of professionals’ being subject to the direction of the corporate owners, was financially disadvantageous. Under the federal income tax laws then in effect, corporations could establish far better pension plans than could the self-employed. During the 1960s, the states began to let professionals incorporate, but the IRS balked, denying them many tax benefits. In 1969, the IRS finally conceded that it would tax a professional corporationA corporation of lawyers, doctor, accountants, or other professionals who enjoy the same benefits in corporate form as do other corporations. just as it would any other corporation, so that professionals could, from that time on, place a much higher proportion of tax-deductible income into a tax-deferred pension. That decision led to a burgeoning number of professional corporations.

Business Corporations

The Two Types

It is the business corporationIn contrast to public (municipal), professional, or nonprofit corporations, business corporations are of two types: publicly held and closely held, referring to how the stock is held within the corporation. proper that we focus on in this unit. There are two broad types of business corporations: publicly held (or public) and closely held (or close or private) corporations. Again, both types are private in the sense that they are not governmental.





Key Takeaway

There are four major classifications of corporations: (1) nonprofit, (2) municipal, (3) professional, and (4) business. Business corporations are divided into two types, publicly held and closely held corporations.


  1. Why did professionals, such as doctors, lawyers, and accountants, wait so long to incorporate?
  2. Distinguish a publicly held corporation from a closely held one.
  3. Are most corporations in the US publicly or closely held? Are closely held corporations subject to different provisions than publicly held ones?