Forms of OwnershipThe following forms of
Ownership are the most commonly used by individuals or companies when
purchasing commercial properties. We have provided this information so
that you can become more familiar with different types of Ownership. The
information was gathered through legal sources and other printed
documentation. The discussion and examples provided herein are simple
illustrations for informational purposes only. We strongly urge you to
contact a licensed professional before making any decisions that could
impact your legal or tax liability.
LLC’sIntroductionWhat is a limited liability company?What are the main differences between an LLC and an S-corporation?Can my LLC have an unlimited lifespan?How many persons are needed to form an LLC?What is the difference between a "member" and a "manager"?Does an LLC have to hold meetings?Capital Contributions and OwnershipLLCs compared to sole proprietorships and partnershipsTax ReportingChecklist for Businesses
CorporationsIntroductionWhat is a corporation?Corporations Compared to Sole Proprietorships and PartnershipsCorporations compared to LLCsForming a CorporationWhere should I form the corporation?Choosing a nameThe Board of DirectorsOfficersRegistered AgentStock and StockholdersOperating a CorporationKeep things separateMeetingsTransfer of ownership interestsTax forms and licenses
Board of Directors and their dutiesS CorporationsTax ReportingChecklist for New CorporationsWho can form a corporation?What are the main differences between a C corporation and an S corporation?What are the main differences between an LLC and an S-corporation?Can I be the only stockholder in my corporation?Other Types of Business Forms & StructuresWhat is a Sole ProprietorshipWhat is a general partnership?What is a Joint Venture?What is a Limited Partnership?What is a limited liability partnership?What is a Non-Profit Corporation?
LLC’sIntroductionLimited
liability companies, or LLCs, are becoming more and more popular, and
it's easy to see why. They combine the personal liability protection of a
corporation with the tax benefits and simplicity of a partnership. In
other words, the owners (or "members") of an LLC are not personally
liable for its debts and liabilities, but also have the benefit of being
taxed only once on their profits. Moreover, LLCs are more flexible and
require less ongoing paperwork than an S-Corporation.
What is a limited liability company?A
limited liability company, or LLC, is an entity created under state
laws which has characteristics of both a corporation and a partnership.
Like a corporation, the owners of a LLC are not personally liable for
the debts of the LLC. Like a partnership and sole proprietorship, an LLC
has operating flexibility and is a pass-through entity for tax
purposes. This means that the profits of the LLC are passed through and
taxable to the owners of the LLC.
What are the main differences between an LLC and an S-corporation?Although
an S-corporation shares many of the same tax characteristics as an LLC,
an LLC has more flexibility and less restrictions than an
S-corporation. An S-corporation cannot have more than 100 stockholders,
cannot issue more than one class of shares, and is subject to more
formalities than an LLC (such as the requirement to hold an annual
meeting of stockholders). However, owners of an LLC are required to pay
social security and medicare taxes on the profits of an LLC. Stockholder
of a corporation are not required to pay these taxes on profits over
and above the stockholder's salary.
Can my LLC have an unlimited lifespan?Yes.
The recent changes to the IRS code have promoted changes in state laws
permitting LLCs to be created with an unlimited life.
How many persons are needed to form an LLC?In
all states, only one person is needed to form an LLC. Recent changes to
the IRS code have promoted reforms in state laws, permitting one-member
LLCs.
What is the difference between a "member" and a "manager"?A
member is an owner of the LLC and is similar to a stockholder of a
corporation. A manager is a person chosen by the members to manage the
LLC, which is similar to a director of a corporation. A manager can also
be a member.
Does an LLC have to hold meetings?The
answer is usually "no," unless the LLC's operating agreement requires
them. This is one of the key advantages of an LLC – fewer formalities,
which means less paperwork and less chance that the members will
inadvertently violate the law and thereby lose their liability
protection.
Capital Contributions and OwnershipOwnership
in an LLC can be expressed in two ways: (1) by percentage; and (2) by
membership units, which are similar to shares of stock in a corporation.
In either case, ownership confers the right to vote and the right to
share in the profits of the LLC.
Unlike a corporation, an LLC can
distribute its ownership interests as it pleases, without regard to how
much money or property a member contributes to the company. For
example, if Sam contributes $10,000 to the company and is a silent
partner, and Rick contributes no money but runs the company on a daily
basis, they could still decide to split the membership interest 50%-50%.
A
limited liability company can also be organized with different classes
of ownership interests, which provides flexibility for special
allocations of profits and voting power. For example, you can create a
special class of "super-voting" units that provide 10 votes per unit or
pay a certain level of profit before the "regular" units.
The
sale of membership interests is subject to federal and state securities
laws. Generally though, if you are not advertising the sale and are
dealing only with a small number (less than 35) of knowledgeable and
sophisticated investors, then you will be exempt from the regulations.
If, however, you are seeking to raise a significant amount of money from
a large number of investors, it will be necessary to consult an
attorney.
LLCs compared to sole proprietorships and partnershipsThe following section outlines the advantages and disadvantages of an LLC as compared to a sole proprietorship and partnership.
Advantages:
Owners are not personally responsible for company debts.This
is the most important attribute of an LLC. In a sole proprietorship and
partnership, the owners are personally responsible for the debts of the
business. If the assets of the sole proprietorship or partnership
cannot satisfy the debt, creditors can go after each owner's personal
bank account, house, etc. to make up the difference. By contrast, if an
LLC runs out of funds, the owners are usually not liable.
Please
note that under certain circumstances, an individual member may be
liable for the debts of an LLC. These circumstances include:
If a member personally guarantees a debt.
If the LLC fails to have a separate bank account and personal funds are intermingled with LLC funds.
If the LLC has minimal capitalization or minimal insurance.
If the LLC fails to pay state taxes or otherwise violates state law (like defrauding consumers).
Easier to raise money.An
LLC has many avenues to raise capital. It can admit new members by
selling membership interests, and it can create new classes of
membership interests with different voting or profit characteristics.
Plus, investors will be assured that they are not personally liable for
company debts.
Ease of transfer.Ownership
interests in a limited liability company may generally be sold to third
parties without disturbing the continued operation of the business. The
business of a sole proprietorship or partnership, on the other hand,
cannot be sold whole; instead, each of its assets, licenses and permits
must be individually transferred. New bank accounts and tax
identification numbers are also required.
Disadvantages:Cost.LLCs
cost more to set up and run than a sole proprietorship or partnership.
For example, there are the initial formation fees, filing fees and
annual state fees. These costs are partially offset by lower insurance
costs.
Formal organization.Although an LLC
requires fewer formalities than a corporation, there is still more
paperwork involved than a sole proprietorship or partnership. A sole
proprietorship or partnership can commence and operate without any
formal organizing procedures; not even a hand written agreement is
required.
Separate records.In order to
maintain the separate form of the LLC and maintain the liability
protection of its members, the owners of the LLC must carefully maintain
separate records and keep their personal business separate from the
LLC's business. Even more importantly, the LLC's money should never be
intermingled with personal money.
Tax ReportingBy default, LLCs do not pay income tax at the
entity level. Instead, the LLC's income is passed through to the
members, who must recognize their allocated income or loss on their
personal tax returns. For a single-member LLC, this income is reported
on the individual owner's Form 1040, Schedule C.
If an LLC elects
to be taxed as a partnership and its fiscal year ends on December 31,
the tax return is due April 15. The LLC must file a tax return on Form
1065 even if it does not have income or no tax is due. Amounts
distributed to members or managers are accounted for on schedule K-1 to
Form 1065.
An LLC with employees is required to pay federal (and
sometimes state) payroll taxes, and unemployment insurance. Furthermore,
some states, including California, have an annual LLC fee that is based
loosely on the company's net income.
Checklist for BusinessesForming
an LLC is just one step in starting a new business. There are other
federal, state, and practical considerations as well. The following is a
list of things to do or think about once you have formed a new LLC.
- Consider registering a DBA if you want to do business under a name other than the official entity name.
- Establish a corporate banking account.
- Contact the state tax board for information about state taxes and obtaining a state tax number.
- Check with the state department of consumer affairs to obtain any required business licenses or permits.
- Contact the Internal Revenue Service for information on filing your federal tax schedules.
- Find out about workers' compensation if you will have employees.
- Protect your trade name – contact an attorney for information on federal trademarks and copyright.
- Obtain city and/or county business licenses or permits.
- Get adequate business insurance or a business rider to a homeowner's policy.
-
Get tax information such as record-keeping requirements, guidelines
for withholding taxes (if you will have employees), information on
hiring independent contractors, facts on estimating taxes, forms of
organization, etc.
- Have business cards and stationery printed.
-
The United States Small Business Administration (SBA) offers
additional information and resources on starting a new business.
CorporationsIntroductionCorporations
have become the standard for many businesses in today's business
environment. Not only can they help reduce your taxes, but they can also
provide peace of mind by protecting your personal assets.
Before
there were corporations, investors in a business risked everything if
the venture turned south. If the company lost money and didn't have the
cash to pay its creditors, the partners had to make up the difference
with their own money. With the advent of the corporation, investors
could be shielded from this type of liability, and as a consequence,
more people were willing to invest in business ventures.
Our law
library provides you with general information relating to corporations.
We also outline their advantages, disadvantages, and how they compare to
other business entities, including the limited liability company
(otherwise known as an LLC). If you are considering forming a
corporation, we urge you to carefully read these sections before
determining which business entity is best for you.
What is a corporation?A corporation is a separate and
distinct legal entity. This means that a corporation can open a bank
account, own property and do business, all under its own name. The
primary advantage of a corporation is that its owners, known as
stockholders or shareholders, are not personally liable for the debts
and liabilities of the corporation. For example, if a corporation gets
sued and is forced into bankruptcy, the owners will not be required to
pay the debt with their own money. If the assets of the corporation are
not enough to cover the debts, the creditors cannot go after the
stockholders, directors or officers of the corporation to recover any
shortfall.
A corporation is managed by a board of directors,
which is responsible for making major business decisions and overseeing
the general affairs of the corporation. Like representatives in
Congress, directors are elected by the stockholders of the corporation.
Officers, who run the day-to-day operations of the corporation, are
appointed by the directors.
One major disadvantage of a
traditional corporation is double taxation. A traditional corporation,
known as a "C-corporation," pays a corporate tax on its corporate income
(the first tax). Then, when the C-corporation distributes profits to
its stockholders, the stockholders pay income tax on those dividends
(the second tax).
One way to avoid double taxation is to make a
special election to be taxed as a pass-through entity, like a
partnership or a sole proprietorship. That way, there is only one level
of taxation. The corporate profits "pass through" to the owners, who pay
taxes on the profits at their individual tax rates. Corporations that
make this tax election are known as "S-corporations."
Corporations Compared to Sole Proprietorships and Partnerships Corporations
enjoy many advantages over partnerships and sole proprietorships. But
there are also disadvantages. We cover the most important ones below.
Corporations compared to LLCsLimited
liability companies are a relatively new type of business entity that
combines the personal liability protection of a corporation with the tax
benefits and simplicity of a partnership. However, there are still
other important differences. The following discusses the main advantages
and disadvantages of corporations versus LLCs.
Advantages:
Stockholders are not liable for corporate debts.This
is the most important attribute of a corporation. In a sole
proprietorship and partnership, the owners are personally responsible
for the debts of the business. If the assets of the sole proprietorship
or partnership cannot satisfy the debt, creditors can go after each
owner's personal bank account, house, etc. to make up the difference. On
the other hand, if a corporation runs out of funds, its owners are
usually not liable.
Please note that under certain circumstances,
an individual stockholder may be liable for corporate debts. This is
sometimes referred to as "piercing the corporate veil." Some of these
circumstances include:
If a stockholder personally guarantees a debt.
If personal funds are intermingled with corporate funds.
If a corporation fails to have director and shareholder meetings.
If the corporation has minimal capitalization or minimal insurance.
If the corporation fails to pay state taxes or otherwise violates state law (like defrauding customers).
Self-Employment Tax Savings.Earnings
from a sole proprietorship are subject to self-employment taxes, which
are currently a combined 15.3% on the first $90,000 of income. With a
corporation, only salaries (and not profits) are subject to such taxes.
This can save you thousands of dollars per year.
For example, if a
sole proprietorship earns $80,000, a 15.3% tax would have to be paid on
the entire $80,000. Assume that a corporation also earns $80,000, but
$40,000 of that amount is paid in salary, and $40,000 is deemed as
profit. In this case, the self-employment tax would not be paid on the
$40,000 profit. This saves you over $5,000 per year. Please note,
however, that you should pay yourself a reasonable salary.
Continuous life.The
life of a corporation, unlike that of a partnership or sole
proprietorship, does not expire upon the death of its stockholders,
directors or officers.
Easier to raise money.A
corporation has many avenues to raise capital. It can sell shares of
stock, and it can create new types of stock, such as preferred stock,
with different voting or profit characteristics. Plus, investors be
assured that they are not personally liable for corporate debts.
Ease of transfer.Ownership
interests in a corporation may be sold to third parties without
disturbing the continued operation of the business. The business of a
sole proprietorship or partnership, on the other hand, cannot be sold
whole; instead, each of its assets, licenses and permits must be
individually transferred, and new bank accounts and tax identification
numbers are required.
Disadvantages:
Higher cost.Corporations
cost more to set up and run than a sole proprietorship or partnership.
For example, there are the initial formation fees, filing fees and
annual state fees. These costs are partially offset by lower insurance
costs.
Formal organization and corporate formalities.A
corporation can only be created by filing legal documents with the
state. In addition, a corporation must adhere to technical formalities.
These include holding director and shareholder meetings, recording
minutes, having the board of directors approve major business
transactions and corporate record-keeping. If these formalities are not
kept, the stockholders risk losing their personal liability protection.
While keeping corporate formalities is not difficult, it can be
time-consuming. On the other hand, a sole proprietorship or partnership
can commence and operate without any formal organizing or operating
procedures - not even a handwritten agreement.
Unemployment tax.A
stockholder-employee of a corporation is required to pay unemployment
insurance taxes on his or her salary, whereas a sole proprietor or
partner is not. Currently, the federal unemployment tax is 6.2% of the
first $7,000 of wages paid, with a maximum of $434 per employee.
If
you pay any required state unemployment tax, you can receive an offset
credit of 5.4%, effectively lowering the federal rate to 0.8%, for a
maximum of $56.00 per employee per year.
Forming a CorporationThe life of a corporation begins upon
the filing of articles of incorporation with the secretary of state's
office. Prior to filing the articles of incorporation, the following
issues should be considered.
Where should I form the corporation?You can incorporate in any of the 50 states.
Many
people choose to incorporate in their home state. Doing so may save you
money because corporations are required to register as a "foreign
corporation" in each state where they do business outside of their state
of incorporation, and there is often no need to pay another person to
serve as the registered agent. For example, a Delaware corporation that
has its main business office in Texas must register as a "foreign
corporation" with the Texas Secretary of State and must have a
registered agent in Delaware.
However, if your home state has a
high corporate income tax or high state fee, and your corporation will
not "do business" in the home state, it may be wise to incorporate
elsewhere. "Doing business" means more than just selling products or
making passive investments in that state. It usually requires occupying
an office or otherwise having an active business presence.
Delaware
is a popular choice because of its history, experience, recognition and
pro-business climate. In fact, over half of the companies listed on the
New York Stock Exchange are incorporated in Delaware. Recently, Nevada
has also gained popularity due to its pro-business environment and lack
of a formal information-sharing agreement with the IRS. Nevada does not
have corporate income taxes (and Delaware does not tax out-of-state
income), and business filings in these states can usually be performed
more quickly than in other states.
Choosing a nameIn
general, the name of a corporation must end with "incorporated,"
"corporation," or an abbreviation of one of these. A name will not be
accepted if it is likely to mislead the public or if it too closely
resembles the name of another corporation formed in that state. Many
states also restrict the use of certain terms in a corporation's name
(like Bank, Police, or Insurance).
We will conduct a name check
before filing to see which names are available. Please note that for
government purposes the names "ABC Inc." and "A.B.C. Corp." are
identical. Therefore, you should disregard spaces, periods and the
corporate ending when coming up with your three different name choices.
If
the name of your corporation will be used in connection with goods or
services, you may wish to consider obtaining federal trademark
protection for the name. This ensures that no one else in the U.S. may
use that name in connection with the same general type of goods or
services (except in areas where someone else is already using that
name).
The Board of DirectorsA corporation is managed
by its board of directors, which must approve major business decisions. A
director can be, but is not required to be, either a shareholder or an
officer. Like representatives in Congress, directors are elected by the
shareholders and typically serve for a limited term. Each corporation
must have at least one director.
Examples of procedures which must be approved by the board of directors include:
Declaring a dividend
Electing officers and setting the terms of their employment
Amending bylaws or the articles of incorporation
Any corporate merger, reorganization or other significant corporate transaction
Directors
of a corporation owe duties of loyalty and care to the corporation.
Generally, means that directors must act in good faith, with reasonable
care, and in the best interest of the corporation. If a director stands
to personally gain from a transaction with the corporation, he or she
must disclose this fact and refrain from voting on the matter, if
possible.
OfficersOfficers are appointed by the board
of directors to run the day-to-day operations of the corporation. A
corporation must have at least three officers: (1) a president, (2) a
treasurer or chief financial officer and (3) a secretary. Officers do
not have to be stockholders or directors, but they can be. There is no
limit on the maximum number of officers, and no limit on the number of
offices that a person may hold. In fact, the same person may hold all
offices.
Registered AgentEach corporation must have a
registered agent, the person designated to receive official state
correspondence and notice if the corporation is "served" with a lawsuit.
The registered agent must be either (1) an adult living in the state of
formation with a street address (P.O. boxes are not acceptable) or (2) a
corporation with a business office in the state of formation which
provides registered agent services.
As previously mentioned, one
of the advantages of forming a corporation in your home state is that
any officer or director can act as the registered agent. However, there
are some advantages to having another person or company act as your
registered agent. First, this adds an extra layer of privacy, since the
name and address of the registered agent is publicly available. Second,
this ensures that if your corporation is named in a lawsuit, no one will
surprise you at home on a Sunday night with court papers.
Stock and StockholdersStockholders
are the ultimate owners of a corporation. They have the right to elect
directors, vote on major corporate actions (such as mergers) and share
in the profits of the corporation. However, stockholders do not have the
right to direct the day-to-day operations of the corporation.
A
corporation is required to hold annual meetings of shareholders to elect
directors. The minutes of these meetings must be carefully maintained
by the corporation. If the corporation has only one or a few
stockholders, it may make sense to hold the meetings by conference call
or simply by having the stockholders sign a statement indicating what
actions are approved.
The most basic level of stock is called
"common stock." Sometimes, there is another level of stock, known as
"preferred stock." The preferred stock generally has greater rights over
the common stock when it comes to receiving dividends and/or assets
from the corporation (in case the corporation is liquidated). Preferred
stock can also have special voting characteristics, the ability to
convert into common stock, the right to require that the company
repurchase the stock at a later date (redemption), and other features
allowed by state law.
The articles of incorporation must state
the maximum number of shares that can be issued by the corporation.
There is no need to actually issue the maximum number of shares – you
can issue a lesser number. For example, if a corporation has two
stockholders, you can authorize a maximum of 1,000 shares, but give each
stockholder only 250 shares. This way, you have the flexibility to add
more stockholders. Otherwise, if additional shares were needed, the
articles of incorporation would have to be amended. There is no maximum
on the number of shares that can be authorized, but be advised that some
states base their annual corporation fee on the number of shares
authorized.
In some states, an archaic feature of stock, known as
the "par value," must be stated. This value is simply for accounting
and tax purposes, since stock can be sold at whatever price a buyer is
willing to pay. The corporation, however, cannot sell stock for less
than its par value. And since some states base their annual corporation
fee on the total par value of the stock, it is advisable to choose a low
par value, such as $.01 or even $.001 per share.
The sale of
stock is subject to federal and state securities laws. Generally though,
if you are not advertising the sale and are dealing only with a small
number (less than 35) of knowledgeable and sophisticated investors or
people you know personally, then you will be exempt from the
regulations. If, however, you are seeking to raise a significant amount
of money from a large number of investors, you should consult with an
attorney.
Operating a CorporationThe most important
thing to know about operating a corporation is to leave a paper trail of
the important business activities. Below are some of the most common
issues to consider when maintaining your corporation.
Keep things separateAs
previously mentioned, it's important to keep the business and affairs
of the corporation separate from the personal affairs of the
stockholders, directors and officers. This means setting up a separate
bank account, maintaining separate records, and keeping separate books
for accounting purposes.
MeetingsDirectors need to
hold periodic meetings, and shareholders must meet once per year to
elect directors. Meetings can take place in person or by telephone.
Either way, you need to make a written record of the items discussed and
actions approved at the meetings. Alternatively, you can just get all
the directors (or a majority of the stockholders) to sign a statement
approving corporate actions. This is known as "written consent."
Transfer of ownership interestsGenerally,
as long as all applicable laws are followed, a stockholder is free to
sell or transfer shares to anyone. However, with small corporations in
which the stockholders act more like partners and each is integral to
the success of the company, you may wish to consider placing
restrictions on the transfer of shares.
Stockholders sometimes
enter into a buy-sell agreement which sets the terms for when shares can
be transferred or sold. A typical buy-sell agreement would state that
if one stockholder seeks to sell shares to any third party, the other
stockholders have a right of first refusal; that is, the other
stockholders may purchase those shares at the same price. Only if the
other stockholders do not purchase those shares can a stockholder sell
to a third party.
Additionally, certain professional corporations
can only have shareholders that are licensed professionals, limiting
the transferability of shares.
Tax forms and licensesEvery
corporation must obtain a federal tax identification number, which is
similar to an individual's social security number. Some states also
require a separate state tax number. In addition, state, county and city
business licenses may be required. Please check with your city and
county to see which types of licenses you need.
Board of Directors and their dutiesThe
Board of Directors is essentially the management body for the
corporation. Responsibilities of the Board of Directors include
establishing all business policies and approving major contracts and
undertakings. In addition, the Board may also elect the President.
Ordinary business practices of the corporation are carried out by the
Officers and employees under the directives and supervision of these
Directors.
The Board of Directors is essentially the management
body for the corporation. Responsibilities of the Board of Directors
include establishing all business policies and approving major contracts
and undertakings. In addition, the Board may also elect the President.
Ordinary business practices of the corporation are carried out by the
Officers and employees under the directives and supervision of these
Directors.
The Directors must act collectively for their votes
and decisions to be valid. That's why Directors may only act at a Board
of Directors meeting. This, however, requires certain formalities. One
such formality is that the Directors must all be notified of a
forthcoming meeting in a prescribed manner, although this can be waived
or provided for in the corporation's Articles of Incorporation or
Bylaws.
For a Directors' meeting to be valid, there must also be a
Quorum of Directors present. A Quorum is usually a majority of the
Directors then serving on the Board; however, the Bylaws may specify
another minimum number or percentage.
The Board of Directors must
meet on a regular basis (monthly or quarterly), but in no case less
than annually. These are the regular Board meetings. The Board may also
call Special Meetings for matters that may arise between regular
meetings. In addition, boards may call a special shareholders' meeting
by adopting a resolution stating where and when the meeting is to be
held and what business is to be transacted.
The first meeting of
the Board of Directors is important because the Bylaws, the Corporate
Seal, Stock Certificates and Record Books are adopted.
Board
members, like officers, have a fiduciary duty to act in the best
interests of the corporation and cannot put their own interests ahead of
the corporation's. The Board must also act prudently and not
negligently manage the affairs of the corporation. Finally, the Board
must make certain that it properly exercises its authority in managing
the corporation and does not abrogate its responsibilities to others.
This
means that the board must be very careful to document that each Board
action was reasonable, lawful and in the best interests of the
corporation. This is particularly true with matters involving
compensation, dividends and dealings involving Officers, Directors and
Stockholders. The record or Corporate Minutes of the meeting must
include the arguments or statements to support the Board action and why
must detail why the action was proper.
S CorporationsA
traditional corporation, known as a C-corporation, is taxed as a
separate entity, leading to double taxation of corporate income and
dividends to shareholders. An S-corporation, on the other hand, is a
corporation that elects to be treated as a pass-through entity (such as a
sole proprietorship or partnership) for tax purposes. Since all
corporate income is "passed through" directly to the shareholders who
include the income on their individual tax returns, S-corporations are
not subject to double taxation. Moreover, the accounting for an
S-corporation is generally easier than for a C-corporation. There are,
however, certain restrictions placed on S-corporations:
The
S-corporation must not have more than 100 stockholders, and each of them
must consent. (A married couple is treated as one stockholder).
Each
stockholder must be an individual who is a citizen or resident of the
United States, or an estate or qualifying trust of such person.
The
corporation must have only one class of stock. (However, voting
differences within a class of stock are permissible). Preferred stock is
not allowed.
The corporation must use the calendar year as its
fiscal year unless it can demonstrate to the IRS that another fiscal
year satisfies a business purpose.
Corporations wishing to become
an S-corporation must file Form 2553 with the IRS, and each stockholder
of the corporation must sign the form.
Tax ReportingAs a separate legal entity, a corporation
must submit a tax return each year with the IRS. For corporations with a
fiscal year ending December 31, tax returns are due on March 15. A
corporation must file a tax return even if it does not have income or no
tax is due. C-corporations file tax returns on Form 1120 or 1120A.
Although
S-corporations do not pay federal taxes at the corporate level, they
still must prepare a separate tax return. S-corporations file their
returns on Form 1120S.
For 2005, the federal income tax rate for a C-corporation is as follows:
Income: |
Tax Rate: |
Up to $50,000: |
15% |
From $50,000 to $75,000: |
25% |
From $75,000 to $100,000: |
34% |
From $100,000 to $335,000: |
39% |
From $335,000 to $10,000,000: |
34% |
From $10,000,000 to $15,000,000: |
35% |
From $15,000,000 to $18,333,333: |
38% |
Over $18,333,333: |
35% |
Some
states, including California, also have a state corporate income tax.
Corporations that anticipate a tax liability of $500 or more must
estimate their taxes and make quarterly estimated tax payments.
Corporations with employees are required to pay federal (and sometimes
state) payroll and unemployment taxes.
Checklist for New Corporations Incorporating is
just one step in starting a new business. There are other federal,
state, and practical considerations as well. The following is a list of
things to do or think about once you have formed a new corporation.
- Consider registering a DBA if you want to do business under a name other than the official corporate name.
- Establish a corporate banking account.
- Contact the state tax board for information about state taxes and obtaining a state tax number.
- Check with the state department of consumer affairs to obtain any required business licenses or permits.
- Contact the Internal Revenue Service for information on filing your federal tax schedules.
- Find out about workers' compensation if you will have employees.
- Protect your trade name – contact an attorney for information on federal trademarks and copyright.
- Obtain city and/or county business licenses or permits.
- Get adequate business insurance or a business rider to a homeowner's policy.
-
Get tax information such as record-keeping requirements, guidelines
for withholding taxes (if you will have employees), information on
hiring independent contractors, facts on estimating taxes, forms of
organization, etc.
- Have business cards and stationery printed.
-
The United States Small Business Administration (SBA) offers
additional information and resources on starting a new business.
Who can form a corporation?Anyone
who completes the articles of incorporation and pays the state filing
fee can form a corporation. There is no age, residency or other legal
requirement.
What are the main differences between a C corporation and an S corporation?C-corporations
are subject to double taxation; that is, one tax at the corporate level
on the corporation's net income, and another tax to the shareholders
when the profits are distributed to them. S-corporations, on the other
hand, have only one level of taxation. All of their income is allocated
to their stockholders. However, C-corporations have greater tax planning
flexibility and can shield stockholders from direct tax liability. In
addition, S-corporations are subject to limitations, such as the number
and type of stockholders it can have.
What are the main differences between an LLC and an S-corporation?An
LLC has more operating flexibility and less corporate formalities than a
S-corporation. For example, an S-corporation cannot have more than 100
stockholders, must hold periodic director's meetings and must hold an
annual meeting of stockholders. However, owners of an S-corporation may
be subject to fewer taxes than owners of an LLC.
Can I be the only stockholder in my corporation?Yes,
a corporation can be formed with only one stockholder. However,
corporate formalities, such as director and shareholder meetings, are
still required in order to preserve the corporate form and prevent the
stockholder from personal liability.
Other Types of Business Forms & StructuresWhat is a Sole ProprietorshipA
sole proprietorship is an unincorporated business that is owned by one
individual. It is the simplest form of business organization to start
and maintain. The business has no existence apart from you, the owner.
Its liabilities are your personal liabilities. You undertake the risks
of the business for all assets owned, whether used in the business or
personally owned. You include the income and expenses of the business on
your own tax return.
What is a general partnership? An
arrangement in which two or more individuals or other persons (such as a
corporation and an individual) conduct business as "partners", whether
officially or not. In terms of asset protection, general partnerships
can be even worse than sole proprietorships. Anything that one partner
does affects all of the partners, because each partner of the general
partnership is personally responsible for all obligations of the
partnership. Thus each general partner's exposure to risk is increased
by a factor equal to the number of general partners in the business.
What is a Joint Venture?A
joint venture is a legal organization that takes the form of a short
term partnership in which the persons jointly undertake a transaction
for mutual profit. Generally each person contributes assets and share
risks. Like a partnership, joint ventures can involve any type of
business transaction and the "persons" involved can be individuals,
groups of individuals, companies, or corporations.
Joint ventures
are also widely used by companies to gain entrance into foreign
markets. Foreign companies form joint ventures with domestic companies
already present in markets the foreign companies would like to enter.
The foreign companies generally bring new technologies and business
practices into the joint venture, while the domestic companies already
have the relationships and requisite governmental documents within the
country along with being entrenched in the domestic industry.
What is a Limited Partnership? In
a Limited Partnership, one or more ‘general" partners manage the
business while "limited" partners contribute capital and share in the
profits but take no part in running the business. General partners
remain personally liable for partnership debts while limited partners
incur no liability with respect to partnership obligations beyond their
capital contributions. The purpose of this form of business is to
encourage investors to invest without risking more than the capital they
have contributed.
What is a limited liability partnership?California
allows attorneys and accountants to operate their practices as a
limited liability partnership. This formation is a General Partnership
that elects to be treated as an LLP by registering with the Secretary of
State. Many attorneys and accountants find the LLP as a very attractive
alternative since it shields the partners from vicarious liability, can
operate more informally and flexibly than a corporation, and is
accorded full partnership tax treatment. Note, in California, with
certain exceptions, the LLP is only available to attorneys and
accountants.
What is a Non-Profit CorporationState
laws distinguish between General, For-Profit (stock) corporations and
nonprofit (nonstock) corporations. In a For-Profit corporation,
shareholders are authorized to receive stock in exchange for capital
investments in the corporation. This capital investment often takes the
form of money, equipment, or some other property. Shareholders in a
For-Profit corporation only receive a return on their investment when
dividends are declared and paid.
A Nonprofit corporation,
however, can not issue shares and cannot pay dividends. In addition,
under the Federal Tax code Section 501(c)(3), a tax-exempt corporation
cannot pay dividends AND, upon dissolution, must distribute its
remaining assets to another nonprofit group.
What is a Professional Corporation?Most
Corporations are formed as General, for-profit corporation. However,
where the corporation will be engaging in what your state might call
"professional services," the Articles of Incorporation must bear special
language and the corporation must be formed pursuant to certain
statutory provisions.
"Professional Services" according to most states usually consists of the following activities:
- Legal Services and Representation
- Accounting and Financial Services
- Other services may be included in this list depending on your selected state of incorporation
Comparison Structure ChartThe table below is a comparison of
business forms and structures recognized as legal entities in most
states. Click on Type of Company to view detailed information.
Some
of the information that has been provided herein was provided by
LeaglZoom.com, Inc., MyCorporation Business Services, Inc., Legal
Information Institute, Business Law FreeAdvise.com and IRS.com. It is
recommended that you consult a Tax Attorney, Tax Accountant or CPA for
clarification on legal issues and tax ramifications in regard to forming
either a Partnership or Corporation.