Carl B. Alaniz (805) 371-8787    Carl@CarlAlaniz.com
Forms of Ownership
Forms of Ownership
The 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’s
Introduction
What 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 Ownership
LLCs compared to sole proprietorships and partnerships
Tax Reporting
Checklist for Businesses

Corporations

Introduction
What is a corporation?
Corporations Compared to Sole Proprietorships and Partnerships
Corporations compared to LLCs
Forming a Corporation
Where should I form the corporation?
Choosing a name
The Board of Directors
Officers
Registered Agent
Stock and Stockholders
Operating a Corporation
Keep things separate
Meetings
Transfer of ownership interests
Tax forms and licenses
Board of Directors and their duties
S Corporations
Tax Reporting
Checklist for New Corporations
Who 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 & Structures
What is a Sole Proprietorship
What 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’s

Introduction
Limited 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 Ownership
Ownership 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 partnerships
The 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 Reporting
By 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 Businesses
Forming 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.
  • Check zoning laws.
  • 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.
  • Get an email address.
  • Get your website set up.
  • The United States Small Business Administration (SBA) offers additional information and resources on starting a new business.

Corporations

Introduction
Corporations 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 LLCs

Limited 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 Corporation
The 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 name
In 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 Directors

A 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.

Officers
Officers 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 Agent
Each 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 Stockholders

Stockholders 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 Corporation
The 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 separate
As 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.

Meetings
Directors 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 interests

Generally, 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 licenses
Every 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 duties

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 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 Corporations
A 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 Reporting
As 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.
  • Check zoning laws.
  • 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.
  • Get an email address.
  • Get your website set up.
  • 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 & Structures

What is a Sole Proprietorship
A 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 Corporation
State 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:

  • Medical Services
  • Legal Services and Representation
  • Accounting and Financial Services
  • Architectural Services
  • Other services may be included in this list depending on your selected state of incorporation
Comparison Structure Chart
The 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.

Type of Company

Liability

Operations

Management

Raising
Capital

Sole Proprietorship

Unlimited

Simple

Proprietor

Difficult

General Partnership

Partners

Simple

Partners

--

Joint Venture

Partners

Simple

Partners

--

Limited Partnership

Partners

Medium

Partners

--

Limited Liability Partnership

No

Medium

Members

Possible

Limited Liability Company LLC

No

Medium

Members

Possible

Corporations

No

Difficult

Board

Stock

S-Corporations

No

Difficult

Board

Stock

Non-Profit Corporations

No

Difficult

Members or Trustees

Stock or Membership

Professional Corporations

Varies by State

Difficult

Board/Licensed Professionals

Stock/Licensed Professionals

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.
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