What is a corporation?
A corporation is a legal entity that can exist separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation (called a charter or certificate of incorporation in some states) are filed with the proper state authority, and all fees are paid.
How do I get started with the incorporation process?
If you choose to incorporate, articles of incorporation must be filed with that state and initial fees must be paid. Business Filings will complete these administrative tasks quickly and effectively. After your articles are filed, your corporation must hold an organizational meeting where by laws are adopted and the incorporation process is completed. Share certificates should be distributed to share holders and these transactions should be recorded on the corporation’s stock ledger. All of this information should be kept in a corporate record book.
What are the advantages of incorporation?
One of the primary advantages of incorporation is the limited liability the corporate entity affords its shareholders. Typically, shareholders and directors are not liable for the debts and obligations of the corporation; thus, creditors will not come knocking at the door of a shareholder or director to pay debts of the corporation. In a partnership or sole proprietorship the owner’s personal assets may be used to pay debts of the business. Maintaining the limited liability of a corporation requires that the shareholders and directors follow all the rules of governance, including holding annual meetings and maintaining meeting minutes, which is why we offer corporate forms disks and corporate kits as part of our complete incorporation package.
Other advantages:
- A corporation’s life is not dependent upon its members.
- A corporation possesses the feature of unlimited life.
- If an owner dies or wishes to sell his or her interest, the corporation will continue to exist and do business.
- Retirement funds and qualified retirement plans may be set up more easily with a corporation.
- Ownership of a corporation is easily transferable.
- Capital can be raised more easily through the sale of stock.
- A corporation possesses centralized management.
What are the disadvantages of incorporation?
The primary disadvantage to a corporation is double taxation. Profits of a corporation are taxed twice when the profits are distributed to shareholders as dividends. They are taxed first as income to the corporation, then as income to the shareholder. All reasonable business expenses such as salaries are deductions against corporate income and can minimize the double tax. Further, the double tax can be eliminated by making an S corporation election.
Other disadvantages:
- There is more complexity and expense with forming a corporation.
- There is more extensive record keeping requirements.
- Operating a corporation across state lines often requires the corporation to qualify to do business in the other state.
What paperwork is required to incorporate?
Articles of incorporation conforming to state law must be prepared and filed with the proper state authorities and filing fees, initial fees must be paid. This is a number assigned to a corporation or other business entity by the federal government for tax purposes. Banks generally require a tax identification number to open bank accounts. The federal tax identification number is also known as the Employer Identification Number (EIN).
Do I need an attorney to incorporate?
You can prepare and file the articles of incorporation yourself; however, you should understand the requirements of your intended state of formation. You can use our service to incorporate and save money on attorney fees. However, if you are unsure if incorporation will benefit your business, consult an attorney or accountant.
What should I name my corporation?
Choose the name of your corporation carefully. It is very important that you portray the image you want for your new corporation. Legally, the name you select must not be “deceptively similar” to any existing corporation or must be “distinguishable on the record” of your state. For example, if a corporation named Flower Corp. exists in your state, you probably would not be allowed to name your business Flour, Inc. It is possible that the name you select will not be available; therefore, we ask for a second choice on the incorporation order form. The corporate name IS followed by some type of indicator, such as Corporation, Incorporated, or an abbreviation.
Where should I incorporate my business?
One of the first decisions a business must make after deciding to incorporate involves selecting the proper state of incorporation. A corporation is not required to incorporate in the state of its operations; however, often the best decision may be to incorporate in your home state.
Two issues must be weighed to determine the proper state:
- - a dollars and cents analysis comparing the costs of incorporating in the state of operation versus qualifying to do business as a foreign corporation in the state under consideration
- - determining the advantages and disadvantages of eachstate’s corporate laws and tax structure.
The decision usually falls between the state in which the business is located or Delaware. For advice regarding which state is optimal for your particular business situation, consult an attorney or an accountant.
Advantages:
Delaware has long been a great place to incorporate in. In fact, over half of the Fortune 500 companies are incorporated in Delaware. The reasons for Delaware’s popularity:
- - The cost to incorporate in Delaware is one of the lowest int he country.
- - There is no corporate income tax for corporations incorporated in Delaware but not transacting business in the state.
- - Delaware maintains a separate corporate law court system, called the Delaware Court of Chancery, that does not use juries, but only uses judges appointed for their knowledge of corporate law.
- - One person can hold all officer positions of the corporation-president, secretary, and treasurer-and serve as the sole director.
- - These names are not required to be listed in the articles of incorporation. Shareholders, directors, and officers of the corporation need not be residents of Delaware.
- - Shares of stock owned by persons outside of Delaware arenot subject to Delaware taxes.
How long does it take to incorporate in Delaware?
After we receive a paid order for a Delaware formation, we will reserve the name with the state that or the next business day. The certificate of incorporation or organization is prepared and filed from our associates Delaware office. For expedited orders, the state typically approves filings within 5 to 7 business days after receiving the filing. For non-expedited orders, the state can take as long as 4 to 6weeks to approve the filing. After the state approves your filing, corporate or LLC existence begins for your company. The paperwork is returned to Business Filings, scanned into our Online Corporate Status Center, and shipped to you. Express shipping is included with Business Filings’ expedited processing service; otherwise the completed documents will be sent to you via regular U.S. mail.
What is the organizational structure of a corporation?
The organizational structure of a corporation relies on three basic groups:shareholders, directors, and officers.
A corporation is owned by shareholders; however, they do not directly manage the corporation. Instead, they influence corporate decisions through indirect methods such as electing and removing directors, approving or disapproving amendments to the articles of incorporation and voting on major corporate issues. The directors, who comprise the “board of directors,” are responsible for managing the affairs of the corporation. Usually, directors make only the major business decisions and supervise and appoint the officers who make the day-to-day business decisions of the corporation. Officers are responsible for the every day management of the corporation. Typically, officers are appointed directly by the board of directors. It is important to note that a shareholder may serve on the board of directors and as an officer. In fact, in most states one person is enough to form a corporation.
What is a Limited Liability Company – LLC?
The Limited Liability Company or LLC is not a partnership or a corporation. An LLC is a distinct type of business that offers an alternative to partnerships and corporations, by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation.
What paperwork is required to formn an LLC?
Articles of organization must be prepared and filed with the state and filing fees, initial franchise taxes, and other initial fees must bepaid.
Do I need an attorney to form an LLC?
You can prepare and file the articles of organization yourself; however, you should understand the requirements of your intended state of formation. You can use our service to form your LLC and save money on attorney’s fees. However, if you are unsure of what entity type would be most beneficial to your business, consult an attorney or accountant.
What are the advantages of an LLC?
LLCs offer numerous advantages.
Pass-Through Taxation – LLCs allow for pass-through taxation. This means that earnings of an LLC are taxed only once. The earnings of an LLC are treated like the earnings from a partnership, sole proprietorships and most “S” corporations.
Limited Liability – The LLC owner’s liability is generally limited to the amount of money which the person has invested in the LLC. Thus, LLC members are offered the same limited liability protection as a corporation’s shareholders.
Flexible Management Structure and Flexible
Ownershipis Permitted – Like general partnerships, LLCs are generally free to establish any organizational structure agreed on by the members. Thus, profit interests may be separated from voting interests.
What are the disadvantages of an LLC?
The disadvantages of an LLC include:
More Paperwork Than an Ordinary Partnership – Documents must be filed at the state level to create an LLC, which is not the case with a general partnership.
Dissolution Date – Some states require that a dissolution date be listed in the articles of organization. This date may be amended. Further, certain events, such as death of a member, a member leaving, bankruptcy, etc. can be a dissolution event. A corporation has unlimited life and these events are not dissolution events for a corporation.
What should I name my LLC?
Choose the name of your LLC carefully. It is very important that your name portray the image you want for your new company. Legally, the name you select must not be “deceptively similar” to any existing company or must be “distinguishable on the record” of your state. For example, if an LLC named Flower LLC exists in your state, it is possible that the name you select will not be available; therefore, we ask for a second choice on the LLC order form. Most states require that the name you select show your business is a limited liability company, by including the words “Limited Liability Company”, or the abbreviation LLC. There is one thing that General Motors, Microsoft, AT&T and all other major businesses in America have in common – they are corporations. A corporation is a separate legal entity, which functions just like an individual, but with some compelling advantages.
Protection from personal liability
As many of you may know, incorporating is one of the best ways to protect a business owner from personal liability. Shareholders of a corporation are generally not liable for the obligations of the corporation. Creditors of a corporation may seek payment from the assets of a corporation, but not the assets of the shareholders. This means that business owners may engage in business without risking their homes or other personal property.
Self-employment tax savings
Corporate profits are not subject to Social Security, Medicare, Workers Compensation and other taxes – a combined 15.3% in taxes. An individual proprietor would need to pay all of the foregoing taxes (commonly referred to as “self-employment taxes”) on all income earned by the business. With a corporation, only salaries are subject to these taxes. For example, if a sole proprietor earned $60,000 from the business, a 15.3% tax would have to be paid on $60,000. Let’s assume that the owner of a corporation pays himself or herself $40,000 a year in salary and $20,000 is leftover as corporate profits. In this case, the 15.3% tax would only be paid on the salary ($40,000). This saves the owner of the corporation over $3,000 per year! Please note that a stock holder – employee must pay himself or herself a reasonable salary, or else the IRS could re-characterize some or all of the corporate profits as salary.
15% Tax on corporate profits – ”C” Corporations provide even greater tax flexibility. By simply dividing income between the corporation and the shareholders, businesses can save thousands of dollars each year on taxes. With proper structuring, a corporation may deduct other expenses such as automobile insurance, education benefits and life insurance. These expenses are subject to strict limitations for sole proprietors (if deductible at all). Moreover, these expenses can be “red flags” that trigger audits for individuals. For example, an individual proprietor who wants to deduct expenses from a home office can trigger IRS scrutiny.
Lower chance of an IRS Audit - On a percentage basis, the IRS conducts fewer audits on corporations than individuals. Corporate returns also have fewer “red flags” than individual returns.
How is an LLC Managed?
A member’s ownership of an LLC is represented by their “interests”, just as partners have “interest” in a partnership and shareholders have stock in a corporation. An LLC may be managed by its members (owners) or by selected managers. If the LLC is to be managed by its members, it operates much like a partnership. Each member has an equal say in the decision making process of the company. If the members choose, they may elect a manager or managers to act in a capacity similar to a corporation’s board of directors. These managers are in charge of the affairs of the corporation. Member management is the normal default rule of state law. This means that if managers are not selected in the articles of organization, the members will direct the affairs of theLLC. Overall, incorporating is one of the best ways a business owner has to protect his or her personal assets, while saving thousands of dollars in taxes. Since individual situations differ, please consult a qualified tax or legal professional to discuss your specific circumstances and to maximize your tax benefits.
