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Corporations

1. What is a Corporation?

A corporation is a business entity formed by filing official documents with the appropriate state. Corporations are one of two types, C Corporations and S Corporations. A corporation is a standard corporation, called a C Corporation, unless and until the shareholders elect special “pass through” tax status with the Internal Revenue Service (IRS) by filing an IRS Form 2553. With the exception of a few special requirements, their tax status is the only difference between the two.

A corporation is recognized by the law as an individual entity, separate from its shareholders (owners), and is many times treated as a human being. Its most important characteristic is the fact that shareholders, directors and officers enjoy limited liability for the debts, obligations and liabilities of the business as well as liability stemming from possible legal action. Protection of shareholders’ personal assets is one of the major reasons business owners choose to incorporate. Normally, shareholders cannot lose more than the amount they invested in the corporation. If the corporation goes bankrupt, the shareholders will not be liable for its debts. Should someone sue the corporation and it is found liable, they can take the corporation’s property to satisfy the judgment but if that property does not satisfy the judgment, they will not be able to take a shareholder’s personal assets, i.e. home, car, or a bank account. An exception to a shareholder’s limited liability exists when the corporation has recklessly harmed people or has been used to perpetuate a fraud.

A corporation best serves owners who want both limited liability and a more formal business structure.

2. What is the difference between a C Corporation and an S Corporation?

The most important difference between a C Corporation and an S Corporation is how they are taxed. C Corporation shareholders do not report any of the business income and expense on their individual tax return. The corporation files tax returns and pays its income taxes (at generally lower tax rates than would individuals) while the individual shareholders report and pay personal income taxes only on what may have been paid them by the corporation. On the other hand, an S Corporation is not subject to income taxes, filing only an informational tax return. All profits, losses, credits, and deductions pass through to the shareholders who report these items (based on their percentage of ownership) on their personal tax returns.

It should be noted that C Corporation shareholders are subject to called “double taxation” since they must pay income taxes on income from dividends paid by the corporation even though income taxes were previously paid by the corporation. However, since tax rates are lower for corporations, C Corporation owners can (by dividing profits) accumulate more in the corporation than is possible with S Corporations.

Another relatively minor difference between C Corporations and S Corporations is that a few special restrictions apply to S Corporations. They can have no more than 100 shareholders. While voting rights can differ, they can have only one class of stock. Their shareholders cannot be other corporations, Limited Liability Companies (LLC’s), partnerships, certain trusts, or non-resident aliens. And there can be some limitations as to the kind of business they are allowed to conduct.
How you want to be taxed is the primary consideration when choosing between a C Corporation and an S Corporation.

3. How is a corporation structured?

A corporation is owned by its shareholders. A Board of Directors, elected by the shareholders, meets regularly to collectively make decisions as to how the business is run. They manage the business, making decisions concerning policy, personnel, compensation, dividends, and the like. Appointed by and under the direction of the Board of Directors, the corporation’s officers handle day-to-day business operations. The officers, who typically include a President, Vice President, Secretary, and a Treasurer, can legally bind the corporation.

4. What are some of the advantages of a corporation?

The primary and most significant advantage of a corporation is the fact that shareholders, directors and officers enjoy limited liability for the debts, obligations and liabilities of the business as well as liability stemming from possible legal action.
A corporation can raise additional capital more easily than most of the other types of business since it can issue and sell stock or a variety of other financial instruments as evidence of interest in the corporation.
Ownership can be easily transferred by selling stock in the corporation.
Employees frequently prefer to work for a corporation that can offer them stock options and stock bonuses.
In a sense a corporation is immortal and perpetual since it does not end with the death of a shareholder owner as do some of the other business types.
Corporations are normally audited less frequently than sole proprietorships and partnerships.
Owners working in the business are employees and are therefore eligible for certain fringe benefits such as group insurance plans, retirement and profit sharing plans, and tax-favored stock option and bonus plans.
The general public normally thinks of corporations as being more substantial than sole proprietorships and partnerships.

5. What are some of the disadvantages of a corporation?

Official documents, typically called a Certificate of Incorporation or Articles of Incorporation, must be filed with the appropriate state in order to form a corporation.
State filing fees must be paid.
Regulations and requirements for operating a corporation are stricter and more complex than for other forms of business. For example, they are required to elect officers, document important decisions, and hold and keep minutes that record mandatory meetings of stockholders and a board of directors.

6. Do I need an attorney to form a corporation?

No. Formation of a corporation is primarily a clerical process and although it is relatively complicated, anyone who understands and follows the required procedures can form a corporation. We provide this formation service for substantially less than the amount charged by most attorneys. We can and do guarantee the accurate formation of a corporation but our service is not intended to serve as a substitute for professional advice. Since individual situations and state statutes vary, you may need to seek more detailed advice from your local professionals who are familiar with your specific requirements as well as those of the state in question. Since taxes are a prime consideration, it is important to consult with your accountant or tax advisor.

7. In which state should I incorporate?

While you can incorporate in any state you choose, your home state is likely your best choice – assuming you will be “doing business” there. That’s because corporations must register as a “foreign corporation” (paying fees and taxes) in every state where they do business, other than their state of incorporation. But if you will not be doing business in your home state, you may want to incorporate in another state because of its lower state fees and corporate income taxes or because of its favorable business climate. Delaware has long been recognized as such a state and is where most of the major publicly held companies are incorporated. Nevada, a state that has no corporate income taxes, is also a popular pro-business state.

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8. What are Articles of Incorporation?

The “articles of incorporation” refers to the document that sets forth the information about a corporation that is required by the laws of the state in which the corporation is formed. Some of that information will be included in the public record. The terms articles of incorporation, certificate of incorporation and charter are often used interchangeably.

9. What is an Incorporator?

The incorporator is the individual filing the articles of incorporation. The incorporator's duties end when the corporation is formed.

10. What are Bylaws?

Adopted by its shareholders, the bylaws of a corporation establish detailed standing rules that govern the internal affairs of the corporation.

11. What is the Board of Directors?

With few exceptions, states require corporations to have a board of directors - individuals who are charged with managing the business and affairs of the corporation. A corporation’s board of directors is elected by the shareholders and meets regularly to collectively make decisions concerning policy, personnel, compensation, dividends, and other issues that determine how the business is run. The officers of the corporation manage the day to day operations of the business as directed by the board of directors.

12. How many Directors are necessary?

All states allow a corporation to have one or more directors. A few states do say that a corporation can have one director only if it has just one shareholder, but if it has two shareholders it must have at least two directors and if it has three shareholders it must have at least three directors.

13. What are the Officers of a corporation?

A corporation will have the officers described in its bylaws or appointed by the board of directors in accordance with the bylaws. Officers normally include a president, vice-president, secretary, and a treasurer. The corporation’s officers hold the authority and perform the duties set forth in the bylaws or, to the extent consistent with the bylaws, those set forth by the board of directors or an officer authorized by the board of directors to prescribe the duties of other officers. One of the officers is normally designated responsible for preparing minutes of board of directors' meetings and shareholders' meetings and for authenticating the corporation’s records. Most states allow the same person to simultaneously hold more than one office in a corporation.

14. What are Authorized Shares?

A corporation’s Articles of Incorporation specify the maximum number and type of shares the corporation is authorized to issue. Since corporations do not have to issue the number of shares authorized, Issued Shares can be fewer than, but never more than, the Authorized Shares. A corporation would have to have issued at least one share of stock. In some states the number of authorized shares can affect fees and taxes.

15. What is Par Value?

Par value is the assigned value of a share of stock. Stock does not have to have a par value and corporations frequently have No Par Stock, stock which has no assigned value. A stock’s par value does not represent the actual value of a share but it is the minimum amount for which a share can be sold. In some states par value can affect fees and taxes.

16. What is a Dividend?

A dividend is a share of a sum paid to shareholders by a corporation out of the corporation's earnings. Dividends are normally paid in cash or stock. Unlike interest on loans, dividends are not a deductible expense to the corporation although they do represent taxable income to the shareholders.

17. What is a DBA - Fictitious Name?

In most states, a corporation is allowed to operate under names in addition to the corporate name. Such a name, often referred to as a fictitious name, assumed name, or trade name, can be made official by filing a DBA (doing business as) with the appropriate state and/or local jurisdiction.

18. What is a Registered Agent must I have one?

Yes, all corporations are required to have a registered agent. A registered agent is a person registered with the state of incorporation who is authorized to receive legal papers on behalf of the corporation. They are normally listed with the Secretary of State and they must be located in that state and available during normal business hours. While anyone can serve as a corporation’s registered agent, most choose to have a professional registered agent since it is extremely important that all legal documents, tax documents, annual reports, and correspondence with the state and regulatory agencies be handled promptly and efficiently.

19. What is a Corporate Kit?

A corporate kit consists of many things that will help you comply with state rules and regulations regarding documentation and record keeping. Corporations are required to hold and keep a record of initial and then annual meetings of the board of directors and shareholders. Stock or membership certificates must be issued to corporation shareholders and a record of the owners must be maintained. A metal seal is used to make an official impression identifying the company on official documents.

Click here to see what is included in the Corporate Kit supplied by MaxFilings.

20. What is a Federal Tax Identification Number (EIN)?

Every corporation is required to have a Federal Tax Identification Number, also known as an employer identification number (EIN), used to identify the business in any number of transactions.

An EIN is obtained by submitting IRS Form SS-4 to the Internal Revenue Service. Your EIN will be needed to open a bank account. We can prepare this form for you and send it to you to sign (required) and mail to the Internal Revenue Service in the pre-addressed envelope we provide.

21. How do I begin the process of forming my corporation?

It couldn’t be easier. Start now by beginning to enter the information required to prepare and file the formation documents in the state you select.

Don’t have all the information now? Afraid you won’t have time to finish?

Don’t worry. You can work on it now, save what you enter under your user name, and come back later to add or change information.

You are under no obligation – you don’t even have to use our service.

You don’t start the formation process unless and until you’re ready – only then do you pay.