What are the main types of incorporated businesses?
There are several. The most popular types of corporations used in the USA are the “C”- Corporation, “S” – Corporation, Non-profit Corporation, Partnership and the LLC (Limited Liability Company).
What is a C Corporation?
C-Corporations are the most commonly used type of corporations that are suitable for small businesses as well as for other types of business. A C-Corporation is a legal entity, separate from its owners, and may have an unlimited number of shareholders. A major advantage of any corporate form is that the assets of the shareholders are protected from the creditors of the Corporation since the liability of the shareholders is limited to the amount contributed by them to the capital of the Corporation. Moreover, as a separate entity, a corporation has unlimited life, prolonging it beyond the life of its owners: stock may be transferred so that owners can distribute their interest in the corporation without the corporation dissolving. The only disadvantage of C-Corporations is double taxation as profits are taxed first as income to the corporation, then as income to the shareholder when distributed as dividends. In order to avoid double taxation, some small corporations that have no more than 75 shareholders can obtain S-Corporation status.
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 appropriate state authority, and all the fees are paid.
What is a Non-Profit Corporation?
In cases where intended activity of the Corporation is connected with education, charity, or scientific activity there is an opportunity to establish a Non-Profit Corporation. Net profit of such corporation is not subject to taxes if it is destined for corporate purposes and is not allocated between the shareholders, directors or other officers.
What is an S Corporation?
S Corporation is actually a Corporation what has obtained special tax status from the Internal Revenue Service (IRS). The Corporation must apply to obtain this special status within a certain frame of time after its incorporation. This tax treatment allows the corporation not to be a separately taxable entity. Instead of being imposed on the Corporation itself, the profits and losses are passed-through, for tax purposes, to Shareholders (as though they were partners). This helps to evade double taxation (at the corporate level and again at the personal level) and does not alter any of the legal protection, which a Company offers. In order to qualify for S corporation status, the corporation must be a U.S. corporation with only one class of stock and number of Shareholders is limited to 75. These shareholders must be individuals, estates or certain qualified trusts that consent in writing to the S corporation election. Shareholders are required to becitizens or residents of U.S. Also, an S corporation can’t issue preferred shares of stock with special liquidation, dividend or conversion rights.
What is Partnership?
A General Partnership is a form of business organized by two or more individuals who do not want to set up a Corporation or other type of company. In this case the members are responsible for any debts and liabilities in proportion to their stake in share capital of the Partnership. In the same way they participate in the distribution of profits.
In the case of a General Partnership, only the income of the members is subject to taxes.
The simplest type of partnership is a Sole Partnership. A Sole Partnership is a business entity connected with the sole owner. In this case the owner runs the business on his own behalf.
In a Limited Partnership the assets and liabilities are divided between general and limited partners. Thus, limited partners in contrast to general members are liable for the debts and liabilities of the Partnership only to the amount of their stakes in the partnership’s capital.
In a Limited Liability Partnership the assets of each partner are more secured. This is due to the fact that the members of a Limited Liability Partnership do not bear responsibility for any debts or liabilities that have been caused by improper or invalid acts of the other members, officers or agents of the Partnership. In all other cases the members of the Partnership are liable for all debts and liabilities of the Partnership as well as for all debts and liabilities that have been caused by acts committed by any officer subordinated directly or managed by the partners.
What is a Limited Liability Company?
Limited Liability Companies are a relatively new business form in the United States, though they have a long-standing history in Europe. First formed in the United States in 1977, and granted pass-thru tax status by the Internal Revenue Service in 1988, this business form currently is recognized in all 50 states.
The LLC is a distinct business entity that offers a alternative to partnerships and corporations by combining the corporate advantages of limited liability with the partnership advantage of pass-through taxation. This means that LLCs can be taxed like partnerships, but only at the individual level when profits are paid as dividends. These earnings have a considerable advantage over C corporations, which are subject to double-taxation (once at the corporate level, and again at the individual level) when profits are paid as dividends to its Members (the equivalent of Shareholders in a Corporation). Similar to corporations, LLCs protect personal assets from business debt. However, LLCs have a limited life of about 30 years, depending on the state and do not have stock (and thus do not get the benefit of stock ownership and sales). Additional advantage of LLC is flexible ownership and management structure. Like general partnerships, LLCs are generally free to establish any organizational structure agreed upon by the members. This type of Company is also similar to the S Corporation, but without the restrictions incident to the latter.
Where should I incorporate?
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 is to incorporate in your home state.
There are several considerations involved in deciding where to incorporate, including the cost of incorporation, tax laws, and general laws governing the actions and liabilities of the corporation. The decision usually falls between the state in which the business is located and Delaware.
If the corporation is a closely held corporation and does business primarily within a single state, local incorporation is typically preferable. Although incorporating a business in its home state may be more costly than incorporating in another state, it will prevent the corporation from having to defend itself in a foreign state, should it be sued. Additionally, by incorporating in its home state, a business will not have to pay the fees required to do business as a foreign corporation, which may be more expensive than the cost of incorporating in the first place. If you have any questions concerning where to incorporate consult an attorney or an accountant.
Still some accountants and lawyers recommend forming a Delaware corporation in all cases. Why?
First, the Delaware General Corporation Law is one of the most advanced and flexible corporation statutes in the nation. Second, Delaware courts and, in particular, the Court of Chancery, have over 200 years of legal precedent as a maker of corporation law. Third, the state legislature seriously takes its role in keeping the corporation statute and other business laws current. Finally, the office of the Secretary of State operates much like a business rather than a government bureaucracy with its modern imaging system and customer service oriented staff.
Delaware is universally recognized as the most corporate-friendly state and the best place to incorporate a Company in the United States. One of the greatest sources of state income for Delaware is an incorporation fee. As a result of the large number of businesses which choose to incorporate in its territory, Delaware has developed an excellent filing system and a very “customer friendly” Corporation Department.
The main advantages of incorporation in Delaware are these:
The incorporation costs of a Delaware Corporation are among the lowest in the United States.
No minimum capital investment in the Company is required, unlike some other States that require a minimum of $1,000. In addition, shares issued may have no par value.
Delaware has no sales tax, no personal property tax, and no intangible property tax. Additionally, Delaware state income tax is not levied on corporations not doing business in Delaware.*If the Company does not do business in Delaware, it does not have to pay any income tax to the state.
Delaware has a separate Court of Chancery, a business court system specializing in corporate law. It is a well-developed body of state corporate law, which helps deliver predictable and consistent legal decisions. Additionally, Delaware has corporation friendly anti-takeover statutes that limit the ability of other corporations to institute hostile takeovers.
The Company has no obligation to have a bank account in Delaware.
The same person can be Shareholder, Director and Officer of a Delaware Company. Many other States require a minimum of three persons in order to fill the Officers’ positions. In addition, there is no obligation for Shareholders, Directors and Officers to reside in Delaware or to hold meetings there. There is no obligation to provide names and addresses of shareholders and directors of a Delaware Company to the State of Delaware, nor does this information appear within public records. The sole obligation for the Company doing business somewhere other than Delaware is to be represented by a registered agent in Delaware.
If a Delaware Company shareholder doesn’t reside in the state, he doesn’t have to pay any taxes concerning the Shares. In addition, there is no sales tax in Delaware.
What is a Registered Agent?
When you incorporate out of your home state and do not have an office in the incorporation state, you need a Registered Agent which can be an individual or a corporation with a street address in that state, open for business during regular business hours and that will accept receiving important legal and tax documents and forward them to your corporation. As the official representative of your Company, the Registered Agent receives and forwards you any documents and notices from the corporate authorities (e.g. Annual Report, Franchise Tax Notice, etc.) and any notice or legal procedure involving your Company. A Registered Agent also provides a local address for service of process in the state of incorporation, and acts as a buffer between the state and your business allowing you greater personal anonymity.
If you incorporate in your home state, you, a friend or any officer of your corporation can be the Registered Agent. Most small businesses choose to have one of their officers or directors as their registered agent, but the job can be performed by anyone inside or outside the company.
What is a Corporate Directors?
All corporate power is vested with the Board of Directors Shareholders elect them for a specified term. The board members act at board meetings, where they set goals for the corporation, authorize the issuance of stock, and choose officers to run the daily operations of the business. In addition, the Board may also elect the President.
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 when managing 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 must detail why the action was proper.
Most states allow having one person hold all of the top offices of a corporation. You can have any number of directors, although many small businesses choose to limit their board size to 2-5 members. In small corporations, most directors also serve as corporate officers (President, Vice President, Secretary, and Treasurer).
What is Corporate Officers?
There are three general positions: President, Treasurer and Secretary (or Clerk).
Although most jurisdictions allow one person to serve in all three positions, the person’s responsibility and authority changes through the different officerships the person assumes.
The President has the overall executive responsibility for the management of the corporation and is directly responsible for carrying out the orders of the board of directors. The board of directors usually elects him or her.
The Treasurer is the chief financial officer of the corporation and is responsible for controlling and recording its finances and maintaining corporate bank accounts. Actual fiscal policy of the corporation may rest with the Board of Directors and be largely controlled by the president on a day-to-day basis.
The Secretary is typically responsible for maintaining the corporate records.
In addition to these required officer positions, a corporation may also have Vice Presidents and/or Assistant Secretaries or Assistant Treasurers.
Typically, the authority and responsibilities of each officer is described in the corporate bylaws and may be further defined by an employment contract or job description.
Can the same person be the shareholder, director and all officers of a corporation?
While jurisdictions will vary in their requirements, most states require that there be at least one director and two officers, in a general, for-profit corporation. The required officers are President and Secretary. Most states allow one natural person to hold both offices and be the sole director of the corporation. Usually, that one person may also be the sole shareholder. A corporation may not be a director of another corporation.
What are Shareholders?
Shareholders are the owners of the corporation. Each share of stock represents a financial interest in the company. Shareholders can receive stock for cash or services to the company. Shareholders are responsible for electing the Board of Directors. Unless the shareholders are part of the management team (directors or officers), they have no authority to control the operations of the company. If they are dissatisfied with the company, they may elect a new board of directors or simply sell their shares.
What are Members?
Members are the owners of the corporation. Members receive certificates that represent a financial interest in the company, similar to stock in a corporation. Members may receive their certificates in exchange for cash or services to the company. Members are entitled to vote at meetings in accordance with their interest in the company.
What is Stock? Does the corporation have to issue stock?
Stock certificates represent the amount of money a shareholder has decided to invest in the corporation. Owning stock entitles a shareholder to certain rights, including voting rights and dividends. At formation, a company decides how much stock will be issued, and how many different classes of shares it will have (common, preferred, etc.). This information is contained in the Articles of Incorporation.
Generally, common stock entitles the owner to vote for directors and receive dividends. Owning common stock does not guarantee that dividends will be paid, however. The board of directors must look at the corporation’s financial situation and decide whether it can legally authorize dividends to be paid. Finally, dividend amounts are split equally among all common shares and distributed to the shareholders.
Most small corporations do not have preferred stock. Preferred stock usually entitles the owner to receive a certain amount of dividends each year, provided the corporation can legally authorize that payment. Preferred shareholders are paid before common shareholders.
Most states have created many exceptions and exemptions from registering a stock issuance with the State or with the SEC for most small businesses, it may be wise to contact the appropriate entity to determine whether you must file a notice of stock issuance on a state or Federal Level.
What is the difference between “par” and “no par” stock, and how much stock do I need?
A business corporation must sell shares of stock in order to capitalize the corporation, that is, provide the corporation with its own capital, separate from the money of its owners. This separation provides part of the support for shielding the shareholders from personal liability for the debts and obligations of the corporation.
Shares of stock sold by the corporation represent proportionate ownership interests held by shareholders in the corporation. “Par value” is a dollar value assigned to shares of stock, which is the minimum amount for which each share may be sold. There is no minimum or maximum value that must be assigned. Shares may also have “no par value,” which means that the Board of Directors will assign a value to the stock below which the shares cannot be issued. It is generally recommended to request the minimum amount of authorized shares of no par value stock in order to qualify for the minimum incorporating fees and annual franchise tax.
What are requirements of the Corporation and LLC name?
Legally, you can choose any name for your corporation that you prefer, however, the name must not be deceptively similar to any existing corporation in your state. To ensure your filing is completed as quickly as possible, it is a good idea to submit at least one alternate name with your order.
Additionally, The corporate name you choose must contain a valid corporate indicator for the state in which you are incorporating. Most every state will accept one of the following identifiers or a suitable abbreviation: company, corporation, incorporated, limited, association, club, fund, syndicate, union or co., corp., inc., ltd., etc. The regulations affecting corporations do vary from state to state. Company Express can assist you in determining an acceptable corporate indicator for your state.
What protection is granted to the Corporation’s Name?
In your incorporation state only your Company will have the right to use its name. However, it is possible that this name is also that of a Company incorporated in another state or elsewhere in the world because there is no national registration of trade names. Generally, businesses, including corporations, protect their trade names by registering their trade name as a service mark or trademark if the trade name also functions as a service mark or trademark. Because of the legal complexities involved, we recommend that businesses obtain private counsel to get advice on how to protect a trade name in interstate commerce.
What are the Articles of Incorporation and Bylaws?
A Corporation’s “Articles of Incorporation” is the main filing document, which begins the corporation’s existence under state law. Once filed, the corporation commences existence.
The level of complexity for a corporation’s Articles of Incorporation can range from very simple to extremely complex. Articles of Incorporation contain information that all states need in order to form your corporation. Generally included in the articles are items such as: the name and purpose of the corporation, the names of the initial directors, the name of the Registered Agent, and the number and par value of authorized shares of stock. Requirements vary by state.
Bylaws serve as the internal operating document for the corporation. Bylaws are adopted by every corporation, and contain rules about shareholder voting, required meetings, stock, the makeup of the board of directors, and the corporation’s fiscal year. Generally, most states do not require that Bylaws be filed.
What are the Articles of Organization and Operating Agreement?
The Articles of Organization contain information that all states need in order to form your LLC. Generally included in the articles are items such as: the name and purpose of the LLC, the names of the initial members, and the name and address of the Registered Agent.
The Operating Agreement is similar to the bylaws of a corporation. It contains the general rules that govern the operation of the LLC, including rules about member voting, required meetings, transfer of membership interests, and management of the LLC. Like bylaws, an operating agreement is intended for use within the LLC, and is generally not filed with the State.
What is a Federal Employer Identification Number? E.I.N.?
If you plan on opening a bank account under your corporate name, most banks will require that your corporation have a Federal Employers Identification Number.
A Federal Tax Identification Number (also known as a “95 Number” or “EIN Number”) is a number assigned to a corporation or L.L.C. by the Federal Government for purposes of taxation. The Federal Tax ID Number is to a corporation or L.L.C. as a Social Security Number is to an individual. Most banks require that a corporation or L.L.C. obtain a Federal Tax Identification Number as a prerequisite to opening a bank account regardless of whether the company will or will not have employees.
Can I keep or transfer my current tax ID number?
No. Your Employer Identification Number is like a social security number. Just as you would obtain a separate Social Security Number for different people, you must have a different EIN for each new company.
Do I need to open a new bank account once I’m incorporated?
It is necessary to open a new bank account for your new entity. Do not commingle cash. Always operate your corporation as a separate entity distinct from yourself in every respect. By using the same bank account for personal and corporate purposes, you pierce your corporate veil and allow creditors to challenge the validity of your corporation and attack your personal assets.
Do I need a Corporate Kit?
Once the corporation is formed, it must comply with corporate formalities: meetings must be conducted, bylaws adopted and shares of stock may be issued. Additionally, in several states, your bank, in order to open a corporate account, may request a corporate seal.
Company Express offers corporate kits, which include these necessary items and preserve your company records all in one binder.
Our Corporate Kit is a manual customized with your company name and includes the following items: a corporate seal, stock certificates with a corporate name imprinted on them, a stock transfer ledger, organizational Minutes, and a personalized binder with By-laws.
Our LLC Organizational Kit is organized with dividers that include samples of Membership agreements, Member certificates and transfer ledgers.