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Corporation FAQs
LLC FAQs
S-Corp FAQs
IRS FAQs
Registered Agent FAQs
Important Disclaimer: The discussion and examples provided herein are simple illustrations for informational purposes only and does not constitute Legal Advice. We strongly urge you to contact an attorney of your choice before making any decisions that could impact business organization or your tax liability.
Corporation FAQs
Q: What is a corporation?
A: An organized business, that has been granted a state charter recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of the individuals within the entity. A corporation can acquire assets, enter into contracts, sue or be sued, and pay taxes in its own name. Corporations issue shares of stock to individuals supplying ownership capital and issue bonds to individuals lending money to the business. The corporation is a desirable organization for a business entity for a variety of reasons including the increased capability such an entity has to raise capital. Most large firms, especially those engaged in manufacturing, are organized as corporations.
A Corporation is considered by law to be a unique entity separate from those that own it. As an individual entity, a corporation can be taxed, sued, and can enter into contractual agreements. Corporations are owned by shareholders of the corporation, which elect a board of directors to oversee the major business decisions and policies. When ownership changes in a corporation, the corporation does not dissolve.
As such, corporations taxed as “C” Corporations are the most formal business entity and they have greater tax reporting responsibilities than other business entities. “C” Corporations allow for profits to be retained in the business, if desired, and frequently these profits can be taxed at a lower rate than personal income. Corporations taxed as “C” Corporations can also pay out after tax profits to its owners in the form of dividends, but this can also lead to double taxation.
Q: Are there any special requirements for selecting a corporation’s name?
A: Yes. The corporation 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 for corporations: Inc., Incorporated, Company, Corp. and Ltd. The regulations affecting corporations do vary from state to state. In addition, your company name must not match or be too similar to the name of an existing company registered in your desired state.
Q: What are By-Laws?
A: They are the regulations of a corporation that, subject to statutory law and the articles of incorporation, provide the basic rules for the conduct of the corporation's business and affairs. The By-Laws are similar to an Operating Agreement for an LLC, a Partnership Agreement for a general partnership, a Limited Partnership (LP) or a Limited Liability Partnership (LLP). It is generally not required by a given state for forming a corporation, although it is certainly recommended that they be prepared as soon as possible after forming the corporation. When dealing with banks and other private companies for financing issues (loans, mortgages, etc.) the By-Laws will likely be required by that institution or company. To validly complete the formation of the corporation, the corporation must have an approved set of By-Laws.
Q: Can I keep the same bank account or do I need to open a new one once I have the corporation formed?
A: 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 increase the likelihood of allowing someone to pierce your corporate veil and allow creditors to challenge the validity of your corporation and go after your personal assets.
Q: Do I have to have a certain income before it makes sense to incorporate?
A: No. This is a common misconception among small-business owners, usually fostered by advice from an inexperienced accountant. Any seasoned advisor will tell you that incorporating is the first and foremost thing you should do when starting a business. Incorporating (or forming an LLC) will not only save you taxes (no matter what your income) but it will also limit your exposure to IRS audits by separating your personal and business expenses.
Q: Is there a minimum capital requirement to start a corporation?
A: In most states, the only capital required to start your corporation is the state filing fee.
Q: Do I need an attorney to incorporate?
A: Legally, no. However, consultation with an attorney prior to business startup and having an attorney file your articles of incorporation and prepare your By-Laws will almost always save you a lot of headaches and legal problems as issues arise during your business activities.
Q: What are the Advantages of forming a corporation?
A: The primary advantage of the corporation is the limited liability the shareholders receive in most circumstances the shareholders and directors are not liable for the debts and agreements of the corporation. Creditors will not be able to demand payments from shareholders or directors. Maintaining the limited liability of a corporation requires that the shareholders and directors govern according to the state and federal laws, including holding annual meetings and maintaining meeting minutes.
- Personal Liability (little or no liability)
The forming of a corporation creates a separate entity. Creditors of the corporation can bring suit against the business only. The stockholders of the corporation have only their investment in the company to lose.
- Adds integrity
By adding corp or inc. to the end of your business name your company will be looked at by your customers and suppliers as a much larger organization with increased integrity and credibility.
- Tax Savings – Deductible Employee Benefits
Incorporating your business will provide tax-deductible benefits for you and your employees. If you are the only shareholder and employee you may still have the to deduct many expenses such as travel, entertainment, life insurance and health insurance Additionally, corporations may provide a tax shelter for retirement plans (401 K’s) or qualified pension plans.
- Easier to raise capital
Through the sale of stock money can be raised much easier. With Other forms of business such as sole proprietorships and partnerships, investors are much harder to attract because of the personal liability. Investors are more likely to purchase shares in a corporation where there usually is a separation between personal and business assets. Also, some banks prefer to lend money to corporations.
- A Corporations life is perpetual
The corporation can continue to exist regardless of what happens to its directors, officers or shareholders. In many other business structures the business may automatically end or at a minimum cause many legal issues.
- Transfer of Ownership
Through the sale of stock ownership of a corporation may be transferred, without disrupting business affairs or the need for complex legal documentation.
- Anonymity for Owners
Corporations can offer the ability for its owners to remain nameless. If you open a small business and don’t want the public at large to know your involvement your best choice may form a corporation. If you are a sole proprietorship or partnership it is hard to hide the fact that you are the owner. Most likely you would be required to register your name and the names of your partners with the state and/or county officials in which you are doing business.
- Management that is Centralized
With a corporation’s management structure all decisions are made by your board of directors. The shareholders cannot unilaterally bind your company by their acts simply because of their investment. In partnerships there may exist binding agreements with individual partners that may cause managerial or financial difficulties to the business.
LLC FAQs
Q: What is a Limited Liability Company (LLC)?
A: An LLC is a form of business entity that is separate and distinct from a person, like a corporation. The LLC is often described as hybrid between a corporation and a partnership. It allows for the limited liability protection similar to that of a corporation (i.e. your risk is limited to the amount that is invested in the LLC, and personal assets beyond that are usually protected). It also allows for a more flexible setup and operating structure like a general partnership (much more simple and flexible than a corporation) while providing the pass through taxation of a general partnership (if a multimember LLC) or that of a sole proprietorship (if a single member LLC). One of the main advantages of an LLC over a general partnership or a sole proprietorship is the Limited Liability protection.
LLCs have long been a traditional form of business structure in Europe and Latin America. LLCs were first introduced in the United States by the state of Wyoming in 1977 and authorized for pass-through taxation (similar to partnerships and S Corporations) by the IRS in 1988. All 50 states and Washington, D.C. have now adopted some form of LLC legislation for both domestic and foreign (out of state) LLCs.
The LLC is becoming one of the most popular ways for new and small businesses to operate. Since a huge number of small businesses are sole proprietorships and partnerships, an LLC is frequently an excellent choice for these types of businesses. The LLC is now a recognized business structure in all 50 states plus the District of Columbia. LLCs are gaining popularity with small business owners because, as noted above, they combine the advantages of a corporation with the tax advantages and management flexibility of a general partnership.
A single member LLC is taxed on the federal level the same as a sole proprietor unless it elects to be taxed as an “S” corporation, while a multimember LLC is taxed on the federal level the same as a general partnership, unless it also elects to be taxed as an “S” corporation.
Many business professionals believe LLCs present a superior alternative to corporations and partnerships because LLCs combine many of the advantages of both. With an LLC, the owners can have the corporate liability protection for their personal assets from business debt as well as the tax advantages of general partnerships or corporations taxed as “S” Corporations.
Q: Do I need an attorney to form my LLC?
A: Legally, no. However, consultation with an attorney prior to business startup and having an attorney file your articles of incorporation and prepare your By-Laws will almost always save you a lot of headaches and legal problems as issues arise during your business activities.
Q: How many people are needed to form an LLC?
A: Since the inception of the LLC, many states used to require two or more members. At present, however virtually all states now only require a single member.
Q: Are there any special requirements for selecting an LLC name?
A: Yes. The LLC 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 for LLCs: LLC, L.L.C. or Limited Liability Company. The regulations affecting corporations and LLCs do vary from state to state. In addition, your company name must not match or be too similar to the name of an existing company registered in your desired state.
Q: Is there a minimum capital requirement to start an LLC?
A: In most states, the only capital required to start your corporation or LLC is the state filing fee. For instance, to form a Delaware corporation, you only need to pay the state filing fee and your Registered Agent service company’s filing and service fees.
Q: What is an operating agreement?
A: The operating agreement is similar to a Partnership Agreement for a general partnership, a Limited Partnership (LP) or a Limited Liability Partnership (LLP) or the By-Laws of a corporation. It is an internal contract amongst the members/owners of the LLC, and it lays out such things as ownership interest, member responsibilities, accounting method, conditions for adding or removing members, terms for concluding the LLC, etc. It is generally not required by a given state for forming an LLC, although it is certainly recommended to be prepared as soon as possible after forming the LLC. When dealing with banks and other private companies for financing issues (loans, mortgages, etc.) it will likely be required by that institution or company. To validly complete the formation of the LLC, members must enter into an Operating Agreement. This Operating Agreement may come into existence either before or after the filing of the Articles of Organization and may be either oral or in writing.
Q: How is an LLC taxed?
A: For federal income tax purposes the profits of an LLC “pass through” to the personal income of the members/owners. In the case of a single member LLC, it is typically taxed the same as a sole proprietorship by default (i.e. typically filed on the schedule C of the owner’s personal income tax filing). In the case of a multimember member it is typically taxed the same as a general partnership by default (i.e. a 1065 partnership return is filed with the IRS, with a schedule K-1 being supplied to each partner/member showing the proportional profit/loss allocated to them, with this being filed on the schedule C). However, these are general tax explanations and may not apply to everyone. You should confer with a CPA to make sure you understand your personal tax liability.
An LLC legally separates the business from its owners (like a corporation), yet it can elect to be treated as an individual or partnership for tax purposes. In this case, the LLC doesn’t pay any tax itself – the income is passed through to the owners as with partnerships. The tax rules governing partnerships are more flexible, allowing for more flexibility in tax planning. It is up to you to be creative and take advantage of every possible tax break you qualify for. Your specific situation will dictate whether an LLC or a corporation offers the best tax advantages for you.
However, a single member LLC or a multi-member LLC may elect to be taxed as an “S” corporation, which provides some distinct advantages. Click the “S” Corp link to find out more. S-Corp FAQs
Q: What is the management structure of an LLC?
A: An LLC is typically managed by its members/owners (referred to as member-managed). In that respect, an LLC is unlike a corporation, which has a much more rigid and defined management structure, including directors and officers. All owners of the LLC are typically referred to as members, and they can have control and voting interest proportional to their ownership interest, or in proportions different from their ownership interest; however the members agree such voting should occur in the Operating Agreement.
However, an LLC can be also be managed by managers (referred to as manager-management). This makes the LLC operate similar to a Limited Liability Partnership. The vast majority of limited liability companies are member-managed. A manager-managed has important tax ramifications and should not be entered into without consulting a CPA.
When you structure your business as an LLC, it is simple to bring new owners (called members) on board, and there is no limit as to how many can be involved. These additional investors can be individuals, corporations, trusts, and pension plans, none of which even have to be in the same state or in the U.S.
The LLC structure was formed around the principle of the freedom to contract. This basically means the owners only have to agree among themselves how the company will be run and the agreement will be held up in court. As an LLC, resolutions, amendments, meeting minutes, and annual board meetings are not required by law, as they are with corporations. In fact, in many states, owners of corporations that do not comply with these requirements can lose the asset and liability protection typically provided by a corporate structure.
While the LLC does provide limited liability for its members, there are some exceptions where individual members may be held liable just like the officers, directors and shareholders in a corporation:
Guarantor Liability: Where an LLC member has personally guaranteed the obligations of the LLC, he or she will be liable. For example, where an LLC is relatively new and has no credit history, a prospective landlord about to lease office space to the LLC will most likely require a personal guarantee from the LLC members before executing such a lease. Alter Ego Liability: Very similar to the judicial doctrine applied to corporations where a court may hold the individual shareholders liable where the business entity is merely the "Alter Ego" of its shareholders, a member of an LLC may also be held liable for the LLCs debts if the court imposes its "alter ego liability" doctrine.
Q: Am I required to hold LLC meetings?
A: While meetings may frequently be necessary and proper to discuss a variety of LLC issues, such meetings are not required by state statute to have and maintain an LLC as they are with a corporation.
Q: What are the Advantages of Forming an LLC?
Limited Liability:
Members of an LLC have limited liability for business debts; Protection of personal assets from business debt; Ordinarily, only the LLC is responsible for the company's debts thus shielding the members from individual liability.
Tax Advantages:
Pass-through taxation; “S” corporation tax election available; Profits/losses pass through to personal income tax returns of the owners, unless the “S” corporation tax election is made; For tax purposes, the allocation of profit and loss of an LLC need not be proportional to ownership interests; With an LLC, there is no double taxation threat since the LLC is not a separate taxable entity;
Ease of Management:
Flexible and simple management and ownership structure; Greater flexibility in management and organization of the business; Less formalities and paperwork; Management and control of an LLC is vested with its members unless the articles of organization provide otherwise; Ordinarily, voting interest directly corresponds to interest in profits, unless the articles of organization or operating agreement provide otherwise; An LLC's failure to hold meetings of members or managers is not usually considered grounds for imposing the alter ego doctrine where the LLC's Articles of Organization or Operating Agreement do not expressly require such meetings.
Foreign Investment:
LLCs who do not elect to be taxed as an “S” corporation, do not have the ownership restrictions of “S” Corporations making them ideal business structures for foreign investors; You do not need to be a US citizen to own or invest in an LLC;
Separate Legal Entity: Like limited partnerships and corporations, an LLC is recognized as a separate legal entity from its "members." Transferability: No one can become a member of an LLC (either by transfer of an existing membership or the issuance of a new one) without the consent of members having a majority in interest (excluding the person acquiring the membership interest) unless the articles of organization provide otherwise. Duration: Although most states now allow an LLC to have a perpetual existence, LLC's traditionally were required to specify the date on which the LLC's existence will terminate. In most cases, unless otherwise provided in the articles of organization or a written operating agreement, an LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member (unless within 90 days a majority in both the profits and capital interests vote to continue the LLC).
Q: What are the Disadvantages of Forming an LLC?
- Existence is not perpetual in a few states;
- Newer type of business entity so there is less case law;
- Ownership is not as easily transferable. With a corporation, a stock certificate can be sold and transferred without the need for more complex agreements and amendment of an Operating Agreement;
- C-Corporations have many tax write off's that an LLC does not. One example of this is the Medical Reimbursement Plan that a C-Corporation can utilize while LLC members are not allowed to.
- LLC’s may be treated a little differently from state to state.
Q: Can I keep the same bank account or do I need to open a new one once I have the LLC formed?
A: It is necessary to open a new bank account for your new entity. Do not commingle cash. Always operate your LLC as a separate entity distinct from yourself in every respect. By using the same bank account for personal and corporate purposes, you increase the likelihood of allowing someone to pierce your corporate veil and allow creditors to challenge the validity of your LLC and go after your personal assets.
S-Corp FAQs
Q: What is an “S” Corporation?
A: There are only two types of corporations: for profit corporations and not-for-profit corporations. Many registered agent firms don’t even know that both LLC’s and corporations can be taxed as “S” corporations, provided that they meet the eligibility requirements.
With the Tax Reform Act of 1986, the “S” corporation became a highly desirable entity for corporate tax purposes. An “S” corporation is not really a different type of corporation. It is a special tax designation applied for and granted by the IRS to corporations and LLCs that have already been formed. Many entrepreneurs and small business owners are partial to the “S” corporation tax status for corporations and LLCs because it combines many of the advantages of a sole proprietorship, partnership and the corporate forms of business structure.
All corporations start out as “C” corporations. If they elect to continued to be taxed under Subchapter “C” of the Internal Revenue Code, a “C” Corporation is a completely separate tax and legal entity from its owners, and owners who work in the business are treated and taxed as employees of the corporation. Corporations taxed as “C” Corporations are subject to corporate income taxes separate from the owners, whereas corporations and LLCs who elect to be taxed as “S” corporations and meet the eligibility requirements allow for the company profits to “pass-through” to the personal income tax statements of the owners.
As such, corporations taxed as “C” corporations are the most formal business entity and they have greater tax reporting responsibilities than other business entities. “C” Corporations allow for profits to be retained in the business, if desired, and frequently these profits can be taxed at a lower rate than personal income. Corporations taxed as “C” Corporations can also pay out after tax profits to its owners in the form of dividends, but this can also lead to double taxation.
Typically, when a standard corporation (general, close or professional) makes a profit, it pays a federal corporate income tax on the profit. If the company declares a dividend, the shareholders must report the dividend as personal income and pay more taxes. Corporations taxed as “S” corporations avoid this "double taxation" (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the shareholders.
Q: How to Elect “S” Corporation Status?
A: After the “C” corporation or the LLC has been formed, it may elect "S Corporation Status" by submitting IRS form 2553 to the Internal Revenue Service (in some cases a state filing is required as well). Once this filing is complete, the corporation or LLC is taxed like a partnership (multiple shareholders) or a sole proprietorship (single shareholder) rather than as a separate entity. Thus, the income is "passed-through" to the shareholders or members for purposes of computing tax liability. Therefore, a shareholder or member's individual tax returns will report the income or loss generated by a corporation or LLC taxed as an “S” corporation.
Q: How Does a Company Qualify for “S” Corporation Status?
A: To obtain “S” corporation status, a general, for-profit corporation or LLC must first be formed by filing articles of incorporation or articles of organization with the appropriate state entity, usually the Office of the Secretary of State. Once the corporation or LLC has been formed, the corporation or LLC must file IRS form 2553 with the IRS. Prior to filing the Form 2553, the “C” corporation or LLC must satisfy the general Federal requirements for qualifying to be taxed as an “S” corporation.
Q: How does S Corporation tax status work?
A: For purposes of federal taxation, a company that elected “S” corporation tax status is taxed differently than a “C” corporation or a typical LLC. Generally, reasonably modest salaries can be paid to the owners (shareholders or members) and the remaining income can be paid to the owners in the form of a profit distribution, which is taxed at essentially half the rate as ordinary income.
Q: Who Should NOT Elect “S” Corporation Tax Status?
A: Shareholders of corporations and members of LLCs taxed as an “S” corporation are taxed based on their pro-rata share of company income regardless of whether the company actually distributes that income to its shareholders or members. Therefore, if Bob's corporation or LLC taxed as an “S” corporation earns $200,000 in taxable income in its second year of business, but the company only issues dividends of $50,000 to Bob because its business plan is to re-invest the remaining $150,000 into developing the business next year, he will still be responsible for the tax liability calculated on the $200,000. Therefore, if you plan on drawing a very low salary and leaving most of the company earnings in the company for re-investment, the “S” corporation tax election may not be the solution for you.
Q: Who Should Elect “S” Corporation Tax Status?
A: Owners who want the limited liability of a corporation or LLC and the "pass-through" tax-treatment of a partnership will often make the “S” corporation tax election. “S” corporation tax status allows you to take a moderate salary from your corporation or LLC at regular taxable rates and take the rest of your income from the company in the form of a profit distribution at approximately half the regular taxable rate by avoiding employment tax.
IRS FAQs
Q: Can I keep or transfer my current tax ID number?
A: 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.
Q: What is the SS4/EIN/Tax ID number?
If you plan on opening a bank account under your LLC 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 EIN/Tax ID number can be thought of as a Social Security Number for your business. Most banks require that a corporation or L.L.C. obtain a Federal Tax Identification Number or EIN as a prerequisite to opening a bank account regardless of whether the company will have employees. In addition to being required to open a bank account in the name of the business, it is also required to properly pay and account for any wage/payroll employees of your company.
With regard to the above tax comments, keep in mind the following:
This is how the above tax strategy works generally. This assumes that you are running a business with an honest "expectation of profit" and "that your expenses are ordinary, necessary, reasonable and directly related to your business." You document the deductions correctly.
Registered Agent FAQs
Q: What is a registered agent?
A: Virtually all state laws require an individual or a company located in the state in which your business is either located or registering to do business to be available during regular business hours to receive legal notices and other official documents from the state. This person is called the Registered Agent. The registered agent must be a resident of or a domestic company in the state of incorporation or foreign registration. In addition, the resident agent must maintain a physical address within that state and must be available to accept service of process on behalf of the corporation during standard business hours.
Q: What is the purpose of a Registered Agent?
A: The Registered Agent acts as the representative for accepting Service of Process served upon the company within the jurisdiction of any state where the company conducts business. Service of Process is broadly construed to include any legal proceeding, legal notice, or official government communication presented to the company while it is within the jurisdiction of a state. These legal documents include notice of litigation (service of process), franchise tax forms and annual report forms. Appointing Legal Entity Services as your Registered Agent provides your company the assurance that this important service is handled correctly and efficiently.
Failure to maintain a Registered Agent can result in loss of corporate or LLC status. Equally important—if a responsible party is not available to receive service of process at all times, then your company could be unaware of a legal claim and a judgment may be entered against you.
Q: What happens if my company fails to register or designate and maintain a Registered Agent?
A: The failure, to register and designate a registered agent, may foreclose or hinder the company's ability to legally enter into contracts and gain access to the state courts. Moreover, it may subject the company to monetary, civil, and possibly criminal sanctions. Also, failure to maintain a registered agent may cause your company to fall out of "good standing" within the state. This will subject your license to do business within a state to forfeiture, with monetary penalties assessed to reinstate your company to a "good standing" again.
If you are in the state in which your company is formed or in a state that you are registering to do business in and have your own address located in that state you do not have to have an independent Registered Agent, however, Legal Entity Services, as your Registered Agent in your own state will ensure that your annual reports will be filed. Failure to file your annual reports, your Secretary of State will dissolve your company.
Q: Why must my business designate a Registered Agent?
A: The law requires it, plain and simple. Any entity conducting business within a state must register to do business in that state, designate and maintain a registered agent, and in some cases a registered office.
Q: Why Shouldn’t I be the Registered Agent for My Company?
A: It is not a good idea for businesses to serve as their own Registered Agent. Rather, the safest route is to select a reliable third party such as a service company. Using a service company as Registered Agent provides peace-of-mind for busy business owners:
It provides a layer of privacy, protecting you from being served with a legal proceeding in front of customers, clients, vendors or neighbors. - It gives you the freedom to let business (and vacation!) take you out of the office.
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