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WHAT IS A CORPORATION?A corporation is an artificial legal entity, typically chartered by a state, generally formed to operate a business. Once chartered, the corporation is completely separate from its owners, has its own life, and is liable for its own debts and must pay its own taxes. HOW CAN I SET UP A CORPORATION?All states have a General Corporation Law or Business Corporation Law that allows virtually anyone to obtain a charter to conduct most businesses. (Certain types of corporations, such as banks, insurance companies, and public utilities often have to be formed either by act of the legislature or under special laws. This is a throwback to the days when all corporations were formed by a charter issued by the King of England, and later by a special act of a state legislature.) The actual formal mechanics of creating a corporation is known as "incorporation." The process involves completing and filing a "Certificate of Incorporation" or "Articles of Incorporation" and paying a filing fee. Each state has its own set of laws governing the process of incorporating. Corporate existence starts when the articles of incorporation are filed with the state office that handles incorporations (e.g., usually the Secretary of State or Corporation Commissioner), along with the required filing fees. Accelerated incorporations or same day filings are available in some states. In addition to the standard "corporation" two relatively new forms of entities known as a "Limited Liability Company" and "Limited Liability Partnership" offer many of the same benefits as the traditional corporation, plus some unique advantages. WHY WOULD I CONSIDER AN LLC OR LIMITED LIABILITY COMPANY FORM OF BUSINESS ORGANIZATION? A limited liability company (LLC) is a hybrid organization that has characteristics of both a corporation and a partnership. Its members (comparable to corporate shareholders) receive interests in the LLC in exchange for property, money, or services. Like a corporation, it is a separate legal entity for purposes of limited liability of its members. It has the tax benefits, however, of a partnership. It also has the freedom from many of the legal formalities that govern corporations (e.g., annual reports, director meetings, shareholder requirements, etc.). To create an LLC, members file articles of organization with the state and pay filing fees. Members should also have operating agreements, similar in concept to a partnership agreement, that explains the operation and management of the business. There has been a lot of fanfare regarding this form of business enterprise and the law is still germinating. Each state has its own set of statutes governing LLCs—which must dovetail with IRS guidelines which are in constant evolution. For this reason, it is a necessity to have the advice of an attorney to determine how the LLC law in your state best applies to your situation. WHICH TYPE OF ENTITY SHOULD I BE FILING? That will depend on the nature of your business, how many others will be participating in the business with you, how you'll be raising capital, your entrepreneurial objectives, the type of operation you want to run, tax considerations, personal liabilities, and the state(s) in which you'll be operating. CAN I SET UP A CORPORATION WITHOUT A LAWYER?The most important decision revolves about the type of entity you should be setting up. That is what you really need a professional's advice for. The specific contents of a Certificate of Incorporation vary with each state’s incorporation laws, but key features are consistent: the corporation's name, the number of shares authorized, the names and addresses of the incorporator(s), and the address of a registered office and agent for service of process. In terms of the actual filing, some people follow a "do it yourself" approach using (1) interactive software programs that automate the process, (2) tear-out forms available in many published guides to incorporating, or (3) fill-in-the blank forms that may be available from the State. Many use a corporate service company to create the corporation for them. Wise ones rely on an attorney to set up the corporation for them. Forming the corporation is just a small part of the total process of setting up a business and making sure what you are setting up makes sense for you. As an attorney's advice is typically needed in connection with many other aspects of business start-up, relying on a lawyer to set up the corporation will make it far more likely the whole job is done right. Further, once the corporation is set up, it becomes necessary to adopt By-Laws and resolutions and a whole long paper trail to assure you the protections and benefits you are seeking by operating in corporate form. WHAT IS A NOT-FOR-PROFIT CORPORATION? A "not for profit" corporation is one specifically formed for purposes other than operating a profit seeking business, such as a charitable, religious, education, or scientific purpose. There is, however, a mistaken belief that all "non-profits" can not make money. It can -- either from its own charitable activities or from ways unrelated to the non-profit purposes. For purposes of incorporating, set up a non-profit is similar to setting up a regular for-profit corporation and would enjoy some of the same common features (e.g, separate legal entity and limited liability protection). But it is distinctive in two ways: (1) the corporation cannot be organized for any person’s private gain, and (2) should it dissolve it must distribute its assets to a similar tax-exempt nonprofit group. The mere fact that a corporation is organized under a not-for-profit corporation law does NOT mean that contributions to it are necessarily tax deductible. For donations to be "tax deductible" the charity must file an "Application for Recognition of Exemption" with the Internal Revenue Service and be approved pursuant to Internal Revenue Code Sec. 501(c)(3). WHAT ARE "PUBLIC PURPOSE CORPORATIONS"?First there is a major difference between "publicly held" corporations -- those whose shares are traded in on a securities exchange or in the over-the-counter market -- and corporations formed for a public rather than private purpose. Some of the latter types of corporations include:
WHAT ARE THE BENEFITS OF INCORPORATING? One primary benefit is LIMITED LIABILITY. If you maintain the corporation's legal status properly, and avoid personally guaranteeing the corporation's obligations, your corporation, and not you, would be solely responsible for its own obligations. The single most important reason people use the corporate form of doing business is to safeguard the personal assets of the owners -- the shareholders (or stockholders) of the corporation -- against potential claims of creditors. Sole proprietors and general partners in a partnership are personally liable for all debts and obligations of the business, such as loans, accounts payable, and defective products. Stockholders typically are not liable for ordinary debts and obligations. Other potential benefits of incorporating (even for one-person operations):
WHAT IS A "CLOSE" OR "CLOSELY HELD" CORPORATION? A PUBLICLY-HELD CORPORATION? The stock of a closely-held (or privately-held) corporation are not publicly traded on the open market. Stock that is traded on a stock exchange or in the "over-the-counter" market is stock of a publicly-held corporation.
I KEEP HEARING THE TERMS "C" AND "S" WHEN REFERRING TO CORPORATIONS. WHAT IS THAT ALL ABOUT? Nothing mysterious. The designations "C" and "S" refer only to how the corporation is TAXED. It has nothing to do with the legalities used to set up the corporation. For federal tax purposes, corporations are taxed under either Subchapter C or Subchapter S of the Internal Revenue Code. A corporation is automatically taxed under Subchapter C (double taxation) unless it qualifies and receives IRS approval to be taxed under a different set of IRC provisions as an S corporation. Under those rules, the corporate level tax is ignored and the S’s tax liability is reported on the shareholder’s income tax return. WHAT IS AN "S" CORPORATION? An S corporation is a regular corporation that opts to tax its profits at the personal income tax level. An S corporation must prepare and file an income tax return, but itself pays no tax (if it complies with all of the technical and complex rules of the Federal law). Each shareholder pays taxes on his/her share of S corporate income on his or her individual tax return. Owner-employees of an S corporation are treated like partners for purposes of employment and benefits An S is set up in the same manner as a regular corporation and then files for IRS approval (and sometimes state approval) after hurdling through several IRS regulations.
WHAT ARE "PCs"? I THOUGHT THEY WERE "PERSONAL COMPUTERS". PCs are an acronym for Professional Corporations (also called "Professional Service Corporations"). They were created to allow certain kinds of professionals (e.g., doctors, lawyers, accountants, engineers, and so forth) to do business as a professional corporation. In contrast to ordinary corporations, all shareholders in the corporation typically must be members of the profession, and the professionals in the firm may not be not relieved of liability for their own professional negligence or malpractice. WHERE SHOULD I INCORPORATE? While you can incorporate in any U.S. state you wish -- there is no legal requirement that says you have to incorporate in the state where you live and work -- the rule-of-thumb is to incorporate in the state that your company has its principal operations, especially if your business is primarily within a single state. However, there may be good reasons not to incorporate in your home state (e.g., other states have more flexible corporation laws, more tax benefits, or no corporate income tax). I WANT TO INCORPORATE OUTSIDE MY HOME STATE. WHAT DO I DO?If you choose to incorporate outside of your home state, you will have to qualify as a "foreign" corporation in your own home state. For example: suppose you form your corporation in Nevada, but are physically present and operating in California. While your Nevada corporation is referred to as a "domestic" corporation in Nevada, it is a "foreign" corporation in California and must file a foreign qualification application. (The use of "foreign" is not to be confused with non-U.S. based corporations.) If you plan on setting up offices or engaging in business in more than one state, we recommend you consult with an attorney who is familiar with the "foreign" corporation rules. It can be wallet-wrenching, especially since your corporation will be subject to the corporation laws of the foreign state, to its taxes, and annual reporting and various fees.
HOW MANY PEOPLE DO I NEED TO FORM A CORPORATION? In most states only one person. Others vary, but usually not more than three are required. WHAT’S IN A NAME? Sometimes a great deal -- as when the name is "hot" and will materially aid the public in conceptualizing your business. Sometimes nothing -- as in the case of what is intended to be a local business, such as a local dry cleaner. Its prospects are not likely to be influenced by its technical corporate name. If you expect to be a major player, a name will be an important asset. Picking a corporate name is not as simple as it sounds. Others may have a prior claim: (1) it may be in use or be someone else's federal or state trademark or service mark; (2) it may be a generic name so that someone else can readily copy it; (3) it may be used by (or similar to) another existing corporation. The acceptance of your corporate name by your state corporate office does not guarantee your right to use it if others have trademarked the name. And once you have found a catchy name, move fast! File with the corporate office on an expedited basis, particularly if you feel that the name has "magic" to it, and start the process to trademark it. Your competitors might be seeking approval of the same or similar name and are moving faster by filing incorporation or trademark papers "a step ahead" of yours. WHO IS A REGISTERED AGENT AND WHY DO I NEED ONE? A corporation and its owner(s) are two separate and independent entities. Because of this legal separation, a majority of state laws require, as part of the incorporation papers, the name of a contact person (called a "registered agent") and location of a place where government and legal documents (e.g. tax documents, summons, lawsuit papers, etc.) can be delivered and forwarded to the corporation. The reasoning behind this is to avoid having important legal papers being handed to anyone at your business location or at your home. If you incorporate in the state you are doing business, an officer, director, or employee can be your contact. If you incorporate in another state but are not located there, you generally will be required to hire a resident agent. WHAT ARE CORPORATE BY-LAWS? They are the "game plan" on how the corporation is to be run and operated. By-laws also set forth the rights and powers of the shareholders, directors, and officers. They are not ordinarily filed in any state’s corporate filing office. In practice, by-laws can be brief or lengthy. The contents vary but typically include the following provisions:
Like articles of incorporation, computer-aided programs will assemble and print by-laws, or one can be prepared "from scratch" or the tear-out forms provided in many published incorporation books may be used. WHAT IS THE ORGANIZATIONAL STRUCTURE OF THE CORPORATION? WHO RUNS THE CORPORATION? The key players in a corporation are: (1) the shareholders, (2) the directors, (3) the officers, and (4) the employees. There is no limit -- your corporation can have as many as are desirable or expedient to do business. One individual can simultaneously be the sole shareholder, the director, the officer, and the employee. It’s the shareholders who own the corporation. That ownership may be 100% in the hands of one individual or spread among tens of thousands or millions. Though shareholders as such may not participate in day-to-day management or have a direct say in decision-making, major shareholders nonetheless carry great weight in influencing corporate decisions because they routinely vote on:
WHAT IS THE ROLE OF THE THE DIRECTORS AND OFFICERS?The board of directors – which may be one person (typically in one shareholder corporations) or as many as the By-Laws provide for — are the responsible parties for making policy and overseeing the operation of the business, although they typically select officers to deal with normal everyday operations. The corporate officers usually are a President, one or more Vice-Presidents, the Secretary and a Treasurer. In larger enterprises, there may be hundreds of officers. |
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