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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.
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 franchise
taxes, and other initial fees must be paid.
If you incorporate through
Business Pro Net Incorporated, all you need to do is complete the online
order form, and Business Pro Net prepares and files your articles of
incorporation. Additionally, the price you pay includes all filing fees.
It's simple, just fill out the order form to get started.
Do I need an attorney to incorporate?
No, an attorney is not a
legal requirement 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.
Additionally, the name you
choose must show your business is incorporated. Most states require that the
corporate name be followed by some type of indicator, such as Corporation,
Incorporated, or an abbreviation.
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 (like 401k) 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 are 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 is an S corporation?
Standard business
corporations or C corporations are required to pay income tax on taxable
income generated by the corporation. Making a subchapter S election by
completing and filing federal Form 2553 with the IRS is a way to avoid
having your corporation treated as a separately taxable entity.
An S corporation is a
standard business corporation that has elected a special tax status with the
IRS. This tax treatment allows the corporation not to be a separately
taxable entity. Instead, the income of the corporation is treated like the
income of a partnership or sole proprietorship; the income is
"passed-through" to the shareholders. Thus, shareholder's individual tax
returns report the income or loss generated by an S corporation.
To be classified as an S
corporation, a corporation must make a timely filing of Form 2553 to the
IRS. This election must be made by March 15 if the corporation is a calendar
year taxpayer, in order for the election to take effect for the current tax
year. A corporation may later decide to elect S corporation status, but this
decision would not take effect until the following year.
In order to qualify for S corporation status, the S corporation
can have no more than 75 shareholders and must make the election to be an S corporation . The
shareholders cannot be non-resident aliens. Also, an S corporation
cannot issue preferred shares of stock with special
liquidation, dividend, or conversion rights. To compare the S corporation to the C corporation and
limited liability company, view our comparison page.
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 everyday 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.
How many directors do I need to form a corporation?
Only one director is
required in most states although you can elect to have more. Some states use
the number of shareholders in the corporation to determine the minimum
number of directors. If the number of shareholders is three or more, then
the corporation must have three directors. If the corporation has less than
three shareholders, then the number of directors may equal the number of
shareholders.
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: (1) 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 and (2)
determining the advantages and disadvantages of each state's corporate laws
and tax structure. The decision usually falls between the state in which the
business is located or Delaware.
If the corporation is a
closely held corporation and does business primarily within a single state,
local incorporation is often preferable. The cost of local incorporation
will usually be less than incorporating in another state and qualifying to
do business as a foreign corporation in the
state. A foreign corporation that qualifies to do business in another state
is subject to taxes and annual report fees from both the state of
incorporation and the qualifying state. Another disadvantage of
incorporating outside of your home state is the possibility of having to
defend a law suit in another state.
For advice regarding which
state is optimal for your particular business situation, consult an
attorney or an accountant.
During the life of your
business, if you find that your company needs to foreign qualify to transact
business in another state, Business Pro Net can assist with this process. To
learn about Business Pro Net foreign qualification service,
click here.
What is a publication requirement?
A few states require notice
to be published in a newspaper that a corporation or LLC has been formed.
States with this requirement include: Pennsylvania (corps only), Georgia
(corps only), Arizona (corps and LLCs), Nebraska (corps and LLCs), and New
York (LLCs only). The filing performed by Business Pro Net completes the
publication requirement for each of the states except for New York LLCs.
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 Pro Net will complete these
administrative tasks quickly and effectively.
After your articles are
filed, your corporation must hold an organizational meeting where bylaws are
adopted and the incorporation process is completed. Share certificates
should be distributed to shareholders and these transactions should be
recorded on the corporation's stock ledger. All of this information should
be kept in a corporate record book.
Business Pro Net corporate
kit includes all of the information and paperwork needed to make this
process easier.
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