Corporate FAQ's
1. What Is A Corporation?
As an organization, when a corporation is formed it becomes a legal personage in its own right. It is this separation that protects owners and investors from most legal ramifications when conducting business. Beings a legal entity allows corporations to operate as an individual and in its own name, opening and closing financial accounts; buying, owning, and selling property; and conducting business.
The Board of Directors, elected by stockholders, manages the business. The Board of Directors makes major decisions, hire and fire officers, and provide oversight of the corporation's assets. It is the officers, however, that conduct the hands on, daily operation of the business. These people are appointed to the office they hold by the Board of Directors.
Stockholders, also known as Shareholders, are the owners of the corporation. Because a business has incorporated, stockholders are sheltered from the liabilities of the business. Except for rare circumstances, if a corporation fails, creditors cannot sue the owners (Stockholders), the Board of Directors (individually or as a group), nor the Officers to recover any moneys not brought about by the corporation's assets.
2. What Are The Benefits Of Incorporation?
Businesses incorporate for various reasons, but the most prominent of those reasons is the protection it offers to the owners (Stockholders). Unless an owner personally signs for a debt they are not held responsible for the business' debts. Only the assets owned by the corporation can be used to settle any of the corporation's debts. This limitation of liability has encouraged people and even other business ventures to make investments into a business. In addition to this protection, there are several tax advantages when your business is incorporated.
3. Which Type Of Incorporation Is Best?
Business owners have two choices of incorporating, as allowed by the United States Internal Revenue Service. They are the C-corporation• and the S-corporation•.
C Corporations (or General Corporation) are the most common type of incorporation. Its advantages include unlimited number of stockholders, ability to issue large offerings of public stock, and personal liability is limited. Profits are taxed as income by the business. If this profit is divided and given to the stockholders, it is again taxed as personal income of the stockholders.
S Corporations has many of the advantages of the C Corporation, but in addition has a special tax status. The S-corporation is most appropriate for the entrepreneur or small business owner. The tax structure for it is much the same as if the business was organized of a sole proprietor or consisted of only a few partners. Company profits are only taxed once, on the personal level.
This tax advantage, plus the limited personal liability and ease of transference of ownership, is preferred by many small business owners.
4. What Are The Tax Advantages Of Corporations?
Income Shifting
Even with the double taxation sustained by C Corporations, there are advantages to be had. Income shifting allows businesses and their owners to qualify for lower income tax brackets. An example of this follows:
Business A earns $100,000 annually. As a sole proprietorship this owner is in the 25% income tax bracket (filing jointly with his or her spouse).
Business B also earns $100,000 annually; however this business has been incorporated. As a corporation this owner can take a $50,000 salary, leaving $50,000 in the business as a corporate profit. The corporate profit is taxed at 15%. The owner's tax bracket is also 15%.
Business B's owner will save approximately $8,000 in tax payments over Business A's tax liability.
Fringe Benefits
Retirement plans, medical plans, higher contributions to life insurance and retirement plans are all benefits allowed to incorporated businesses. Tax advisers and accountants can help you chose what benefits are best for your corporation and your employees.
Business Losses
Under current tax laws in the United States, incorporated businesses have no limit to the amount of gains or losses sustained that can be carried through successive tax years. This advantage does not apply to unincorporated businesses. In fact, in a sole proprietorship, capital loss is limited to $3,000 annually unless the owner has offsetting capital gains.
Your Corporation and Leased Assets
One tool business owners can use for tax liability reduction is to lease assets to the business. When such a lease is set up, the business pays the appropriate fee for the property (a legitimate business expense). The owner (and lessor) receives the rental income and may deduct from that income depreciation, insurance, maintenance, acquisition interest, and any associated administrative costs.
Leases may be set up when the following criteria is met:
A) There must be a formal lease agreement. This agreement must be set up in the same way as it would be if the property was leased from any other entity.
B) The fees must be fair and reasonable, as established by the area market.
Savings on Self-Employment Taxes
Sole proprietorship earnings are subjective to self-employment taxes. Currently, on the first $106,800 of income this results in a combined rate of 13.3%. If the business is incorporated, profits are not taxed, only the salaries are. This savings can amount to thousands of dollars each year.
To demonstrate:
A sole proprietorship earning $80,000 would have to pay 13.3% in taxes on the entire amount. If a corporation earns the same amount but pays out $35,000 in salaries, only the remaining $45,000 is considered a profit, saving over $5,000 per year. (Make sure whatever salary you draw from your business is reasonable.)
By incorporating your business, you can take advantage of these benefits. You will not be disappointed with your decision when tax time rolls around.
5. What Are The Differences Between Corporations, Sole Proprietorships, And Partnerships?
While keeping in mind the advantages as noted above that can be enjoyed by incorporating your business, there are disadvantages you need to be aware of. Commonly known as piercing the corporate veil,• there are circumstances when shareholders may be held liable for any corporate debts not recoverable by corporate assets. Some circumstances include:
- Intermingling of personal and corporate funds
- Not holding meetings of directors and shareholders
- Holding only minimal capitalization
- Holding only minimal insurance
- Failure to pay state taxes
- Violating state law
Corporations do not cease to exist when a shareholder, director, or office passes away.
Corporations can create and sell multiple types of stock shares. This can allow for different privileges being granted to separate classes. One of these types, known as preferred stock, may grant different characteristics of voting and profit sharing.
Corporate investors are not generally held personally liable for debts accrued by the business. Owners of partnerships and sole proprietorships can be sued for any amount for which the business assets do not cover if a creditor were to sue for any loss.
Neither sole proprietorships nor partnerships may be sold as a whole. Corporations, however, may be sold as a whole without disturbing the continuity of the business. If not incorporated, the business must be dismantled: licenses and permits, as well as all assets, must be transferred individually. New bank accounts must be opened by the new owner. New tax identification numbers must be assigned.
Although corporations are more costly to set up than either partnerships or sole proprietorships, many of those costs are various fees that can be offset by the lower cost of insurance needed. The fees can be initial formation fees, fees collected by the state annually, and other filing fees. Partnerships' and sole proprietorships' start-up formalities are minimal. They don't need a written agreement, a list of formal operating procedures, or any formal organization.
Corporations are created by filing legal documents with various agencies. There are set formalities that must be met on a continuing basis. Some of these are holding director meetings and shareholder meetings, during which official corporate minutes must be recorded. The Board of Directors must approve any major business transactions. Not maintaining these formalities can result in the loss of the shareholders personal liability protections. While not difficult, we understand these formalities can be time consuming. The law office of Kevork Adanas, P.C. can help you incorporate your business quickly and affordably.
Neither sole proprietorships nor partnerships are required to provide unemployment insurance. Corporations are required to pay this insurance on its employees' salaries. The current federal unemployment tax is at 6.2%. Taxes are collected on the first $7,000 of wages paid to each employee up to the maximum or $434 per employee. If the state requires unemployment insurance taxes, an offset credit of 5.4% can be received, which lowers the federal rate to 0.8% (maxing out at $56.00 per employee each year).
6. What Are The Differences Between Corporations And LLCS?
The business model combining the protections and benefits of a corporation with the simplicity of partnerships is the Limited Liability Company. Like sole proprietorships and partnerships, LLCs are subject to self-employment taxes (currently equal to 13.3% combined) unless it exercising its option to be taxed as a corporation. Corporations are only taxed on salaries, not profits.
Although continuing to gain acceptance, LLCs may experience trouble obtaining credit from vendors or financial institutions. Also, some states restrict the types of businesses LLCs may conduct.
The variety of fringe benefits that corporations are allowed to offer is greater than other business models. Employee stock purchase plans are only available to incorporated businesses, as are stock options and retirement plans. Sole proprietors, employees, and partners that own more than 2% in an S corporation are required to pay taxes on fringe benefits. These taxable benefits can include medical insurance premiums and reimbursement plans, group-term life insurance plans, and parking. C corporation shareholder-employees do not have to pay taxes on these benefits.
Even with the double taxation sustained by C Corporations, there are advantages to be had. Income shifting allows businesses and their owners to qualify for lower income tax brackets. An example of this follows:
Business A earns $100,000 annually. As a sole proprietorship this owner is in the 25% income tax bracket (filing jointly with his or her spouse).
Business B also earns $100,000 annually; however this business has been incorporated. As a corporation this owner can take a $50,000 salary, leaving $50,000 in the business as a corporate profit. The corporate profit is taxed at 15%. The owner's tax bracket is also 15%.
Business B's owner will save approximately $8,000 in tax payments over Business A's tax liability.
Advantages of an LLC over a corporation include not having to hold regular meetings. In turn, this results in less paperwork and other possible business complications.
S corporations are not allowed to have more than 75 shareholders. Every one of these shareholders must be a person who is either a US resident or a US citizen. These restrictions do not apply to C corporations or LLCs. Shares of an S corporation are difficult to place into a living trust. LLCs and C corporations are not subject to these limitations.
LLCs and S corporation members may deduct losses from the operation of the business (as allowed by law); C corporation shareholders are not allowed these deductions.
LLCs have the flexibility to elect one of two different tax treatments. Like a partnership or sole proprietorship, an LLC can be considered a pass-through being in regards to tax purposes. Or it can choose to be taxed as a corporation (whether as a C or an S corporation).
7. How Do I Form A Corporation?
The first step in creating a corporation is to develop the Articles of Incorporation (also known as the Certificate of Incorporation• or the Certificate of Formation). This document is filed with either the appropriate state agency (usually the Secretary of State). The law office of Kevork Adanas, P.C. can help businesses with this paperwork. By answering our questionnaire, the law office of Kevork Adanas, P.C. will be able to know which documents are required and file them with the appropriate state agency.
8. What Is A Foreign Corporation?
If business is conducted outside the state of incorporation, the corporation is required to register in each state in which business is conducted. Registering as a foreign corporation• is a process known as Foreign Qualification. The law office of Kevork Adanas, P.C. can help determine if this registration is necessary for your business, and assist with the process.
9. How Are Corporations Managed?
The Board of Directors manages the corporation. The Directors approve major business decisions. These directors can be shareholders or officers, but this is not a requirement. Directors are voted on by shareholders. Typically, they serve only a limited term. Corporations are required to have at least one director.
Directors must approve the following procedures: Dividend declaration, officer elections, employment terms for officers, changes and amendments to the bylaws and the articles of incorporation, corporate mergers, corporate reorganizations, and any other major transactions.
Directors must always act with reasonable care and in good faith with the company's best interest in mind. Disclosure of any director's possible personal gain in a transaction must be reported to the board and this member must not cast a vote in the matter (if at all possible).
10. What Are Officers And Who Elects Them?
The appointment of officers is made by the Board of Directors. These officers run the corporate operations. By law in most states, and even commonly agreed upon, corporations must have at least three officers. These offices are to be the president, a CFO or treasurer, and a secretary. Officers are not required to be on the Board of Directors even be shareholders; however, it is allowed. The number of officers is not limited, and each can hold more than one office. It is even allowed, in most cases, for one person can hold all of the offices.
11. What Are Shareholders Or Stockholders?
The terms shareholders and stockholders are used interchangeably in most circumstances. The shareholders are the corporation's owners. They elect the Board of Directors, and cast votes on corporate actions that are considered major.• They share in corporate profits. They do not direct daily operations of the business.
Annual meetings of the shareholders are to be held for the election of directors. Minutes of these meetings must be maintained carefully. If possible, these meetings may be held through the use of a conference call. Alternately, shareholders may sign a statement regarding approved actions.
12. What Is Corporate Stock?
Corporate stock is sold in shares•, or a fraction of the company's ownership. Two common types of stock are common• and preferred•.
Common stock, the basic level, is a share that includes voter rights in regards to management and policies. The preference of common stock is not above other stock classes in regards to dividend payments or other asset distributions; however, it usually is the only stock class that has voting rights.
Corporations may also issue preferred stock•. This type, or class, of stock most usually has different rights from common stock•. These rights can include different dividend receipts, corporate assets (when the corporation is liquidated), special voting rights, redemption rights, and the right to convert their preferred stock to common stock. There may be additional features allowed, as determined by state law.
Nevada, Delaware, and some other states require that the par value be stated on articles. This is the dollar value chosen and assigned to each share. Par value and market value are not the same thing. Market value is determined only by the price another entity is willing to pay for the share. Par value, used for tax and accounting purposes, is the absolute minimum any corporation can sell its stock. Some states base corporation fees on par value totals. Therefore, it is widely advised to choose a very low amount for this value (examples are 0.01 or 0.001 per share).
Stock sales are governed by both federal and state securities laws. If dealing with only a few (35 or less) investors that are knowledgeable and sophisticated, and the sale is not advertised, some restrictions can be lifted. As these regulations are complex, consultation with an attorney knowledgeable in the securities laws applicable is advised.
13. How Many Shareholders And Directors Are Required?
Corporations must have at least one shareholder and one director with which to run the company.
14. How Many Corporate Officers Are Required?
By law in most states, and even commonly agreed upon, corporations must have at least three officers. These offices are to be the president, a CFO or treasurer, and a secretary. It is even allowed, in most cases, for one person can hold all of the offices.
15. How Are Corporations Run?
Records of important business activities must be kept. Common issues to be considered for maintaining your corporation include the following.
Not allowing the intermingling of personal and corporate funds: Separate bank accounts, records, and accounting records must be maintained.
Not holding meetings of directors and shareholders: Periodic meetings of directors and annual shareholders meetings must take place either in person or by conference call. Written records of the meetings must be maintained. Written consent• is a statement signed by all the directors (or in the case of a shareholders meeting, only a majority is required) showing approval of the corporate actions.
Management of corporate ownership interests: A shareholder may sell or transfer his or her shares to anyone as long as all laws applicable are followed. Small corporations may want to consider restrictions on these transfers to protect the company's success. Sometimes shareholders can set terms for the sale or transference of shares. Such agreements typically limit the sales of shares to third parties. Referred to as a first right of refusal•, if a shareholder wishes to sell shares to anyone other than another current shareholder, the body of shareholders may purchase them for the same price quoted. If the shareholders don't purchase the shares, only then may they be sold to a third party. Also, certain corporation shares can only be held by licensed professions, limiting the share transfers.
Taxation: A federal tax identification number (similar to the Social Security number of an individual) must be obtained by every corporation. A separate state tax number is required in some states. Also, some businesses are required to obtain licenses to be able to operate. Make sure to check with all government levels for information regarding business licenses.
16. What Are S-Corporations?
Like a sole proprietorship or a partnership, an S corporation can be set up so that all profits are passed onto the shareholders as income. In doing so, the corporation pays no income tax. Taxes are paid by the shareholders in accordance to the shares they own. This is also known as being a pass-through entity. It avoids the double taxation• that C corporations endure. Also, S corporation accounting is usually easier than the accounting for a C corporation.
S corporation restrictions include:
The number of shareholders is limited to 75 or fewer, and each must consent (although a married couple is treated as one shareholder).
Shareholders must be a US citizen, and US legal resident, or the estate or trust of a US citizen or legal resident.
S corporations may issue only one class of stock (although within that class it is permissible to have different voting rights). It is not allowed to sell preferred stock.
Unless demonstrated to the IRS otherwise, S corporations must use the calendar year as their fiscal year.
Passive income is limited to no more than 25% over three continuous years. Such income might come from rentals, royalties, and interest received.
IRS Form 2553 must be filed by the corporation.
17. What Tax Returns Do Corporations File?
Tax returns must be submitted to the IRS for each year by the corporation. If the corporation follows the calendar year for its fiscal year, tax returns are due on March 15. Even if no income has been realized, and even if no taxes are due, a tax return must be filed. IRS Form 1120 or 1120 A is the appropriate return for a C corporation.
S corporations must file IRS Form 1120S, even though no taxes are levied at the corporate level.
18. What Is The New Jersey Registered Agent Service?
New Jersey law requires Corporations to have and appoint a registered agent and registered office in the state of New Jersey. The registered agent is responsible for receiving important legal and tax documents including notice of litigation (service of process), franchise tax forms and annual report forms.
19. What Is Your Mail Forwarding Service?
You can operate your business even before establishing a permanent address. By using our office address as your own, we can forward mail for you between your attorney, State offices or other organizations.
20. What Types Of Rush Filing Services Do You Provide?
With our Standard Service we will prepare your corporate package to include your certificate of organization, your Corporate Book and Seal, all regulations and any other documents you requested as part of your application. We will complete and finalize your documents on the same day your order is placed and you have spoken to one of our representatives. We will send your application documents to the State of New Jersey that same day. When your paperwork is completed by the State is based upon their own work schedule. This usually varies and can usually take between two to four weeks. If you require your corporate package sooner, please choose one of our priority options noted below.
Priority Service (2 Day)
If you require your Corporation to be formed urgently, we can file the registration forms and prepare all of the necessary documents to be ready for shipment within two business days.
Priority Service (4 Day)
If you require your Corporation to be formed quickly, we can file the registration forms and prepare all of the necessary documents to be ready for shipment within four business days. Contact us today at 201-592-9190 or fill out our online form.