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Articles of Incorporation
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The centerpiece of the incorporation process is the Articles of Incorporation.
Filing this document with your state brings a corporation to life and begins the process of organizing your business.
The Articles of Incorporation is usually a basic form that contains information about your corporation, the stock it issues,
its appointed representative, and its organizer. It is filed with a state agency responsible for corporations.
The articles of incorporation go by different names in some states.
It may be called a certificate of incorporation, charter, articles of organization, or similar title.
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Articles of Organization
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Articles of Organization for an LLC are like the Articles of Incorporation for a Corporation.
Most states do not require a specific format for the articles of organization.
However there are requirements for specific information which must be included within the articles.
The reuired information varies from state to state.
PCF can prepare Articles of Organization for your LLC based on your specific business requirements.
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Assumed name
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(also referred to as ‘Fictitious Name’)
Sometimes a corporation may want to transact business under a different name than its corporate name.
This is referred to as using an assumed name, or assumed corporate name.
Some states refer to it as a fictitious name, or trade name (not trademark).
Some simply call it a d.b.a., or "doing business as," as in ABC Corp., doing business as, Dean's bookstore.
Using an assumed name, allows you to present yourself to the public as different entities, while using only one corporation and keeping only
one set of books.
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Authorized shares
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This is the total number of shares your corporation will ever have.
This number is stated in the articles of incorporation.
You can only change this number with the approval of a majority of shareholders and by amending the articles of incorporation.
When authorized shares are "given out" to the shareholders, they become "issued" shares.
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Board of Directors
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The directors that oversee the affairs of the corporation are referred to collectively as the Board of Directors.
The board may consist of one or more persons.
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Business Entity
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An organization that possesses a separate existence for tax purposes.
Some types of business entities include corporations and foreign corporations, business trusts, limited liability companies,
and limited partnerships.
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Bylaws
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Bylaws are the internal rules by which the corporation operates.
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C Corporation
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Most of the large companies that you are familiar with are C Corporations. (The "C" is for subsection C of the IRS code.) If you plan to issue a lot of stock to attract investors then a C Corporation may be the best solution. C Corporations may grow and expand more than the other types of Corporations. After-tax profits may be retained in a C Corporation or they may be distributed to its shareholders in the form of dividends.
C Corporations take on a distinctly separate business and tax identity from that of the owners and are subject to corporate income taxes that are completely separate from their owners. This means that besides paying corporate income taxes, any dividends to shareholders are taxed again at the applicable personal tax rate. This is sometimes referred to as "double taxation". Tax reporting requirements are usually more complex for C Corporations than for the other types of Corporations but corporate tax rates are usually lower than personal income tax rates.
The owners are removed from personal liability for debt incurred by the corporation. Should the business go bankrupt, or be faced with a lawsuit, the owner's personal assets are protected.
Shareholders are the owners of a C Corporation. Owners who work in the business are treated and taxed as employees of the Corporation. There is no limit to the number of C Corporation shareholders and shareholders need not be US citizens or permanent residents. C Corporations may have more than one class of stock and shareholders may be other Corporations. This is different for the other types of corporation.
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Capitalization
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Capitalization is the amount of money or property that a corporation has when operations are begun.
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Certificate of incorporation
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In order to form a corporation in any state you must file certain documents with the state in which you want to incorporate
and pay an incorporation fee.
These documents are usually called Articles of Incorporation but the name varies in a few states.
The formation documents must include certain specific information.
The required information varies from state to state.
The agency with which the documents are filed is usually the Secretary of State, however, it is a different agency in some states.
The formation documents may subsequently be amended after filing amendment forms with the appropriate state office.
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Controlling interest
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See majority interest.
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Common stock
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There are two different types of stock (shares) your corporation can issue, common and preferred.
Common stock is what corporations usually issue to shareholders.
Common stockholders receive a pro-rata share of the corporation’s assets upon its dissolution.
Common stock can be voting, or nonvoting.
Holders of voting common stock get to elect the directors of the corporation, and thereby exercise control of the corporation.
Holders of nonvoting common stock do not get to elect the directors, but they still receive their pro-rata share of the
corporation's assets upon its dissolution. Common stockholders are eligible to receive quarterly dividends if corporate profits allow.
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Corporation
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A corporation is a body of persons granted a charter legally recognizing them as a separate entity having its own rights, privileges,
and liabilities separate from those of its members.
It is a separate and distinct entity that acts for, or on behalf of a person or group of people.
A corporation can consist of one person.
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DBA
Doing Business As - See Assumed Name.
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Delayed effective date
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A delayed effective date is put in the articles of incorporation so that the filing won't be effective until that date.
If you are incorporating toward the end of the year, you may want to include a delayed effective date of incorporation so that your corporation
won't begin until the first of the upcoming year.
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Department of State
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See Secretary of State."
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Directors
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Directors are people who oversee the affairs of the corporation on behalf of the shareholders, to protect the shareholder's interests.
They meet from time to time to review the actions of the corporate officers who run the corporation on a day-to-day basis.
Directors do not have to be shareholders, but in a small corporation, they are usually one in the same.
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Dividends
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Dividends are bonuses paid to shareholders based on the number of shares that person owns. They are usually paid on quarterly basis as corporate profits allow."
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Double Taxation
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Corporations are treated as a separate legal taxable entity for income tax purposes.
Therefore, corporations pay tax on their earnings.
If corporate earnings are distributed to shareholders in the form of dividends, the corporation does not receive the reasonable business
expense deduction, and dividend income is taxed as regular income to the shareholders.
Thus, to the extent that earnings are distributed to shareholders as dividends, there is a double tax on earnings at the corporate and
shareholder level.
S corporations and LLCs are pass-through entities which are not subject to the double tax.
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Duration
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The duration of the corporation is simply how long it will exist.
If you are using the corporation to pursue a single project, you may wish to limit its life span to the length of the project.
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Employer Identification Number (EIN)
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This number is assigned by the IRS.
It is an identifying number, essentially a social security number for your business.
An Employer Identification Number is obtained by filing a form SS-4 with the IRS.
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Federal tax ID number
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A Federal Employer Identification Number (FEIN), also known as a Federal Tax Identification Number, is used by the IRS to identify a business entity.
A FEIN is like a Social Security Number for your company.
All businesses operating as corporations are required to have an FEIN.
PCF can prepare and file the appropriate forms to obtain an FEIN on your behalf. |
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Fictitious name
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See assumed name.
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Formation Documents
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In order to form a corporation in any state you must file certain documents with the state in which you want to incorporate and pay
an incorporation fee.
For Corporations these documents are usually called Articles of Incorporation but the name varies in a few states.
For LLCs the formation documents are called Articles of Organization.
The formation documents must include certain specific information.
The required information varies from state to state.
The agency with which the documents are filed is usually the Secretary of State, however, it may be a different agency in some states.
The formation documents may subsequently be amended after filing amendment forms with the appropriate state office.
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Form 2553
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The IRS form filed to elect S Corporation Status.
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Form SS-4
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Employer Identification Number is obtained by filing a form SS-4 with the IRS.
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General Partnership
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A General Partnership is a business entity that is made up of two or more people or entities to carry on a trade or business.
The partnership is governed by state law and a partnership agreement.
Each partner contributes money, property, labor, or special skills and each partner shares in the profits and losses from the business.
In a General Partnership all the partners are personally liable for the partnership debts.
A General Partnership can be dissolved at the will of any partner.
In a Limited Partnership, limited partners are not liable for the partnership's debts beyond the funds they contribute to the partnership.
A limited partner will normally have little knowledge or participation in the activities of the partnership.
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Incorporator
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Incorporators may be people or business entities (depending on the state).
Incorporators are responsible for setting up the corporation and filing formation documents with the state.
All states require at least one incorporator.
Some states have specific minimum age requirements for incorporators.
This may be specified as the "age of majority".
This is the age at which a person becomes responsible for his or her own actions - the person is not a dependent.
Incorporators generally have broad powers until the board of directors assumes management of the corporation.
Once the directors take over, the incorporators generally relinquish any power to the board of directors.
When you incorporate online with PCF, we act as the incorporator and relinquish all power to you immediately when the incorporation process is completed.
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IRS 2253
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This form is used to apply for S corporation status.
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Issued shares
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This is the number of authorized shares that are actually "issued" out to the shareholders.
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Limited Liability Company (LLC)
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A Limited Liability Company (LLC) is not a partnership or a corporation but includes features of both.
LLCs are structured like a partnership or a sole proprietorship but with limited liability protection similar to a corporation.
Because an LLC is considered a separate entity from its owners, the owners cannot be held personally liable for debts and obligations of the LLC.
This is the principal advantage of an LLC.
LLC's provide all the liability protection of a C Corporation but with far less formalities.
The IRS does not recognize an LLC as a classification for federal tax purposes.
LLC members can elect for the IRS to tax the LLC as a sole proprietorship, partnership, C Corporation, or S Corporation.
This decision may be made after the LLC is created.
If a single member LLC does not declare a tax classification within the alloted time it is taxed the same as a sole proprietorship.
A multiple member LLC that does not declare a tax classification is taxed as a general partnership.
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Limited Partnership (LP)
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A Limited Partnership (LP) is a special type of partnership created by state statute.
LPs consist of two classes of partners: one or more limited partners and one or more general partners.
A general partner shares characteristics similar to those of a partner in a general partnership, including individual liability for the
acts of the partnership or of any member of the partnership engaged in carrying out partnership business.
A limited partner is akin to a shareholder in a corporation, except that the limited partners have no inherent right to elect a board of directors.
Limited partners have no day-to-day involvement in the management or operation of the business and are not generally liable for
either the acts of the partnership or of the general partners.
A limited partner does have certain rights to participate in certain limited decisions, such as the decision to liquidate and dissolve the partnership.
Under state law, and in the absence of any special provision to the contrary in the partnership agreement, an LP cannot be dissolved without the
unanimous consent of all of the partners.
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Majority shareholder
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A shareholder who owns more than 50 percent of a corporation's issued shares, usually 51 percent.
The majority shareholder controls the corporation by electing the Board of Directors who oversee the corporation and appoint the officers
of the corporation. See majority interest.
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Majority interest
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An owner of more than 51 percent of the corporation stock is said to have a majority interest in the corporation.
By having a majority interest, a shareholder controls who is elected as directors of a corporation, and thereby controls the actions
of the corporation.
A majority interest may be gained by combining the ownership of one or more shareholders.
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Meetings
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C Corporations and S Corporations must hold corporate and shareholder meetings, at least annually, and must keep minutes of each meeting on file.
It is the job of one of the officers, usually the secretary, to schedule the required meetings of directors and shareholders and to keep muniutes
of each meeting.
A copy of the minutes is evidence that the meetings took place.
The minutes of each meetings must be open for inspection by any shareholder or director.
This meeting requirement is often overlooked and comes into play when the corporation is challenged for any reason.
Keeping proper meeting minutes and documenting resolutions made and approved by the directors is a formality that could save the corporation
a lot of potential trouble.
LLCs are not required to to hold director and shareholder meetings.
PCF can prepare minutes for any type of meeting.
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Minutes
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Whenever a meeting of directors or shareholders is held, a record of what was discussed is kept.
This record is known as the minutes of the meeting.
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Members
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Of the types of corporations only LLCs have members.
Members own an LLC just as shareholders own a corporation.
Members run the company and make all business decisions.
Division of ownership and distribution of profits are decided by private agreement among the members.
Most states do not restrict ownership.
Members may include individuals, corporations, other LLCs and foreign entities.
There is no maximum number of members and most states permit single-member LLCs - those having only one owner.
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Name Reservation
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The name of a corporation or LLC must be distinguishable on the records of the state government.
If the name is not unique, the state will reject the articles of incorporation or articles of organization (for LLCs).
A name can be reserved, usually for 120 days, by applying with the proper state authorities and paying a fee.
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No par value stock
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See no par stock."
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No par stock
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No par stock is stock without par value, or a fixed price per share.
No par stock can be issued at any price (what buyers will pay for it) since it does not have a fixed "face" value.
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Nonvoting stock
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See common stock.
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Officers
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Officers are responsible for running the corporation on a day-to-day basis.
They answer to the directors of the corporation. Officers include president, secretary, treasurer, etc.
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Operating Agreement
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An agreement among the LLC's members which govern the LLC's operations and the rights of its members.
It is analogous to corporate bylaws.
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Organizational Meeting
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The organizational meeting is held after the articles of incorporation are filed with the state.
At the organizational meeting the directors and officers of the corporation are appointed.
Stock is also issued.
Any other organizational matter is taking care of here."
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Organizers
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Organizers are for LLCs what Incorporators are for Corporations.
Organizers may be people or business entities (depending on the state).
Organizers are responsible for setting up the LLC and filing formation documents with the state.
All states require at least one organizer.
Some states have specific minimum age requirements.
Organizers generally relinquish any power to the LLC members once the LLC has been formed.
When you form an LLC online with PCF, we act as the Organizer and relinquish all power to you immediately when the LLC formation process is completed.
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Par Value
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Par value of stock is a bookkeeping term that basically equates to price.
If a share of stock has a par value of one dollar, then one dollar per share must be given to the corporation in order to purchase the stock.
Buying 1,000 shares of stock with a $1 par value, will cost you $1,000.
Stock can sell above or below its par value, but usually not on newly issued shares.
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Pass-Through Taxation
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The income to the entity is not taxed at the entity level; however, the entity does complete a tax return.
The income or loss as shown on this return is "passed through" the business entity to the individual shareholders or interest
holders, and is reported on their individual tax returns. S corporations and LLCs are both pass-through tax entities.
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Perpetual duration
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A corporation with perpetual duration is one that exists forever, or until the shareholders terminate it.
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Piercing the Corporate Veil
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If corporate formalities are not followed, it is possible that the corporate entity will not protect shareholders from corporate debt.
Keeping proper records and holding regular meetings help solve this possible problem.
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Preemptive rights
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Preemptive rights allow existing shareholders too purchase additional shares of stock before shares are issued to new shareholders.
Having preemptive rights allows existing shareholders to maintain their current ownership percentage despite the issuance of additional shares.
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Preferred stock
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There are basically two different types of stock your corporation can issue, common and preferred.
Common stock is what corporations usually issue to shareholders.
Preferred stock, on the other hand is more like a bond or promissory note.
It carries a fixed dividend percentage rate.
Holders of preferred stock get paid dividends first.
If there are profits left after paying the preferred dividends, then dividends are paid to the common shareholders.
That's why it's called preferred stock; dividends on it are paid first.
There is a drawback however.
As a trade-off for getting dividends first, preferred shareholders don't get to vote on matters affecting the corporation.
Preferred stock is nonvoting.
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Proxy
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If a shareholder can not attend a meeting, the shareholder is allowed to vote by proxy.
A proxy grants another individual the power to vote on their behalf.
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Purpose clause
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A purpose clause is sometimes required in the articles of incorporation.
The purpose clause tells the state what kind of business your corporation will operate.
Some states require this purpose clause to be very specific, while others allow the use of a "general" purpose clause,
which basically says the corporation will engage in any legal business activity.
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Reporting Requirements
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Corporate reporting requirements vary by state but usually require an annual or biennial update of some basic corporate information.
Some states require that shareholder reports be sent to all shareholdres each year and some states require a separate franchise tax report each year.
Failure to perform any of these tasks could result in the default of the Corporation.
A suspended Corporation cannot legally conduct business and may not sue or defend a law suit.
Contracts made by a suspended organization can be voided at the option of the other party.
Most importantly, it may be a criminal act to attempt to exercise any of these functions if your Corporation is in default.
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Registered agent
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All states require corporations to have a registered agent to ensure that there is a valid address within the state where official and
legal correspondence can be delivered.
In some states this position is referred to as "Agent For Service of Process".
The registered agent may be a person or a business which can legally conduct business in the state.
In either case the registered agent must have a physical address within the state.
The registered agent receives all official and legal corporate correspondence and forwards them to a designated contact for handling.
You can act as your own registered agent, however, many corporations hire an outside registered agent to provide a level of privacy.
PCF offers registered agent services in all 50 states.
Some states also require corporations to have a registered address within the state.
This may be the same address as any of the corporation's places of business.
In these states the registered agent is usually required to have the same address as the registered address.
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Registered Office
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Some states require corporations to have a registered address within the state.
This may be the same address as any of the corporation's places of business.
In these states the registered agent is usually required to have the same address as the registered address.
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SEC
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Securities and Exchange Commission, a federal agency that oversees the issuance of stock and other securities.
This agency is charged with protecting investors against fraud relating to the purchase of stock and investments.
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S Corporation
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S Corporations are not treated as separate taxable entities like C Corporations. The "S" is for Chapter S of the IRS code. No corporate income tax is paid to the IRS for S Corporations. For tax purposes net income is "passed through" the S Corporation to the personal income tax of the shareholders.
With an S-Corporation double taxation (paying both corporate and personal taxes) can be avoided while retaining all the legal protections of a C Corporation.
In addition, federal law alows a nontaxable Employee Stock Ownership Plan to hold stock in an S Corporation. This gives shareholders a way to defer some of their taxes. No tax is paid on these stocks until they are withdrawn from the Plan.
All corporations start out as C Corporations. In order to be treated as an S Corporation a form must be filed with the Federal government within 90 days of incorporation of the C Corporation. Eligibility requirements include:
* Less than 75 shareholders
* All shareholders must be either US citizens or resident aliens, certain trusts, estates or organizations
* Business entities and non-resident aliens may not be shareholders
* Only common (not preferred) stock may be issued
* The end of the fiscal year must be Dec. 31
S Corporations are required to hold corporate and shareholder meetings just like C Corporations. |
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Secretary of State
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In most states, this is the state agency that is responsible for the formation and regulation of corporations.
In some states, it is known as the department of state, or bureau of corporations.
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Shares
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See stock.
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Shareholder
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A shareholder is an owner of a corporation.
Shareholder is used interchangeably with the term "stockholder".
Since someone has to own the corporation, a corporation must have at least one shareholder.
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Sole Proprietorship
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A business owned and managed by one person, who is personally liable for all business debts and obligations.
For tax purposes, the owner and his or her business are one entity, meaning that business profits are reported and taxed on the owner's
personal tax return.
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Stock
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Stock is issued to a corporation’s shareholders (owners) to show that they own a part of the enterprise.
The term stock is used interchangeably with the term "share".
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Stock certificate
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A document used to evidence a person’s ownership of stock in a corporation.
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Stockholder
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See shareholder.
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Voting stock
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See common stock.
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