What should I know before I Incorporate? |
BEFORE YOU INCORPORATE ONLINE YOU SHOULD KNOW EXACTLY
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- Why you want to form a Corporation
- What kind of Corporation you want to form
- Where you want to form your Corporation
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The information on this page may help you make these decisions.
We've helped thousands of businesses through the formation process.
Once you make a decision we know what needs to be done and how to do it as quickly and effieciently as possible.
However,
if you don't know the answer to any of these questions, you should seek the advice of a competent lawyer, accountant or both
before you incorporate online.
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Why should I Incorporate? |
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The main reason that businesses incorporate is to isolate the owner's assets from the business's debts and liabilities.
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A Corporation is an artifical legal entity which can do almost anything a person can do.
For example, a Corporation may enter into contracts, open a business, or own real property.
In a properly structured and managed company, and absent any fraud, owners should have limited liability for business
debts and obligations.
Liability is usually limited to the amount that the owners have invested in the business.
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Corporations can implement various tax-free benefits such as life and health insurace, retirement plans and stock ownership plans.
Corporations usually have a perpetual life as well, distinct from that of the shareholders who own the Corporation.
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Also, Corporations can deduct normal business expenses before declaring profit.
Many small business benefit from this feature.
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Do I need a lawyer to Incorporate? |
The short answer is no. No state legally requires a lawyer to form a Corporation.
However, if there is anything about forming a new Corporation that you're not sure about you should seek the advice of a competent
lawyer, an accountant, or both in the state in which you want to Register your new Corporation BEFORE you Incorporate.
Once you have made the decision to Form a New Corporation, a lawyer can file your documents and act as a middle man for a few hundred
dollars an hour; or you can use an online service provider like All Business Documents to perform these services and save money that you
can use in your New Corporation.
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What are the different types of Corporations? |
C Corporation |
Most of the large companies that you are familiar with (GE, FedEx, etc.) are C Corporations.
(The "C" is for subsection C of the IRS code.)
If you plan to issue a lot of corporate 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.
Corporate stock is issued to shareholders.
Shareholders own the C Corporation.
Owners who work in the business are treated and taxed as employees of the C Corporation.
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.
The owners are removed from personal liability for debt incurred by the corporation.
Should the business go bankrupt or be faced with a lawsuit, absent any fraud, the owner's personal assets (houses, cars, bank accounts, etc.) are protected.
C Corporations pay tax on their corporate profits.
After-tax profits may be retained in a C Corporation or they may be distributed to its shareholders in the form of dividends.
Shareholders then pay tax on their dividends at the applicable personal tax rate.
This is sometimes referred to as "double taxation".
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S Corporation |
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 and paid at the
appropriate personal income tax rate.
With an S-Corporation double taxation (paying both corporate and personal income taxes) can be avoided while retaining all the legal
protections of a C Corporation.
As in a C Corporation shareholders of corporate stock are the owners of the S Corporation.
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.
An S-Corporation has some limits on ownership.
It may be a better choice if you know that your Corporation will always be small and be owned by a small group of people.
S Corporation constraints include:
- No more than 100 shareholders
- All shareholders must be either US citizens or resident aliens, certain trusts, estates or organizations
- Shareholders may not be partnerships, Corporations or non-resident aliens
- Only common (not preferred) stock may be issued
S Corporations are required to hold director and shareholder meetings just like C Corporations.
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Nonprofit Corporation |
A Nonprofit Corporation is formed to provide some kind of public or community benefit.
Unlike the other types of Corporations and LLCs, a Nonprofit Corporation may be eligible for certain benefits, including tax exemptions
on both the state and federal levels.
Depending on the nature of the organization, some Nonprofit Corporations may not be eligible for tax exempt status.
A Nonprofit Corporation may also be eligible for public and private grants.
A Nonprofit Corporation is formed at the state level in a similar way as that of forming a for-profit Corporation.
Nonprofits must file Articles of Incorporation in the same way that C Corporations do.
A Nonprofit Corporation comes with the same liability protection as the other types of Corporations.
The main difference between a Nonprofit Corporation and a for-profit Corporation is how the profits of the Corporation are distributed,
In a for-profit Corporation profits can be distributed to shareholders.
Nonprofits are legally required to use the income to further a goal that benefits the community or some part of the public.
The most common types of Nonprofit Corporations are:
- Public-benefit Nonprofit Corporations
Organized for the general public benefit, rather than for the interest of its members or shareholders
Formed primarily for social, educational, recreational or charitable purposes
Examples are food banks and youth sports organizations
- Religious Corporation
Organized to promote religious purposes
Subject to less complicated filing and reporting requirements than other types of Corporations
May be exempt from regulations governing non-religious groups performing the same services
- Mutual-benefit Nonprofit Corporation
Serves its members in ways other than just distributing profits to them
Cannot obtain IRS tax-exempt status as a charitable organization
Pays the same taxes as for-profit Corporations
Examples are homeowners associations or a public utility companies
Each type is treated a little differently legally and admin istratively depending on the state in which they are Incorporated.
While most federal tax exempt organizations are Nonprofit Corporations, registering a Nonprofit Corporation at the state level does not
automatically qualify the Nonprofit tax exempt status at the federal level.
The IRS recognizes various types of tax exempt Nonprofit Corporations.
To receive federal tax exempt status a Nonprofit Corporation must file forms with the Internal Revenue Service.
The forms can get very complex depending on the nature of the Nonprofit.
Also, a Nonprofit Corporation cannot legally use its resources for propaganda or to further a political cause or to support a candidate for
public office.
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Benefit Corporation |
One of the major responsibilities of a for-profit Corporation is to increase shareholder value. For most Corporations the pursuit of
shareholder value is done without regard for specific benefits to the public. The only benefits that matter are those that benefit
the shareholders, who are the owners of the Corporation.
For-profit Corporations often face pressure to abandon social goals in order to increase their bottom line.
Nonprofit Corporations are formed to provide some kind of public benefit but may be restricted in their ability to raise capital
when they need to grow.
In the last few years some states have created a new kind of for-profit Corporation which has a legal responsibility to include some
kind of public benefit in their Corporate operating requirements.
A Corporation of this kind is called a Benefit Corporation or a B Corporation.
Benefit Corporations are a hybrid between a for-profit and nonprofit Corporation.
Operating capital is easier to raise for a Benefit Corporation and the Benefit Corporation is required to provide some kind of public
benefit.
Benefit Corporations do not have any special tax breaks or benefits. Benefit Corporations are taxed just like any other Corporation
is taxed.
To qualify as a Benefit Corporation, a Corporation must have an explicit social or environmental mission, and a legally binding
fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders.
A Benefit Corporation must also publish independently verified reports on its social and environmental impact alongside its financial
results.
Some states require that the report must be filed with the Secretary of State.
Some examples of the specific public benefit that a Benefit Corporation must provide, among others, include:
- Providing low-income or under served individuals or communities with beneficial products or services
- Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business
- Preserving the environment
- Improving human health
- Promoting the arts, sciences or advancement of knowledge
Currently a little over half of the states have laws that allow for the formation of a Benefit Corporation.
It is probable that in the near future all states will have legislation which allows the legal creation of Benefit Corporations.
We can help you form a Benefit Corporation in any state which currently has provisions for Benefit Corporations.
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Professional Corporation |
A Professional Corporation, usually abbreviated PC or P.C., is just what the name implies. It is a Corporation made up of only
Professionals.
The definition and requirements of "Professional" varies from state to state but Professionals are generally people who
require some kind of license for what they do.
Examples of Professionals are doctors, dentists, engineers, land surveyors, accountants, architects and attorneys.
A Professional Corporation provides the same liability protection as is provided by a C Corporation.
A PC sets a limit on the owners' personal liability for business debts and claims.
Forming a Professional Corporation cannot protect a Professional against liability for Professional negligence or malpractice,
but it can protect against liability for the negligence or malpractice of an associate Professional.
Some states require that Professionals register as Professional Corporations rather than as regular general for-profit Corporations while
other states allow Professionals the choice to register as a normal for-profit Corporation or as a Professional Corporation.
The process of registering a Professional Corporation is almost exactly the same as registering a C Corporation.
You file Articles of Incorporation with the Secretary of State.
Some states may require approval from a state licensing board before they will approve the Articles of Incorporation of a Professional
Corporation.
Getting approval from some state licensing boards can take a number of weeks.
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Limited Liability Company (LLC) |
A Limited Liability Company 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.
Like a C Corporation, an LLC is considered as a separate tax and business entity from its owners.
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, absent any fraud.
This is one of the principal advantages of an LLC.
LLC's provide all the liability protection of a C Corporation but with less formalities and corporate obligations.
For example, bankruptcy can have serious personal consequences for a sole proprietorship or general partnership.
However, if an LLC declares bankruptcy the owner's assets are considered separate from the assets of the LLC and are
thus protected from bankruptcy.
Each state has different rules governing LLCs.
There are usually special rules for foreign LLCs.
LLCs do not issue corporate stock.
LLC owners are called "members" not partners or shareholders.
The formation documents for LLCs are called Articles of Organization.
Every LLC must file Articles of Organization with a state agency - usually the Secretary of State.
We can prepare Articles of Organization based on your specific business requirements.
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 within 12 months 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.
Some features that make LLCs fifferent from S and C Corporations
- LLCs are not required to to hold director and shareholder meetings
- A board of directors is not required
- The owners and managers may make all management and operation decisions
- Generally have more flexibility in the way that profits are distributed
- Require no corporate minutes or resolutions
- Owners do not have to be residents or citizens of the USA
LLCs may be governed by an Operating Agreement.
Operating Agreements may include requirements for profit sharing, ownership responsibilities and almost anything else that involves the management and
operation of the LLC.
Although Operating Agreements are not legally required, it is highly advisable to have one.
If your LLC should encounter difficulties down the line a well drafted Operating Agreement can potentially save a lot of time and money.
We can prepare an initial Operating Agreement based on your specific business requirements.
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Where should I Incorporate? |
You are free to choose any state in which to Incorporate a Business.
There is no requirement that you must form your Corpoiration in the state where your business is physically located or
where most of the Corporation's business will be conducted.
If you Incorporate in one state and do business in another state, situations may arise where you would have to
pay lawyers and/or accountants from both states instead of just the state in which you are Incorpoprated.
It is for this reason that most Corporations, especially small Corporations, decide to Incorporate in the state in
which they conduct most of their business.
Incorporating locally can be the least complicated way to form a new business especially if you plan to operate exclusively in your home state.
Most state impose a Corporate Income Tax.
The Corporate Income Tax Rate varies from state to state. These states do have any Corporate income tax:
- Nevada
- South Dakota
- Texas
- Washington
- Wyoming
Some states also impose a Franchise or Privelige Tax which is a fee for the privelige of doing business in the state.
Franchise Tax may be based upon Corporate assets, total value of outstanding shares, a combination of the above, or the Franchise
Tax may be a flat fee.
In some states, including California, the Franchise Tax is an indirect income tax.
Some states, like Delaware, have a significant Franchise Tax.
Other states have a small Franchise Tax, or, like Nevada, have no Franchise Tax at all.
Some states, like Texas, have no Corporate income tax but have a high Franchise Taxes.
Generally, states with higher Corporate income taxes usually have low Franchise Taxes.
Failure to pay Corporate Income Taxes or the Franchise Tax may result in the Administrative Dissolution of the Corporation
and forfeiture of the Corporate charter.
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How can I Incorporate Online? |
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If you are ready to Incorporate Online now, simply click on your state in the list below to
get more information and access our order entry page
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