FAQS About Corporate Law
How do I incorporate a corporation? What are the steps in incorporating?
The first step is a reserve a name with the secretary of state; second file a Certificate of Incorporation with the Secretary of State; third organize the company, elect officers, and distribute stock.
How do I select a name?
One may choose a name but it cannot be a name of another company already in existence or so close to that name as to cause confusion in the market place. Once the name is chosen it is submitted to the Secretary of State where it is reserved for sixty days, the time in which the incorporation under that name must be completed.
Who should form a corporation?
Anyone can form a corporation but is advisable to use a lawyer who can insure that the company is organized in the manner intended by the shareholder(s).
How are Corporations taxed?
C corporations are taxed on its profits at the end of the year at a rate fixed by the tax code. S corporations are not taxed separately. The shareholders are taxed on the money received from the company.
What are the liabilities of a corporation?
Corporations may be liable for the consequences of the company's conduct just as would an individual. However, the shareholders are not individually liable for any judgment against the company.
Can my corporate directors be on an H1-B status?
Yes. Immigration status is not a factor.
What is a buy-sell agreement?
A buy-sell agreement is an agreement among the shareholders in an S corporation, or a C corporation that is not a public company (shares are not sold on the stock market), that before a shareholder can sell his/her shares to a third party, the shares must first be offered to the corporation or to the other shareholders.
What is the difference between a partnership and a LLC?
In a partnership the partners are personally liable for the debts and obligations of the partnership, which means that all of their personal assets are at risk if there is a legal judgment against the partnership. Members of LLC are not personally liable and can lose or risk losing only the money they have in the LLC.
What is the difference between a Limited Partnership and a General Partnership?
General partners are all 100% liable for the liabilities of partnerships. Limited partner is only liable for percent of participation in partnership.
Who owns the corporation?
The corporation is owned by the shareholders. A corporation may have one or more shareholders. In general, since the shareholders elect the persons who serve on the Board of Directors, the corporation is controlled by the shareholders. The shareholders that own more than 50% of the corporation's common stock get to make the ultimate decisions about running the corporation.
How does an S corporation differ from a limited liability company?
A limited liability company (LLC) is like an S corporation. Generally, business owners form an LLC rather than an S corporation if one or more of the following situations apply:
- ANY owner of the company is another business entity or non-resident alien (a person is a nonresident alien if he or she is neither a resident nor a citizen of the United States).
- The company will be owned by more than 75 persons.
- The company plans to issue more than one CLASS of stock (for example, special allocations of profits and losses will be made that are not proportionate to the equity percentage of each owner.)
- The owners desire to use business debt (money borrowed by the (company) to increase their tax basis.
- The state where your business is located imposes an entity level income tax on the profits of an S corporation and does not impose such a tax on the profits of an LLC.
If these situations do not apply to you, than an S corporation should do the job.
Generally, the LLC is treated like a partnership for tax purposes and there is no entity level tax. Under the recently approved IRS check-the-box regulations, an LLC will be taxed like a partnership unless the members elect to have the LLC taxed like a C corporation (association). Prior to the check-the-box system, to be taxed like a partnership, an LLC could have no more than two of the following four characteristics of a corporation:
- Limited Liability;
- Centralized Management;
- Continuity of Life;
- Free Transferability of Ownership Interests.
If the above situations do not apply to you, than the corporation may apply for the S corporation status by timely filing IRS Form 2553.
The law requires submission of form 2553 for the S election within 75 days after the corporation first has assets, shareholders or starts doing business. If you miss the deadline, you may file Form 2553 within 75 days after January 1, but there might be tax consequences. If a corporation fails to qualify for S corporation status, than the corporation must be a C corporation. With a C corporation, 100% of the medical expenses incurred by you (as a shareholder and employee), your spouse and your children are tax deductible. In a sole proprietorship, only 45% of such medical expenses are tax deductible for the 1998 tax year. In 1993, Section 1202 of the Internal Revenue Code was enacted to provide a 50% exclusion of any capital gain from the sale of "qualified small business stock."
For shares to qualify for the exclusion, several tests must be met. For instance:
- Shares must be purchased directly from a C corporation and the shares must be held for at least five years (shares do not qualify if purchased in any later trading market).
- A "qualified small business" must have not more than $50 million in assets at all times before and immediately after the issuance of stock.
- At least 80% of the corporation's assets must be used in the "active conduct of one or more qualified trades or businesses" throughout the holding period.
There are also limitations on the persons who may use the exclusion. You should consult your own tax advisor as to the availability of the capital gains tax exclusion.
How does an S corporation differ from a sole proprietorship?
With an S corporation, the distribution of S corporation profits is exempt from the 15.3% social security/Medicare tax that is imposed on wages. The shareholder of an S corporation saves about $1530 for every $10,000 profit distribution ($10,000 x 15.3% = $1530) because the entire profit distribution is exempt from the social security/Medicare tax. The tax savings strategy is commonly called "wage reduction." Remember to pay a reasonable wage if you implement the wage reduction strategy. By contrast, in a sole proprietorship, all self-employment income is subject to the 15.3% social security/Medicare tax (called self-employment tax in the context of a sole proprietorship).
If you are the sole owner of a business that has not incorporated, your business is considered a sole proprietorship. The 15.3% security/medical tax is comprised of a 12.4% social security tax and a 2.9% Medicare tax. Wages higher than $76,200 are exempt from the 12.4% social security portion of the tax. Note, however, that the 2.9% Medicare portion of the tax is applied to all wages (and self-employment income), without an upper limit. In addition to the tax savings benefit explained above, there are liability protection reasons for choosing to run your business as an S corporation. With an S corporation, your liability is limited to the money you invest in your business. With a sole proprietorship, you have unlimited personal responsibility and all of your personal assets are subject to the rights of creditors to seize or place a lien against your personal assets and treat the S corporation like a C corporation.