INCORPORATING 101 Incorporations, LLCs, and Subchapter
S Corporations DESCRIPTION
of a corporation, LLC and S corporation
STRUCTURE of a corporation,
LLC and S corporation
ADVANTAGES of a corporation,
LLC and S corporation
LIMITATIONS of a corporation,
LLC and S corporation
MANAGEMENT of a corporation,
LLC and S corporation DESCRIPTION
OF EACH Corporation A corporation is a separate legal entity that
exists independently from its owners. A corporation is created
and comes into existence when articles of incorporation (charter
or certificate of incorporation in certain states) are filed
with the proscribed fees, and accepted by the proper state
authority S Corporation An S Corporation is merely a corporation which
has elected a special tax status with the federal government.
It was created for smaller business owners. The special tax
treatment permits the income of the corporation to be treated
like the income of a partnership or sole proprietorship in
that the income is "passed through" to the shareholders.
In order to be considered an S Corporation,
the stockholders of a properly filed corporation must elect
such status within 75 days of formation for the current tax
year, or at any time during the preceding tax year. This election
is made by filing Form 2553 with the IRS. To qualify for S
Corporation status:
- Must be a domestic corporation.
- Only one class of stock.
- Not more than 35 stockholders.
- Stockholders must be individuals, estates
or certain trusts.
Except for the above characteristics, an S
Corporation follows the same guidelines as a regular “C”
Corporation. Limited Liability Company A Limited Liability Company ("LLC")
is a separate legal entity that offers an alternative to partnerships
and corporations by combining the corporate advantages of
limited liability with the partnership advantage of pass-through
taxation. An LLC is created and comes into existence when
articles of organization are filed with the proscribed fees,
and accepted by the proper state authority [top] [Order
Form] STRUCTURE
OF EACH Corporation A corporation is owned by stockholders. While
stockholders do not directly manage the corporation, they
influence corporate decisions through indirect actions such
as electing and removing directors, approving or disapproving
amendments to the articles of incorporation and voting on
important corporate decisions. The members of the Board of Directors are responsible
for managing the affairs of the corporation. Usually, directors
make only major business decisions, however they supervise
and appoint 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. A stockholder may serve on the Board of Directors
and also be an officer of the corporation. In fact, in most
states one person is enough to form a corporation, and that
person can be the sole officer, director and stockholder S Corporation ( See DESCRIPTION
of S corporation and Corporation above) An S Corporation follows the same structure
as a regular corporation. However, an S Corporation is usually
owned and run by a small number of individuals or family members
(one or more). Thus, while the above structure applies, the
same person or related persons or a small number of persons
MAY control all positions. Limited Liability Company An LLC is owned by its members. The members
of an LLC are like partners in a partnership or shareholders
of a corporation. A member will more closely resemble a shareholder
if the LLC utilizes a manager or managers, because under that
situation the members will not participate in the management
of the LLC. However, if the LLC does not utilize managers,
then the members will more closely resemble partners because
they will have decision making powers in the LLC. The member’s ownership in the LLC is
represented by their respective "membership interest",
in the same manner as a partner has an "interest"
in a partnership or a shareholder has stock in corporation. Number of Members: Most states require LLC’s
to have at least two members. The states which allow one member
LLC’s are: DE, ID, MO, MN, NY, TX and VT. [top] [Order
Form] ADVANTAGES
OF EACH Corporation The most important advantage of incorporation
is that it gives its stockholders limited liability. Since
the corporation is a separate legal entity, its stockholders
are protected from the debts and liabilities of the corporation.
Other advantages include:
- A corporation has unlimited life.
- If an owner dies or sells his interest, the corporation
will continue to exist.
- Ability to easily establish insurance and retirement plans.
- Ownership of a corporation is easily sold or transferred
through sale or transfer of stock.
- Capital can be raised through the sale of stock.
- A corporation has centralized management that may remain
in place after a sale.
S Corporation The special tax treatment permits the income
of the corporation to be treated like the income of a partnership
or sole proprietorship in that the income is "passed
through" to the shareholders. Thus, shareholders report
the income or loss that is generated by an S Corporation on
their individual tax returns. Under these circumstances the
"double taxation" potential is avoided. Limited Liability Company Taxation: Pass-Through Taxation LLC’s
allow for pass-through taxation, allowing earnings of an LLC
to be taxed only once. The earnings from an LLC are treated
in a similar manner as earnings from a partnership, sole proprietorship
and most S corporation. Limited Liability: The member’s liability
is generally limited to the amount of money which the member
invested in the LLC. As a result, the members of an LLC receive
the same limited liability protection as do shareholders of
a corporation. Flexible Organizational Structure: LLC’s
are generally free to establish any organizational structure
agreed upon by its members. Thus, profit interests may be
separated from voting interests. In general, the disadvantages of either entity
might include:
- Complexity and expense of forming a corporation or LLC.
- Legal formalities involved with running a corporation
or an LLC
[top] [Order
Form] LIMITATIONS
OF EACH Corporation The primary disadvantage to incorporation is
the possibility of double taxation. The 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 second as income to the shareholder. However, all reasonable
business expenses such as salaries and other operating expenses
are deductions against corporate income that can minimize
double taxation. “Double taxation” can be eliminated
by making an S Corporation election. S Corporation
- Must be a domestic corporation.
- Only one class of stock.
- Not more than 35 stockholders.
- Stockholders must be individuals, estates or certain trusts.
An S Corporation cannot have shareholders who
are C-Corporations, other S Corporations, certain trusts,
LLC’s, partnerships or nonresident aliens. S Corporations
are not allowed to own 80% or more of another corporation’s
shares. Limited Liability Company
- Possibility of losing pass-through taxation if the LLC
is not properly structured.
- More paperwork than an ordinary partnership.
[top] [Order
Form] MANAGEMENT
OF EACH Corporation
- A corporation is owned by stockholders.
While stockholders do not directly manage the corporation,
they influence corporate decisions through indirect actions
such as electing and removing directors, approving or disapproving
amendments to the articles of incorporation and voting on
important corporate decisions.
- The members of the Board of Directors are
responsible for managing the affairs of the corporation.
Usually, directors make only major business decisions, however
they supervise and appoint 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.
NUMBER OF DIRECTORS Generally, in most states a corporation is
only required to have one director, however you are permitted
to have more. However, certain states base the required number
of directors on the number of stockholders. If the corporation
has 3 or more stockholders, then the corporation must have
at least 3 directors. If the corporation has less than 3 stockholders,
then the number of directors may be equal to or more than
the number of stockholder The states which have this rule
are: CA, CO, CT, HI, LA, ME, MD, MA, MO, NY, OH, VT and UT. S Corporation An S Corporation follows the same guidelines
as a regular corporation. However, an S Corporation is usually
owned and run by a small number of individuals or family members
(one or more). Thus, while the above structure applies, the
same person or related persons or a small number of persons
MAY hold all positions. Limited Liability Company An LLC is owned by its members. The members
of an LLC are like partners in a partnership or shareholders
of a corporation. If the LLC is managed by its members, then
it operates much like a partnership. Each member shares equally
in the decision making process of the LLC.
Alternatively, the members may choose to appoint a manager
or managers to act in a capacity similar to a corporation’s
board of directors. The managers are then in charge of the business
affairs of the LLC. If managers are not designated in the
articles of organization, the members will be deemed to direct
the business affairs of the LLC
A member will more closely resemble a shareholder if the LLC
utilizes a manager or managers, because under that situation
the members will not participate in the management of the
LLC. However, if the LLC does not utilize managers, then the
members will more closely resemble partners because they will
have decision making powers in the LLC. [top] [Order
Form] |
