Documents Required· Reasons· Income Tax
Corporations are one of the four basic forms of doing business, the other three being partnerships, limited liability companies or sole proprietorships. The Limited Partnership is much like a combination of a partnership and a Corporation and has been used extensively for real estate development projects in the past. The limited liability company is a new form of doing business which may replace the Limited Partnership in real estate development projects.
The Corporation is a legal person, and as such, must be treated as a separate person. The Corporation has certain legal rights and obligations, and in order to obtain the advantages of the corporate form of doing business certain formalities must be observed.
The Corporation consists of three classes of people. In small Corporations, the same persons normally belong to all three classes. In fact, in California, Nevada, Delaware and in several other states one person may form a Corporation and hold all offices in that corporation. The three classes of persons are the (I) Shareholders (also commonly called stockholders,), (2) the Directors, and (3) the Officers, and key employees.
The shareholders are the owners of the Corporation. They provided the initial capital of the Corporation and they have only one management function. That function is to elect the directors. There must be at least one shareholders' meeting per year in which they elect the directors. If the Corporation or the bulk of the assets of the Corporation are to be sold, then the shareholders must approve that action by a majority vote, unless the articles of incorporation require a greater percentage. Buying and selling the bulk of a Corporation is a complex legal matter and an attorney should be consulted.
Because of the limited management function of the shareholders, they are not normally treated as part of the business operations of the Corporation and they have limited liability. The limited liability is one of the most important characteristics of a Corporation. It separates the personal assets of the shareholders from those of the Corporation. It becomes extremely important if the Corporation becomes involved in a lawsuit. The only liability that shareholders normally have (if all the corporate formalities have been observed) is the value of the stock that they hold. The shareholders must hold at least one meeting each year. The second group of people involved in the operation of the Corporation is the Board of Directors. They are elected by the shareholders and they determine the major policy decisions of the Corporation. The Board determines where the corporate headquarters are to be located; what types of business the Corporation will engage in; the states the Corporation will do business in; and they elect the officers of the Corporation. They also must hold at least one meeting per year.
The Board will often meet more often than annually. There should be a board meeting any time that a major business decision is made for the Corporation. A major decision for a small Corporation may be the purchase of a vehicle to be used in the business. That would not be a major decision for a company that owns a substantial number of vehicles and the purchase of a single vehicle would not require board approval. In the latter case, the Board would approve all purchases at the annual Board meeting.
The Officers and employees are the third class of people that are part of the corporate structure. These are the people that deal with people outside the Corporation. They make the day to day decisions. They purchase supplies, sell products and services, collect the accounts receivable and pay the accounts payable.
There are three legal documents that govern the operation of the Corporation in addition to the financial records. There are the Articles of Incorporation, By- Laws, and the minute book. The stock ledger is a record showing the distribution of ownership of the stock.
The Articles of Incorporation are, in a sense, the contract between the state and the Corporation. In California, following substantial changes in the Corporation Laws, the Articles can and normally should be a simple straight forward document, rarely consisting of more than two pages. The Articles we filed with the Secretary of State and are public record. The Articles protect the name of the Corporation within the state as well as performing other legal functions. No one else can use the corporate name. The Articles provide constructive notice to anyone who deals with the corporation that they are dealing with a Corporation.
The By-Laws are the operating procedure of the Corporation, and describe the functions of the Board of Directors and Officers as well as prescribe the rights of the shareholders. They are private records and are normally much more extensive than the Articles.
The minute book is used to keep the records of the meetings of the Board of Directors and the Shareholders. It is of utmost importance that the minute book be kept current and that all Board meetings be recorded. It is not necessary to keep extremely detailed minutes of the meetings. Your attorney and accountant can advise you as to what should be included in the minutes. Too many details in the minutes can lead to as many problems as too little information.
It is mandatory to hold Shareholders and Board of Directors meetings at least annually. If these meetings are not held, the Corporation may lose its tax status and the Shareholders may lose their limited liability protection. It is recommended that you hold the annual meeting with an attorney because she or he can discuss any recent developments in laws or lawsuits. The financial status of the corporation should be discussed with the corporate accountant prior to the annual meeting
You will be responsible for determining the value of assets being transferred to the Corporation and making the transfer. This subject will be discussed at the organizational meeting.
Questions regarding taxes or filing tax forms should be directed to your accountant. Your accountant will be required to file all tax forms including Subchapter S applications, employer identification numbers and state franchise tax or sales tax forms.
The corporation is no longer required to file an income tax prepayment for the first two years.
In some instances, there may be an advantage in incorporating in Nevada or Delaware. The fees are less, but that does not avoid the California minimum tax if the Corporation. does business in California.
| Attorneys fees | $880.00 | |
| Filing fee for articles (to Sec. of State) | 115.00 | |
| One check to Sec. of State for $100.00 | ||
| One check to Sec. of State for $ 15.00 | ||
| Permit to issue stock | 25.00 (minimum) | |
| Corporation kit (seal, by-laws, | ||
| minute book, certificates) | 90.00 | |
| First year's officer statement | 10.00 | |
| Name check | c10.00 | |
| Name reservation | 10.00 | |
| One day service walk through fee | 60.00 | |
| (otherwise 6 weeks to 2 months waiting period) | ||
| Total = | $1200.00 |
If your business fits into the scheme of a Nevada Corporation, the cost is approximately $700.00 total, this plan can be discussed during the initial consultation. If you are doing business in California, then you must register in California, which eliminates the savings of a Nevada Corporation. If your business is passive in California – owning bare land, investments or mail order business that can be done in Nevada, then you may not have to register in California.
The corporation may file its tax returns as a corporation or as a Subchapter S corporation. The decision must be made almost immediately after incorporating. The tax accountant should be consulted prior to making the selection, since it is a decision based on the income taxes of the shareholders and expected income from the corporation. The tax preparer or tax accountant files the subchapter election. If the Subchapter S election is not filed shortly after incorporating, the corporation must file as a C corporation.
A Subchapter S corporation files a federal information return. The S corporation pays no federal income taxes. All profits or losses of the corporation are filed with the personal income tax returns of the shareholders. This is particularly advantageous for a start-up corporation that has heavy initial expenses which will result in a first year loss. The loss is passed on to the individual shareholders.
The C corporation pays federal taxes based on the profits of the corporation. The profits of a closely held corporation can always be reduced by paying bonuses to the officers. Paying the bonus shifts the tax from the corporation to the shareholder in much the same way as the Subchapter S corporation. Paying the bonus avoids the double tax of paying a dividend.
There are additional advantages and disadvantages of the Subchapter S election which will be reviewed at the organizational meeting. There is no legal difference between a C corporation and S corporation for shareholder protection.