Business Corporations


What is a "C" corporation?

“C” refers to Subchapter C of the Internal Revenue Code and describes how the corporation’s profits and losses will be treated. All for-profit corporations are automatically C Corporations when formed. A C Corporation reports income and losses on a corporation tax return and pays taxes on its profits at corporation tax rates. The “C” designation is strictly a tax classification and has no bearing on the structure of the corporation or the limited liability protection afforded the shareholders of the corporation.

What is an "S" corporation?

An "S" corporation is a for-profit corporation that has made an election with the IRS under subchapter S of the Internal Revenue Code to be treated for tax purposes as a "pass-through entity" - meaning that profits and losses of the corporation are passed through to the shareholders (owners) who report them on their personal tax returns and pay the tax at the individual level. The corporation pays generally pays no federal income tax at the corporation level.

Corporations must satisfy certain requirements to be eligible for S status. They can have a maximum of 100 shareholders; the shareholders must be of the following types: individuals who are U.S. citizens or permanent residents, certain types of trusts, estates, or a tax-exempt organization.

What is the difference between an S-corporation and a Limited Liability Company (LLC)?

Both entities provide the benefits of pass-through taxation to avoid "double taxation" of profits as well as limited liability for the owners. An LLC has more operating flexibility and fewer restrictions than a S-corporation. For example, there are restrictions on the type and number of shareholders that are permitted in an S corporation that are not imposed on the member-owners in an LLC. Corporations must hold annual meetings of shareholders and follow certain other record keeping requirements not legally required of an LLC. On the other hand, shareholder-employees of an S corporation may pay less taxes overall than members (owners) of an LLC. It is generally less expensive to form an S corporation than an LLC, particularly in California where additional taxes are imposed on LLC's.

Who can form a corporation?

Anyone who files completed Articles of Incorporation with the Secretary of State, and pays a filing fee, may form a corporation. Any type of business may be operated as a corporation.

How many people are required to form a corporation?

The person forming a corporation is known as the Incorporator. This may be one of the principals of the corporation or an attorney or service company preparing and filing the Articles of Incorporation with the state.

After the corporation has been formed, one individual may fill all of the required capacities: i.e., as the sole shareholder and director, and serving as president, secretary, and treasurer or chief financial officer.

Am I required to have an attorney to form my corporation?

An attorney is not legally required to form a corporation. However, there are legal and tax impacts on the type of entity you select to operate your business and the tax classification you choose. It is often advisable to obtain information from a legal and/or financial advisor to assist you in choosing the most advantageous entity type and tax classification for your particular business and the financial status of the shareholders.

You should also understand that filing Articles of Incorporation is only the first step in forming your corporation. To properly complete the formation of your corporation, you need bylaws, organizational minutes (electing the initial officers, authorizing bank accounts, issuing ownership shares and more), and stock certificates issuing shares to the initial owners to document their ownership percentages.

What are Articles of Incorporation?

Articles of Incorporation (known in some states as "Certificate of Incorporation" or "Certificate of Existence") is the document that legally creates the corporation, once submitted to and filed by the Secretary of State. Unlike sole proprietorships and general partnerships, which come into existence upon commencement of business, a corporation comes into existence by filing Articles of Incorporation and paying the necessary filing fee.

What are Bylaws?

A corporation’s bylaws typically set forth the rules and procedures that govern the management of the corporation’s business and the conduct of its corporate affairs. Bylaws serve two principal functions. First, they provide a useful reference that the officers, directors, and counsel may consult to make sure their acts comply with the Articles of Incorporation, the state corporation laws, other laws, regulations, and agreements. Second, the bylaws may vary some of the standard rules set forth in the state corporation laws and may establish rules in areas not covered by such laws. Bylaws are an internal document that is not filed with any governmental agency.

What is a "registered agent" for a corporation?

The registered agent, short for "registered agent for service of process," is the person or entity designated by the corporation to receive any official communication on its behalf, as well as accept service of any legal process (e.g., a summons and complaint) for the corporation. The registered agent must be named in the Articles of Incorporation and must be a natural person with a physical address in the formation state or an approved service company authorized to provide registered agent services.

Most corporations prefer to designate one of their officers as agent for service of process, setting forth the corporation’s business address as the agent’s address. This choice typically allows earlier receipt of any process served on the corporation.

Do I need a registered agent for my corporation?

Yes. Corporations that do not have a physical address in the incorporating state or simply prefer to use an outside registered agent may use a private service company to act as the registered agent for an annual fee. Any change in the registered agent (name or address) must be documented with a change document filed with the formation state.

How long does it take to form a corporation?

The processing time varies in each state. Normal processing time may be just a few days in states with a small number of corporate filings. States having large volumes of corporate filings may take several weeks to a couple of months to process filings. Many states offer expedited filing services for an additional fee that reduce the filing times to generally 1 to 4 days.

Keep in mind that you will need to open a separate bank account for your corporation to deposit income and pay expenses. Most banks will require you to present a copy of your filed Articles of Incorporation from the Secretary of State together with your federal tax number (EIN) in order to open a corporate bank account. You should therefore consider expedited filing services, when available, if you need to open a corporate back account quickly.

Are there any requirements or restrictions in naming my corporation?

Yes. The Secretary of State (or equivalent agency) governs the use of corporate names. In addition to certain words you cannot use without permission (such as "bank" "olympic" “insurance” or "federal"), the name you select must not be the same (or "confusingly similar") as that of an existing corporation in your state.

If I'm using a D.B.A. name for my business, does this mean I can use the same name when I incorporate?

Not necessarily. D.B.A. names (sometimes called trade names or assumed names) are generally regulated by individual counties or other municipalities within a state while corporate names are regulated by a state agency (Secretary of State, or equivalent agency). Therefore, since the state agency generally keeps no record of unincorporated businesses, another corporation may already have chosen your desired name. Registering a D.B.A. name does not give you any priority or exclusivity in obtaining that name as your corporate name.

If I incorporate, will anyone else be able to use my corporation's name?

Incorporating only provides you the exclusive right to use your corporate name (or any name "confusingly similar" to it) in your incorporating state. It will not keep another business from using your corporate name as its business name by filing a D.B.A. for a different business form (e.g., a sole proprietorship or partnership).

Registering your corporation's name as a trademark or service mark, either federally or with your state, alerts other businesses that you claim priority rights to use your corporate name within the state(s) in which you do business. Registering a mark may provide additional protection against another business using your corporation name, but the concept of name ownership is a fairly complex one, and best discussed with your legal advisor.

Can anyone be a director or an officer?

There are very few restrictions on who may serve as a director or an officer of a corporation.

The most important restriction is that only natural persons may serve. This means that a corporation (or any other business entity) may not serve as a director or officer.

The other restrictions deal with legal capacity to contract. Individuals less than eighteen years of age, or who are mentally incompetent, may not enter into legally binding agreements and therefore cannot serve as directors or officers in most states.

What are shares?

Shares are ownership units in a corporation, and are evidenced by a stock certificate of the corporation. A stock certificate indicates the number of shares issued to a shareholder. A share entitles its holder to a proportionate share of the assets of the corporation, whether by dividend payments or upon the ultimate distribution of its assets when the corporation is dissolved (terminated). Shares also confer other rights to shareholders, such as the right to vote and attend meetings.

Does my corporation have to issue shares?

Yes, even if you are the only owner (shareholder). There are two main reasons:

First, issuing shares of stock is a corporate formality, which must be followed to assure compliance with all of your state's statutory requirements with respect to proper formation of a corporation. Completing this formality is also important in preserving the limited liability protection for shareholders.

Second, as mentioned above, shares indicate ownership of your corporation.

What is the difference between "authorized" shares and" issued" shares?

"Authorized shares" refers to the total number of shares that a corporation is authorized to issue to its shareholders in one or more share certificates. The owners of a corporation decide this number, and it is listed in the Articles of Incorporation. There is generally no legal or tax significance to the number of authorized shares, although some states charge a variable filing fee to file Articles of Incorporation based on the number of authorized shares (often in combination with a share’s “par value” discussed below).

"Issued shares" refers to the number of authorized shares that the corporation has actually issued to its shareholders, as represented in one or more share certificates. This information is not kept on file with any state agency, but all issuances of stock are recorded in the corporation's stock ledger and documented in the corporate minutes.

How do I determine the number of authorized shares for my corporation?

First, you need to determine whether your state (or any other state in which you may regularly transact business) imposes any fees based on the number of authorized shares of a corporation. If so, you'll probably want to stay within the maximum number permitted without paying additional fees. If this is not an issue, then the number is essentially arbitrary and only has meaning with respect to the number of shares that the corporation has actually issued. You’ll want to use a number that allows for simple calculation of ownership percentages such as 1,000 or 10,000 shares.

How do I determine the number of shares to issue to a shareholder?

If the shares of your corporation have a "par value" (see question below about par value), the number of shares issued to a shareholder should be a mathematical calculation based on the value of the items contributed to the corporation by the person to receive the stock and the par value established for each share. For example, if the corporation established a par value of $1.00 per share and a person contributes $1,000 in cash or property to the corporation, he should receive 1,000 shares of stock.

If your corporation's shares do not have a par value (called “no par” stock), then the number of shares issued to each shareholder should reflect the ownership percentage that each shareholder is intended to have. For example, if a total of 100 shares of the authorized shares will be issued to two shareholders, one of whom will own 75% of the corporation and the other 25% of the corporation, they should be issued 75 shares and 25 shares, respectively.

What types of items may a corporation receive in exchange for issuing shares?

Shareholders are issued shares in the corporation in exchange for contributing money, property or services, or any combination thereof, which are transferred to and become the property of the corporation. The contributions become assets that capitalize the corporation.

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