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BEFORE YOU INCORPORATE ONLINE YOU SHOULD KNOW EXACTLY

Why you want to form a Corporation
What kind of Corporation you want to form
Where you want to form it

The information on this page may help you make these decisions. We would love to help you incorporate online. 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.

Why Incorporate

The main reason that businesses incorporate is to isolate the owner's assets from the business's debts and liabilities.

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 Corporation, 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.

Because a Corporation is considered as a legal entity separate from its owners, an owner (stockholder) is a holder of shares of stock in the Corporation and is not the employer of those working for the Corporation or the owner of any Corporate property.

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.

The owners of a Corporation can often save thousands of dollars in income taxes by keeping a small amount of profits in the Corporation and paying out the rest to themselves as employee salaries and bonuses. Also, Corporations can deduct normal business expenses before declaring profit. Many small business benefit from this feature.

What are the 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 Corporation. Owners who work in the business are treated and taxed as employees of the 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".

S Corporations and LLCs may choose "pass-through" taxation as explained below. In pass-through taxation there is no corporate income tax. All taxable profits are passed through to and paid by the owners thus avoiding the double taxation of C Corporations. Also, tax reporting requirements are usually more complex for C Corporations than for the other types of Corporations but corporate tax rates are usually lower than personal income tax rates.

There is no limit to the number of C Corporation shareholders and shareholders need not be US citizens or permanent residents. The other types of Corporations have constraints on ownership as explained below. C Corporations may have more than one class of stock and shareholders may be other Corporations. S Corporations may have only common stock. LLCs do not issue corporate stock.

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 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. 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.

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. PCF 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. There is more information at the IRS web site.

Some features that make LLCs fifferent from S and C Corporations

LLCs are not required 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. PCF can prepare an initial Operating Agreement based on your specific business requirements.

Where should I Incorporate

You are free to choose any state in which to incorporate. There is no requirement that you must form your business in the state where your business is located physically or where most of the Corporation's business will be conducted. If you're a small business and plan to operate in only one state then it makes a lot of economic sense to incorporate in that state.

If you incorporate in one state and do business in other states, you will have to qualify (pay a fee) to do business in any state in which you are not incorporated. There will be separate reporting requirements as well as recurring fees in each state in which you do business. Also, situations may arise where you would have to pay lawyers and/or accountants from each state 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.

If you plan on growing into a multi-state business then it might make sense to incorporate in Delaware or Nevada. These states have lower inCorporation fees and laws that are favorable to business.

For more information, or if you're ready to order, pick a state from either the Corporation or LLC lists below.

Corporation
Alabama	Kentucky	North Dakota
Alaska	Louisiana	Ohio
Arizona	Maine	Oklahoma
Arkansas	Maryland	Oregon
California	Massachusetts	Pennsylvania
Colorado	Michigan	Rhode Island
Connecticut	Minnesota	South Carolina
Delaware	Mississippi	South Dakota
District of Columbia	Missouri	Tennessee
Florida	Montana	Texas
Georgia	Nebraska	Utah
Hawaii	Nevada	Vermont
Idaho	New Hampshire	Virginia
Illinois	New Jersey	Washington
Indiana	New Mexico	West Virginia
Iowa	New York	Wisconsin
Kansas	North Carolina	Wyoming
LLC
Alabama	Kentucky	North Dakota
Alaska	Louisiana	Ohio
Arizona	Maine	Oklahoma
Arkansas	Maryland	Oregon
California	Massachusetts	Pennsylvania
Colorado	Michigan	Rhode Island
Connecticut	Minnesota	South Carolina
Delaware	Mississippi	South Dakota
District of Columbia	Missouri	Tennessee
Florida	Montana	Texas
Georgia	Nebraska	Utah
Hawaii	Nevada	Vermont
Idaho	New Hampshire	Virginia
Illinois	New Jersey	Washington
Indiana	New Mexico	West Virginia
Iowa	New York	Wisconsin
Kansas	North Carolina	Wyoming

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