HOW TO INCORPORATE ONLINE

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 C Corporation.  Owners who work in the business are treated and taxed as employees of the C 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 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 S 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  No tax is paid on these stocks until they are withdrawn from the Plan.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. 

An S-Corporation has some limits on ownership.  It may be a better choice if you know that your Corporation will always be small and be owned by a small group of people.

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. 

A Nonprofit Corporation is formed to provide some kind of public or community benefit.  Unlike the other types of Corporations and LLCs, a Nonprofit Corporation may be eligible for certain benefits, including tax exemptions on both the state and federal levels.  Depending on the nature of the organization, some Nonprofit Corporations may not be eligible for tax exempt status.  A Nonprofit Corporation may also be eligible for public and private grants.  A Nonprofit Corporation is formed at the state level in a similar way as that of forming a for-profit Corporation.  Nonprofits must file Articles of Incorporation in the same way that C Corporations do.

A Nonprofit Corporation comes with the same liability protection as the other types of Corporations.  The main difference between a Nonprofit Corporation and a for-profit Corporation is how the profits of the Corporation are distributed,  In a for-profit Corporation profits can be distributed to shareholders.  Nonprofits are legally required to use the income to further a goal that benefits the community or some part of the public.

The most common types of Nonprofit Corporations are:

• Public-benefit Nonprofit Corporations
  Organized for the general public benefit, rather than for the interest of its members or shareholders
  Formed primarily for social, educational, recreational or charitable purposes
  Examples are food banks and youth sports organizations
• Religious Corporation
  Organized to promote religious purposes
  Subject to less complicated filing and reporting requirements than other types of Corporations
  May be exempt from regulations governing non-religious groups performing the same services
• Mutual-benefit Nonprofit Corporation
  Serves its members in ways other than just distributing profits to them
  Cannot obtain IRS tax-exempt status as a charitable organization
  Pays the same taxes as for-profit Corporations
  Examples are homeowners associations or a public utility companies

Each type is treated a little differently legally and admin istratively depending on the state in which they are Incorporated.

While most federal tax exempt organizations are Nonprofit Corporations, registering a Nonprofit Corporation at the state level does not automatically qualify the Nonprofit tax exempt status at the federal level.  The IRS recognizes various types of tax exempt Nonprofit Corporations.  To receive federal tax exempt status a Nonprofit Corporation must file forms with the Internal Revenue Service.  The forms can get very complex depending on the nature of the Nonprofit.

Also, a Nonprofit Corporation cannot legally use its resources for propaganda or to further a political cause or to support a candidate for public office.

One of the major responsibilities of a for-profit Corporation is to increase shareholder value. For most Corporations the pursuit of shareholder value is done without regard for specific benefits to the public. The only benefits that matter are those that benefit the shareholders, who are the owners of the Corporation.  For-profit Corporations often face pressure to abandon social goals in order to increase their bottom line.

Benefit Corporations are formed to provide some kind of public benefit but may be restricted in their ability to raise capital when they need to grow.

In the last few years some states have created a new kind of for-profit Corporation which has a legal responsibility to include some kind of public benefit in their Corporate operating requirements.  A Corporation of this kind is called a Benefit Corporation or a B Corporation.

Benefit Corporations are a hybrid between a for-profit and nonprofit Corporation.  Operating capital is easier to raise for a Benefit Corporation and the Benefit Corporation is required to provide some kind of public benefit.

Benefit Corporations do not have any special tax breaks or benefits. Benefit Corporations are taxed just like any other Corporation is taxed.

To qualify as a Benefit Corporation, a Corporation must have an explicit social or environmental mission, and a legally binding fiduciary responsibility to take into account the interests of workers, the community and the environment as well as its shareholders.  A Benefit Corporation must also publish independently verified reports on its social and environmental impact alongside its financial results.  Some states require that the report must be filed with the Secretary of State.

Some examples of the specific public benefit that a Benefit Corporation must provide, among others, include:

• Providing low-income or under served individuals or communities with beneficial products or services
• Promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business
• Preserving the environment
• Improving human health
• Promoting the arts, sciences or advancement of knowledge

Currently a little over half of the states have laws that allow for the formation of a Benefit Corporation.  It is probable that in the near future all states will have legislation which allows the legal creation of Benefit Corporations.

We can help you form a Benefit Corporation in any state which currently has provisions for Benefit Corporations.

A Professional Corporation, usually abbreviated PC or P.C., is just what the name implies. It is a Corporation made up of only Professionals.  The definition and requirements of "Professional" varies from state to state but Professionals are generally people who require some kind of license for what they do.  Examples of Professionals are doctors, dentists, engineers, land surveyors, accountants, architects and attorneys.

A Professional Corporation provides the same liability protection as is provided by a C Corporation.  A PC sets a limit on the owners' personal liability for business debts and claims.  Forming a Professional Corporation cannot protect a Professional against liability for Professional negligence or malpractice, but it can protect against liability for the negligence or malpractice of an associate Professional.

Some states require that Professionals register as Professional Corporations rather than as regular general for-profit Corporations while other states allow Professionals the choice to register as a normal for-profit Corporation or as a Professional Corporation.

The process of registering a Professional Corporation is almost exactly the same as registering a C Corporation.  You file Articles of Incorporation with the Secretary of State.  Some states may require approval from a state licensing board before they will approve the Articles of Incorporation of a Professional Corporation.  Getting approval from some state licensing boards can take a number of weeks.

A Limited Liability Company is not a partnership or a corporatiosn 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.  We 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.

Some features that make LLCs different from S and C Corporations

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