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|Why you should
To incorporate a business means to
give it its own legal entity. When you register
and incorporate your business at our local state
corporate offices your business becomes a
"person". It can now incur expenses, own
assets, contract for loans, buy and sell, be sued and sue
and present itself to the public, all quite
independently from the owners or shareholders.
Incorporation has nothing to do with the
size of your business. The benefits and risks remain the
same, whether you are large or small. Which form of
incorporation you select, might be a reflection of your
business size. But that is not true in all cases.
Advantages of Incorporation
Asset Protection and Liability of Shareholders
Corporations and LLC's are legal
persons with assets and liabilities
separate from their shareholders or owners.
Provided that there is no fraud and that the
legal documentation requirements are adhered to,
the shareholders or owners liability is strictly
limited to the amount they have put as investment
or shareholding into the business.
of your business is protected within your state,
since other non associated business entities are
not allowed to carry the same name. Though for
nationwide name protection you will have to
protect the name as a trademark.
||Since a C
Corporation or a LLC is a legal
person in its own right their existence is not
dependent on changes in ownership.
on the corporate format you select (C
Corporation, S Corporation, LLC) your
corporate tax liability can be reported on your
personal income tax returns. Thus avoiding
business with a C Corporation or an LLC (or other
form of incorporation as opposed to a sole
proprietor) adds credibility to your business
corperation, the deductibility of your allowable
expenses is well regulated and better defined
then when you are a sole proprietor.
There are several legal structures or
formats for a corporation. The ones best suited for a
start up, are the General or C Corporation (Inc.) and the
LLC (LLC). You should make a few basic decisions:
format of business entity best suited to your
needs: general or "C"
corporation, close or "S" corporation,
limited liability company, or limited
partnership. To learn more about the differences
among these entities, click here.
select a "C" or "S"
corporation, youll need to think about the
number of shares you want to authorize. Click
here to learn more about this.
want a service (business formation company) to do
the incorporation for you, be careful
that there are no hidden fees. These
services usually offer pre-priced package
deals that include various useful
elements. One such service is Harvard
Business Services Inc. a Delaware
based Incorporator. They offer efficient domestic and international
packages of incorporations as
reasonable prices. HBS Inc will also act as your
Agent. Other incorporators are shown on the
advertisements on this page or can be found
through Google search.
to select the name for your new company and the
suffix that describes the form of business
entity. Common suffixes for corporations are:
||Company (or Co.)
||Limited (or Ltd.)
Limited Liability Companies or LLCs, the
only allowable endings are LLC, L.L.C.,
or Limited Liability Company.
You should be aware that your
company name cannot contain the words
"trust", "university", or
If you conduct business in several
states, you should also check the
availability of your selected company name in
states where you will be doing significant
business. This will give you the option
of reserving the name there as well in the event
you want to operate in that state at some point
in the future.
the choice of which corporate format a new venture should
take is, with the exception of professional associations,
pretty simple. You either select the General or C
corporation or a LLC (Limited Liability Company) as your
decision is the place of incorporation. While
states like Delaware, Nevada and a few others, offer
certain advantages, if you live and conduct business in
another state, for instance from your home state, it might
be more cost effective to locate your
incorporation in the state where you will do business
have incorporated, you will have to get a
business license and pay the "franchise
tax" (or business tax) at the state, county
and city level. Most states will charge different license
fees for "home corporations" and those from out
of state which they usually call "foreign
corporations" (even though your corporation is
incorporated say in a US state like Delaware). The difference
in business license fees charged between the home
corporation and the foreign corporation tax can be quite
states the business license or franchise tax is based on
the number of shares issued (for an Inc. or General
Corporation) and the par or face value of these shares.
Therefore, at the initial stage, keep both low ($1,000
and $ 0,01 par value per share is a good start).
states when you form a corporation (or LLC), you will
also require an agent for your corporation.
Though, some states will allow that the company is its
own agent. Annual Agents fees can range
from $50.00 (for instance HBS Inc in Delaware) to $250 or
sometimes more. The agents function is to act as your
company representative for receiving the annual franchise
tax demand from the state you incorporate, or other legal
papers on behalf of your company. Agents often offer a
whole host of additional facilities for which you,
obviously, pay additional annual fees!
Different Forms of Incorporation in the U.S.A.
or C Corporations (Inc.)
form of incorporation is the General or
With that legal form, you create a
||A corporation is
a separate legal person with
Limited Liability for directors,
officers, shareholders and employees. The
Liability is limited to the realizable
Net Worth of the company
as the owners, elect
and appoint from amongst
themselves or from outside directors
(minimum two, the Chairman/woman
and the Secretary), who
are paid a directors fee. These in turn
will employ officers (CEO, CFO) who run
the company. The directors have
the fiduciary responsibility for the
purpose and a clear separation
of rights and responsibilities are
defined in the Articles
of Association which govern the
corporation. Other agreements within the
corporation, such as Bye Laws,
Buy-Sell Agreements etc,
are subordinate to the Articles
||There is no
limit to the number of shareholders and
the corporation can issue
different classes of shares (common
stock, preferred stock, options, non
voting stock) and the shares can
be held by an individual or a
Secretary is the person who calls
the Annual Shareholders Meeting
and sets the Agenda. He/she keeps
the minutes of the various meetings such
as the AGM or directors meetings and
draws up corporate resolutions as
||Can with the appropriate
corporate resolutions purchase or sell
companies and transact business
to be a S-Corporation, but only
after meeting the qualifications for
hold Annual Shareholder Meetings (AGM).
- Financial transactions
with shareholders (size and
increase/decrease in share capital, dividends)
and corporate officers (salaries, loans,
advances, bonuses, stock options, etc) or
- Financial commitments to
third parties (bank loans, lease
contracts) that are not strictly within the
normal trading, or that exceed
predetermined authority levels, have to
be sanctioned through corporate
- Pays tax on income after
deduction of allowable expenses.
- Owners do not have to be US
Citizens or permanent resident aliens
- Can, with a successful
business record, be floated through an IPO (Independent
Public Offering) at a stock exchange with shares
being offered to the public.
- Limited Liability Company
recognized in all 50 States plus DC - It has
become the preferred form of
incorporation for small and medium sized
||An LLC is a
separate legal person with
Limited Liability for its
members, officers and employees. The
Liability is limited to the realizable
Net Worth of the LLC.
formalities such as minutes,
by-laws, meetings, officers and directors
can be eliminated in the
LLC agreement. The members have
the fiduciary responsibility for the
and management of the LLC are governed by
a written agreement among its
owners that is not required to be
publicly filed or disclosed in some
states (e.g. Delaware) The business
purpose and a clear separation
of rights and responsibilities can be
defined in the LLC
Agreement. Other agreements
within the corporation, such as Bye
Agreements etc, are subordinate
to the LLC Agreement. This
is also often known as the Articles of
Association. In an LLC, non of
these agreements have to be public.
||There is no
limit to the number of owners. But the
LLC does not issue shares.
||Whereas in a
General Corporation (C Corp), formalities
(minutes, corporate resolutions) must be
followed or creditors can destroy the
protection from personal liability by
"piercing the corporate veil". These
formalities can be eliminated in the LLC,
without loosing the corporate veil.
Though it is advisable to keep regular
meetings and minutes of meetings.
the tax flexibility of a partnership with the
personal liability protection of a corporation.
LLC owners report their share of business profit
and loss on their personal tax returns, similar
to tax reporting for a general partnership. Forming
an LLC can help you separate yourself from your
business, protecting your personal assets in
the event of a judgment against the company.
For non USA residence, there is the added
advantage by using a Delaware LLC,
non-resident aliens of the U.S.
can legally avoid all U.S. federal taxes for
their non-U.S. business activities.
If you want to know more about
Delaware LLC's, click here.
Statutes governing LLC's differ from state to
state. Forming a Delaware LLC has special
advantages: The contractual flexibility
offered by the Delaware Act is unmatched by any
other LLC statute.
LLC owners can elect for the IRS (Federal) to tax
the LLC as a sole proprietorship,
partnership, C Corporation, or S Corporation.
Owners make this election through the IRS after
the company forms with the state.
also referred to as S-Corp. or Subchapter
S-Corp., is either a general corporation
or close corporation that has elected with the
IRS to be taxed pursuant to Subchapter S of the
the appropriate tax form in a
timely manner at the beginning of the tax
Requires the approval
of all shareholders
have more than 100 shareholders and
can only issue one type of stock (common
be non-resident aliens
to be individuals, they cannot be other
companies. The S Corporation
also cannot own large parts of
choice allows the profits of the corporation to
pass through the entity to the individual
shareholders. These profits are therefore only
taxed once. Subchapter S tax status is reserved
for small business corporations and
refers only to a company's FEDERAL taxation.
STATE taxation may vary.
Owners report profit and loss on
their individual tax returns. Because it is
really a C corporation with a special tax
arrangement, the owners personal assets are
protected from judgments against the business.
"Close" or "closely held"
||This is a
variation of the General or C Corporation.
It is intended for companies which want
to restrict the number of shareholders to a small
group and where the shareholders are also
directly involved in the management of the
company. In the Delaware version one
level, the director level, is eliminated.
||Restricted to no
more than 30 Shareholders. The
company cannot make a public offering of
its shares (no IPO) and there will be
restrictions on the sale and transfer of
of Directors is eliminated
assume the directors' responsibilities
and manage the company directly by
becoming the officers and managers of the
be run like a partnership while
maintaining all the corporate benefits.
directors can be appointed to settle
disputes (e.g. in the case of a 50:50
ownership by two shareholders)
||Can be a
Subchapter S Corporation if all other
qualifications are met.
held corporation can be of any size. But, because
the sale of stock is usually limited by
"Buy-Sell Agreements", the company
cannot raise money through offering shares to
this is an ideal corporate form for a family
Limited Partnerships and Professional
can be business associations of like-minded
individuals. There is no state filing required
and you will simply have to get a business
license in your place of business. From a tax
and liability point of view a Partnership is like
a Sole Proprietor with unlimited
liability for each partner and taxed
at the personal level.
avoid the unlimited liability most
partnerships are formed as a Limited
Partnership, whereby one partner, the General
Partner, carries unlimited liability and
the rest of the partners carry limited liability.
The limited liability partners cannot
participate in the management of the business.
Limited Partners can be LLC's.
is usually governed by a written
Partnership Agreement that regulates,
work performed, the financial side, profit
distribution and what happens upon the leaving or
demise of one partner.
Partnerships are often used for real
estate development deals.
you have a license to practice law, accounting,
medicine, architecture, or another professional
service, you may qualify to form a Professional
Corporation or Professional Limited Liability
Company (PLLC). The laws and regulations
for PLLC's vary from state to state. Many states require
all owners to be licensed in the same profession.
States often require proof of licensing before
approving the company.
a PLLC, you may need to follow
industry-specific regulations for naming your
business structures can help licensed
professionals protect their personal assets from
lawsuits brought against their practice.
Profit and Tax Exempt Corporations
scientific, religious, and charitable
organizations typically form nonprofit
corporations to provide limited liability for the
people involved in their management. As a
Nonprofit corporations qualifying for 501(c)(3)
status you will have the following advantage
protection and limited liability for
directors, officers, and members
from federal income tax as a charitable
eligibility which will allow the
corperation to receive private and public
||Donors can make tax-deductible
existence, even if a director leaves
the business or passes away
from property taxes
||Application for special
postage rates at a reduced cost
Incorporating your nonprofit
association can help you to establish the legal
protection that separates your personal savings
and possessions from the activities of the
other types of nonprofit organizations exist,
most applicants 501(c)(3) tax-exempt status
with the Internal Revenue Service (IRS)
the simplest form for a business. You do
not have to register this form with a state
authority. You only have to get a
business license as a "doing business
as" ("dba") form
(if you do not want to use your own name in the
business). Your business unit operating
as a sole proprietor has unlimited liability!
liability for this company is taken care of at
the individual level. You will pay taxes on your
profits as part of your normal personal tax
If, on the other hand, you are intending
to open business units in several states, you might
consider forming an LLC in Delaware, as the holding
company. This company in turn will be the owner of the
LLC's in the states in which you operate. Although, you
can do the formation of these units a lot more price
efficient through an agent, such as Harvard Business Services
Inc. in Delaware, or any other agent of your
choice, you should get yourself some sound legal
and tax advice, before you embark on the formation of
If you need to know more about
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about Incorporation and Company Formation from