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The Question of Incorporation and the Forms of Incorporation

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Different Forms of Incorporation and where you can Incorporate

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The Advantages of Incorporation and The Forms of Incorporation

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Why you should Incorporate

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.

The Advantages of Incorporation
Personal Asset Protection and Liability of Shareholders and Investors Both C 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.
Name Protection The name 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.
Perpetual Existence Since a C Corporation or a LLC is a legal person in its own right their existence is not dependent on changes in ownership.
Financial Flexibility Depending 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 "double taxation"
Credibility Doing business with a C Corporation or an LLC (or other form of incorporation as opposed to a sole proprietor) adds credibility to your business
Allowable Business Expenses As a 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:

Choose the 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.

If you select a "C" or "S" corporation, you’ll need to think about the number of shares you want to authorize. Click here to learn more about this.

If you 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.

You have to select the name for your new company and the suffix that describes the form of business entity. Common suffixes for corporations are:

Incorporated (or Inc.) Company (or Co.)
Corporation (or Corp.) Limited (or Ltd.)

For 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 "bank", "insurance", "trust", "university", or "college."

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.

Generally, 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 corporate vehicle.

An important 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 from.

Once you 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 substantial.

In most 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).

Corporate Agents

In most 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!

The Different Forms of Incorporation in the U.S.A.
General or C Corporations (Inc.) Standard form of incorporation is the General or C Corporation
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
The shareholders 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 company.
The business 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 of Association.
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 corporation.
The Corporate 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 needed.
Can with the appropriate corporate resolutions purchase or sell companies and transact business worldwide
Can elect to be a S-Corporation, but only after meeting the qualifications for that.
- Must 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 resolutions.

- 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.
LLC - Limited Liability Company Now recognized in all 50 States plus DC - It has become the preferred form of incorporation for small and medium sized companies
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.
Corporate 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 company.
The operations 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 Laws, Buy-Sell 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.
Combines 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.

The 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.

Note: 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.

Subchapter S Corporation An S-Corporation, 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 IRS Code.

Must file the appropriate tax form in a timely manner at the beginning of the tax year.

Requires the approval of all shareholders

Cannot have more than 100 shareholders and can only issue one type of stock (common stock)

Shareholders cannot be non-resident aliens

Shareholders have to be individuals, they cannot be other companies. The S Corporation also cannot own large parts of affiliated companies.

This 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.

A "Close" or "closely held" Corporation 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 the stock
The Board of Directors is eliminated
Shareholders assume the directors' responsibilities and manage the company directly by becoming the officers and managers of the company
Corporation can be run like a partnership while maintaining all the corporate benefits.
Provisional 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.
A closely 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 outside investors.

However, this is an ideal corporate form for a family company.

Partnerships, Limited Partnerships and Professional Partnerships Partnerships 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.

To 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.

The Limited Partners can be LLC's.

A Partnership 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.

Limited Partnerships are often used for real estate development deals.

If 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.

As a PLLC, you may need to follow industry-specific regulations for naming your company.

These business structures can help licensed professionals protect their personal assets from lawsuits brought against their practice.

Non Profit and Tax Exempt Corporations Educational, 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
Personal asset protection and limited liability for directors, officers, and members
Tax Exemption from federal income tax as a charitable organization
Grant eligibility which will allow the corperation to receive private and public grants
Donors can make tax-deductible donations
Perpetual existence, even if a director leaves the business or passes away
Possible exemptions 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 corporation.

Though other types of nonprofit organizations exist, most applicants 501(c)(3) tax-exempt status with the Internal Revenue Service (IRS)
Sole Proprietor These is 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! The tax 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 payments.

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 companies!

If you need to know more about incorporation, here are some books from amazon. com.

Books about Incorporation and Company Formation from amazon.com

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