FAQ’s: Forming a Corporation

 

The Process

To form a Corporation one files a Certificate of Incorporation with the Department of State.

The filing fee for filing the Articles or Organization is $125 plus a $25 expediting fee.

The firm’s legal fee to prepare and file the Articles of Organization is $150. This fee includes obtaining your new company’s tax identification number.

Estimated time for performance after being retained: 1-2 days.

Summary of Cost:

The total cost of filing the Certificate of Incorporation ($150) + obtaining the tax identification number (included) + the firm’s fee ($150) = $300 

Some Corporation Basics

Types of Corporations: A Corporation when formed is by default a C-Corporation. There are also Benefit Corporations, B-Corporations and S-Corporations, which might make the conversation a little confusing but here we simplify it for you:

  • A Benefit Corporation is a new type of legal entity that is committed to producing a public benefit for society and/or the environment.
  • A B-Corporation (not the same thing as a Benefit Corporation) is actually a certification that your corporation meets certain verified standards of social and environmental performance, public transparency, and legal accountability.
  • An S Corporation is a tax election, meaning you file a form with the IRS and the State to be treated as an S Corporation for tax purposes. This is discussed in a little more detail below, but all you need to know is an S Corporation is a C Corporation that seeks to be treated differently for tax purposes.

Limited Liability: All corporations offer limited liability for the shareholders, provided that the shareholders follow the statutory required corporate formalities such as holding annual meetings (where shareholders vote on the directors and the directors vote on the officers), entering into business contracts in the business’s name, not your name, and maintaining business bank accounts. The key is remembering that you as a shareholder are protected from personal liability for your corporation’s actions because your corporation is considered a separate entity from yourself and as such, you must maintain a formal separation from yourself and your company by engaging in corporate formalities, and maintaining separate bank accounts etc.

Taxation: C-Corporations are known for their double taxation scheme. So, income that a corporation receives is taxed twice: first when the corporation receives the income and then again when the money is disbursed to the shareholders either in the form of salary, distributions or dividends.

As mentioned previously, to become an S-Corporation is a tax election i.e. You file a form with the State Tax Department and with the IRS to “elect” to be treated as an S-Corporation. One of the key differences between a C-Corporation and an S-Corporation is the difference in how income is taxed. As per the IRS website: “S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income.” See https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations for more information on S Corporations, and the requirements.

Ownership: A corporation is owned by “shareholders”. Shareholders own shares of stock in the corporation. The corporation “issues” shares to individuals (or in some cases other companies) who then become shareholders. When you form your corporation, you can determine how many shares the corporation is authorized to issue. “Authorized” shares are the shares a company is authorized to issue, not the number of shares the company will necessarily issue. For example, you might authorize 10 million shares, but only issue 2 million. “Authorized but unissued shares” are shares that are authorized but not issued. If outstanding shares are less than authorized shares, the difference (unissued stock) is what the company retains in its treasury

Management:  A corporation is managed by its directors or board of directors. In most closely held corporations, shareholders and directors are generally one in the same.

  • Directors: Directors generally control the policy of the corporation, and the officers put that policy into effect.  A director may not delegate his or her authority.  A director may not give his or her proxy to vote at a meeting of the board of directors, for example.  A director may be removed only under specific and special procedures.
  • Officers: A corporate officer is basically a high-level management official of a corporation, hired by the board of directors of a corporation or the owner of a business. Common officer positions are: president, vice president, secretary, financial officer or chief executive officer (CEO). The officers of the corporation serve at the pleasure of the board of directors.  An officer, except as limited by the corporation and its enabling statutes, may delegate his or her responsibility and authority. Even though an officer may have an employment contract which provides him or her with rights to compensation, he or she may be removed from office at any time by the board of directors. 

Corporate Governance Documentation: There are various written instruments that a corporation uses to document the rights and duties of shareholders, directors, and officers. Bylaws are a detailed set of rules adopted by a corporation’s board of directors after the company has been incorporated. They specify the corporation’s internal management structure and how it will be run. Through the course of the corporations’ lifetime, both shareholders and directors will have meetings in order to vote on certain aspects of the corporation’s management. These meetings are documented in “meeting minutes” and the decisions made by the shareholders or directors will be set forth in a written “resolutions”.  Shareholders can also use other types of agreements in the management and planning of their business such as proxies, voting agreements, or buy-sell agreements. A buy-sell agreement basically sets forth the mechanism for buying out a shareholder’s stock in the corporation in the event of death or disability, generally speaking.  A sample buy sell agreement can be found in the appendix to this e-book.

Miscellaneous: There is no legal requirement that a corporate seal be used on any documents under state law, however many financial institutions require that you use your seal in connection with corporate resolutions, loan documents, notes, and the like.

 

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