A corporation is a distinct legal entity. A corporation can open a bank account, own property and do business, all under its own name, just like an individual. A corporation is managed by a board of directors, which is responsible for making major business decisions and overseeing the affairs of the corporation. A corporation's directors are elected by the stockholders of the corporation. Officers, who run the day-to-day operations of the corporation, are appointed by the directors.
The primary advantage of a corporation is that its stockholders or shareholders (owners), are not personally liable for the liabilities of the corporation. For example, if a corporation gets sued and is forced into bankruptcy, the stockholders will not be required to pay the debt with their own money. If the assets are not enough to satisfy the debts, the creditors cannot go after the stockholders, directors or officers of the corporation to recover any shortfall.
Other entities, like an LLC, afford the same liability protections as a corporation with the flexibility of a partnership.
Who is this for?
An entity with many stockholders or investors, needs to distinguish between classes of stock or may go public (although you can convert from other forms).
Formation Process
Choose an available business name. We confirm name availability.
Appoint the initial directors of your corporation. We guide you through this.
File the "articles of incorporation," and pay a state filing fee that depends on the state where you will incorporate. We help you create your articles and we file them in your chosen state. You get confirmation and recorded documents.
Create corporate "bylaws," which lay out the operating rules for your corporation. We guide you through this as well.
Hold the first meeting of the board of directors. This formality is up to you, but we can provide you guidance.
Issue stock certificates to the initial owners (shareholders) of the corporation. Our optional Corporate Kit includes blank certificates.
Obtain any licenses and permits that are required for your business. For instance, you may be required to be a licensed general contractor.
Peel back theOnion Types of Corporations
C-Corp. A C-corporation is taxed at two levels. This is commonly referred to as double taxation. A C-corporation pays a corporate tax on its corporate income (the first tax). Then, the C-corporation distributes profits to stockholders who pay income tax on those dividends (the second tax).
Most U.S. public companies and companies with large shareholder bases are organized as C-corporations.
S-Corp. One way to avoid the double taxation of a C-corporation is to make a special election to be taxed as an S-corporation, which is pass-through entity taxed like a partnership or a sole proprietorship. That way there is only one level of taxation. The corporate profits "pass through" to the owners, who pay taxes on the profits at their individual tax rates. Moreover, the accounting for an S-corporation is generally easier than for a C-corporation.
The following restrictions are placed on S-corporations:
Must not have more than 100 stockholders, and each of them must consent. (A married couple is treated as one stockholder).
Each stockholder must be an individual who is a U.S. citizen or resident, or an estate or qualifying trust of such person.
Can only have one class of stock. (However, voting differences within a class of stock are permissible.) Preferred stock is not allowed.
Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.
Corporations wishing to become a S-corporation must file Form 2553 with the IRS. Each stockholder must sign the form. Legal Onion can prepare this form for you.
Choosing a domicile Many people choose to incorporate in their home state. However, if your home state has a high corporate income tax or high state fee, and your corporation will not "do business" in the home state, you should consider incorporating elsewhere. "Doing business" means more than just selling products or making passive investments in that state. It usually requires occupying an office or otherwise having an active business presence. There are a few states that are in the business of attracting incorporations:
Delaware is a popular choice for incorporating because of its history, experience, recognition and pro-business climate. Also, Delaware does not tax out-of-state income. In fact, over half of the companies listed on the New York Stock Exchange are incorporated in Delaware.
Nevada has also gained popularity due to its pro-business environment and lack of a formal information-sharing agreement with the IRS. Nevada does not have corporate income taxes. Business filings in Delaware and Nevada can typically be performed more quickly than in other states.
Keep in mind, if you do incorporate somewhere other than your home state, you may have to pay additional fees and meet additional requirements. You may want to speak with an accountant or tax advisor before making a decision.
A Limited Liability Company (LLC) is a business entity that offers limited liability protection and pass-through taxation. An LLC can be managed by either the members or by the managers.
Advantages LLCs allow for pass-through taxation. Members of an LLC are not typically held personally responsible for the debts and liabilities of the business.
LLCs generally have no ownership. restrictions - you can have as many owners and types of owners (persons, businesses).
LLC members have flexibility in structuring the management of the company.
An LLC does not require as much annual paperwork, or have as many formalities, as a C corporation or an S corporation.
Potential customers may perceive an LLC as a more professional entity than a sole proprietorship or partnership.
Disadvantages Profits are subject to Social Security and Medicare taxes. In some cases, LLC owners may end up paying more taxes than owners of a corporation. Salaries and profits of an LLC are subject to self-employment taxes, currently equal to a combined 15.3%. With a corporation, only salaries (and not profits) are subject to such taxes. This disadvantage is most significant for owners who take a salary of less than $97,500.
Owners must immediately recognize profits. A corporation does not have to immediately distribute profits to its shareholders as a dividend. This means that shareholders in a corporation are not always taxed on the corporation's profits. A LLC is not subject to double-taxation, profits are automatically included in a member's income.
Annual Fees. California LLCs are subject to an annual minimum franchise tax of $800 per year. The first payment must be made by the 15th day of the 4th month from the date of formation. The state of California does send a bill to help you to remember to make this payment.
Peel back theOnion When you form an LLC, you are eligible to receive pass-through taxation as its income is not taxed at the entity level. However, a tax return for an LLC must be completed. Any income or loss of an LLC as shown on this return is passed through to the owner(s). The owners, also called members, must then report the income or loss on their personal tax returns and pay any necessary tax.
As with corporations, an LLC legally exists as a separate entity from its owners. Therefore, the owners cannot typically be held personally responsible for the debts and liabilities of the LLC.
Choosing a domicile Many people choose to form an LLC in their home state. However, if your home state has a high income tax or high state fee, and your corporation will not "do business" in the home state, you should consider incorporating elsewhere. "Doing business" means more than just selling products or making passive investments in that state. It usually requires occupying an office or otherwise having an active business presence. There are a few states that are in the business of attracting incorporations.
Keep in mind, if you do incorporate somewhere other than your home state, you may have to pay additional fees and meet additional requirements. You may want to speak with an accountant or tax advisor before making a decision.
Formation Choose an available business name that complies with your state's LLC rules. We confirm name availability.
File formal paperwork, usually called articles of organization, and pay the state filing fee. We help you create your articles and we file them your chosen state. You get confirmation and recorded documents.
Create an LLC operating agreement, which sets out the rights and responsibilities of the LLC members. We help you create this.
Obtain licenses and permits that may be required for your business. For instance, you may be required to be a licensed general contractor.
A limited partnershipis a form of partnership that consists of one or more general partners (GPs) and one or more limited partners (LPs).
Like shareholders in a corporation, LPs have limited liability, meaning they are only liable for debts incurred by the firm to the extent of their investment. The GPs pay the LPs a return on their investment (similar to a dividend), the nature and extent of which is defined in the partnership agreement.
Formation Process
File a Certificate of Limited Partnership with the Secretary of State. We do this for you.
Execute a Partnership Agreement. We help you draft this.
Peel back the Onion
The GPs are, essentially, in the same legal position as partners in a conventional firm in that they have management control, share the right to use partnership property, share the profits of the firm in predefined proportions, and have joint and several liability for the debts of the partnership.
The GPs have actual authority as agents of the firm to bind all the other partners in contracts with third parties that are in the ordinary course business. An act of a general partner, which is not for carrying on in the ordinary course of the limited partnership's activities or activities of the kind carried on by the limited partnership, binds the limited partnership only if the act was actually authorized by all the other partners.
Taxation
Partnerships are tax pass-through entities. This means partners pay tax on their share of the the profit and loss. Partners will receive a K-1 from the partnership detailing their profits and losses.
Choosing a domicile Many people choose to form a partnership in their home state. However, if your home state has a high income tax or high state fee, and your partnership will not "do business" in the home state, it may be wise to form a partnership elsewhere. "Doing business" means more than just selling products or making passive investments in that state. It usually requires occupying an office or otherwise having an active business presence.
An LLC is a hybrid form of doing business that combines characteristics of the corporate structure and the partnership structure. It is a separate entity like a corporation and therefore carries liability protection for all of its members, but (if structured properly) is taxed like a partnership which has the benefit of flow-through taxation.
The corporation is a separate entity and therefore carries with it limited liability protection for its owners or stockholders. It has perpetual life and is a tax paying entity. Double taxation is a potential negative feature as earnings are taxed at the entity level and then taxed again when distributed to the stockholders as dividends.
A business structure that allows one or more partners (called limited partners) to enjoy limited personal liability for partnership debts while the general partners have unlimited personal liability. Terms of partner division of profit and loss are flexible.
Who is this for?
Typically for sole member or few members, companies remaining private.
Typically for many shareholders unless sub-chapter S election is made. Companies that plan to go public
Businesses where a single, limited-term project is the focus, such as real estate or the film industry. Limited partnerships can also be used as a form of estate planning in that parents can retain control of their business while transferring interest to their children.
Ownership
Owners are called members Unlimited number of members Allows for multiple classes of members Allows non-US members
Owners are called shareholders Unlimited number of shareholders Allows for multiple classes of members An S-corporation is limited to 100 owners and they cannot be corporations, nonresident aliens, general or limited partnerships, pension plans, charitable organizations or certain trusts. An S corporation cannot own more that 80 percent of the stock of other corporations and may not be part of an affiliated group.
A limited partnership must have two or more owners. At least one owner must be a general partner.
Taxation
Pass-through tax entity LLCs do complete a business tax return, but profit or loss is passed-through to the owners' personal tax returns. Personal income subject to self-employment tax. State imposes franchise tax or asset value-based tax. See state website for more information.
Taxation (separate or pass-through) depends on sub-chapter S election. File a tax return and profits are taxed at corporate level. Face double taxation (corporate level and personal income level on dividends). Salary subject to self-employment tax if not paid by the corporation.
Limited partners can use losses to offset other passive income on their tax returns. General partners losses can be used to shelter other income up to the value of their investment in the partnership since their losses are not usually considered passive.
Management
Similar to a partnership Members can set up structure as they choose.
Has directors and officers. Board of directors oversees affairs of the corporation.
General Partners usually run the business, and limited partners, who are usually passive investors, are not allowed to make day-to-day business decisions without risk of being treated as general partners with unlimited personal liability.
Transferability of Interest
Possibly, depending on restrictions outlined in the operating agreement
Shares of stock are easily transferred unless restricted.
Partnership interests are freely transferable unless restricted.
Administrative requirements
Relatively few requirements No need to file yearly updates
Elect board of directors/officers Hold annual meetings and annual report filing requirements
Generate annual K-1 tax document
Term
Typically limited life span Ends on dissolution date or certain events such as death or withdrawal of a member
Perpetual existence Extends past death or withdrawal of shareholders
What is it? A DBA ("Doing Business As") or FBN ("Fictitious Business Name Statement") is a declaration by an individual or other business entity stating that they intend to conduct their business under the name they have chosen. It is illegal in the state of California to do business under any name which has not been registered with the county in which the business resides and published in an adjudicated newspaper in the same county. We can obtain a DBA for you.
In the case of a corporation, LLC or partnership, a Fictitious Business Name is any name other than the exact corporate name as stated in the Articles of Incorporation. You can form an entity and name it Joe's Onions while conduct business under the "Onion Peel" fictitious business name.
What you get with Legal Onion
We file your DBAs or FBNs within the county you are doing business.
You will receive a confirmation in the mail from the county.
We place a required announcement in the appropriate newspaper.
Peel back theOnion A DBA or FBN is a business name that does not include the surname of the individual owner, and each of the partners or the nature of the business is not clearly evident by the name.
For example, doing business under a name like John Doe & Associates or John Doe & Sons would require a Fictitious Business Name be registered, even though the surname of the owner is stated, the words following the surname suggest other owners that are not specifically named. However, doing business under a name like John Doe Plumbing would not require that Fictitious Business Name be registered, because the owner (John Doe) is conducting business under his legal name. Why you need a DBA Few things are as important to a business as its name. It is the way customers find the business. It is one of the ways business owners make sure that their customers do not mistakenly find their way to a competitor. A DBA is a clear way of distinguishing the business from others.
Any person who regularly transacts business for profit, under a fictitious name (defined above), is required to file a Fictitious Business Name Statement with the Recorder/County Clerk, within 40 days of first transacting business.
By law, you have to inform the public that you are Doing Business As any name other than your own personal name. California law states that all Fictitious Business Name Statements (aka DBAs) must be published for four (4) consecutive weeks in an adjudicated newspaper after filing with the County Clerk/Recorder's office.
Banks will not open a business account for you without proof of your DBA filing.
By filing a DBA, you are protecting your business name in the county in which you do business. (There are many other ways and levels, such as trademarks, by which you can protect your business name. You should check with an attorney for details and further protections.)
