Free Corporate Law FAQs | Free Corporate Law Legal FAQs

What is an "S" corporation?

Tue, 24 Mar 2009 12:39:01 GMT

There are several different types of corporations from which business owners can choose when they initially set up their business. One type of corporation is an S corporation. The “S” in “S Corporation” refers to Chapter 1, Subchapter S of the United States Internal Revenue Code. Owners who choose to incorporate an S Corporation are choosing not to have the Corporation pay income taxes but rather to have each shareholder pay personal income tax (or report a loss) on the shareholder’s proportionate share of income (or loss) from the S Corporation. In order to elect to incorporate as an S corporation, the company must have only one class of stock and not more than a certain number of shareholders. Since all of the shareholders are responsible to the IRS and state revenue department for their proportionate share of the corporation’s profits or losses, all of the shareholders must be US citizens or residents and must be people and not other legal entities (such as other corporations, LLC or LLPs.)

What is a "C" Corporation?

Tue, 24 Mar 2009 12:41:22 GMT

A C corporation is the most common type of corporation. The “C” refers to the subchapter of the Internal Revenue Code which explains the rules of taxation for this type of business structure. C corporations may have any number of investors and it can, therefore, be easier to raise the capital necessary to operate the business. Since the number of investors is not limited, C corporations can offer stock incentives to their employees. Corporate owners usually do not have personal liability for corporate debts or negligence. Some businesses also find that it is less expensive to provide health insurance and retirement benefits for employees if their business is properly incorporated as a C corporation.

What are the advantages of a corporation?

Fri, 20 Nov 2009 21:45:37 GMT

Forming a business as a corporation offers many advantages over a sole proprietorship or other entity types. The corporate form gives the owners (called the shareholders) limited liability protection. This means the owners are not liable for the corporation’s debts and, as such, their personal assets are not at risk if the corporation is unable to pay its debts. Also, the owners are not personal liable for the mistakes or misconduct of the board of directors, officers or employees of the corporation. Additionally, corporations enjoy separate tax treatment from its owners. The owners do not pay taxes on the business income. Rather, the owners only pay taxes on the corporate profits that are distributed to them in the form of salaries or dividends. However, the corporation itself must pay taxes at the corporate rate on profits that are realized. Finally, with the stock structure of the corporation, and transferability of shares, it is a form of business which is typically attractive to investors and employees.

What steps are required to form a corporation?

Sat, 21 Nov 2009 00:20:07 GMT

A corporation is a legal entity with a corporate charter from a state. To form a corporation, the following simple steps are required:

1. Select a name for your business. State laws restrict certain words or phrases that can be used in your business name - so make sure you check your state’s rules, which are typically available on the Secretary of State website.

2. Prepare and file the required paperwork with the Secretary of State in the state of incorporation. Typically, Articles of Incorporation must be filed, but in some states the wording is slightly different.

3. Pay the required filing fees.

4. Establish the corporate governance by choosing a board of directors and adopt corporate bylaws.

5. Hold the first meeting of the board of directors and authorize the directors and officers to conduct business. Typically, the first orders of business include issuing stock to the owners, setting up bank accounts, setting up a record-keeping system, obtaining licenses and permits from local government offices, obtaining appropriate insurance for the business, leasing or purchasing offices and equipment, hiring employees, etc.

As time goes on, it is important the board of directors, and officers, conduct business in accordance with corporate governance requirements. Meetings must be held at least annually, and usually more regularly, to document that the corporation is conducting business in accordance with state laws.