A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation are filed with the correct state authority, and all fees are paid. Incorporating your business provides protection against creditors seeking to repossess your personal assets to satisfy business debts. Selecting some form of organization that provides limited liability protection is a fundamental step in a company’s growth.
What is the Difference Between an “S” Corporation and a “C” Corporation?
All corporations start as “C” corporations and are required to pay income tax on taxable income generated by the corporation. A “C” corporation can be converted to an S corporation by completing and filing IRS Form 2553.
One key distinction involved regarding the choice of corporate entity involves taxation. An S corporation’s net income or loss is “passed-through” to the shareholders and are included in their personal tax returns. Because income is not taxed at the corporate level and is passed through, there is no concern over double taxation as with C corporations. Sub-chapter S corporations, as they are also called, are restricted to having fewer than 100 shareholders, who must be individuals (S Corps cannot be owned by other corps) who are not nonresident aliens.
Do I Need an Attorney to Incorporate?
In every state except South Carolina, you do not need an attorney. In all other states, you can prepare and file the articles of incorporation yourself; however, you should be thoroughly versed in the laws of your state. Therefore, it is still wise to consult with an attorney when considering all of the consequences of incorporation or alternate forms of entity organization.
In spite of their seemingly high hourly fees, a good corporate attorney can be a valuable resource to your small business. If you are unsure of what steps your business should take and you don’t have the time to research the matter yourself, even the cost of one hour’s consultation can pay off handsomely later. Just remember to bring lots of questions.
Once you have decided, the accountants and CPAs of the Cook CPA Group can form your corporation and save you money.
How Do I Name My Corporation?
First, we recommend that you spend some time coming up with a name for your corporation. Although each state has different rules concerning the naming of your corporation, the most common rule is that it must not be deceptively similar to another already formed company. The corporate name must include a suffix. Some examples are “Incorporated”, “Inc.”, “Company”, and “Corp.” However, your state may have different suffix requirements.
We can assist with an array of questions regarding your corporation’s name.
What are the Benefits of Incorporating?
The primary advantage of incorporating a business or organization is to limit your liability. That is, if your company is sued or runs into financial difficulties and cannot pay its debts, liability will be limited to company and business assets. The personal assets you have worked so hard to build and save up will be protected from most collection attempts.
A limited liability form can also help attract investors. Typically, shareholders are not liable for the debts or obligations of the corporation. Therefore, unless a shareholder or owner has personally guaranteed the loan then he or she is not personally liable. This outcome would not be the case if the business owner failed to reorganize and is still operating a sole proprietorship or partnership. In this scenario, the business owner’s personal assets would be within reach of creditors. Corporations also offer many tax advantages that are not available to sole proprietors.
Additional advantages of the corporate form of a business organization include:
- A corporation’s life is unlimited and is not dependent upon its members. If an owner dies or wishes to sell their interest, the corporation will continue to exist and do business.
- Retirement funds and qualified retirement plans (like 401k) may be set up more easily with a corporation.
- Ownership of a corporation is easily transferable.
- Capital can be raised more easily through the sale of stock.
- A corporation possesses centralized management.
How Many Shares of Stock Should I Choose, and at What Par Value?
Every situation is different and they type and the amount of stock you offer will vary with these factors. At the Cook CPA Group, we provide a default of 200 shares, although you can choose any amount you want on all orders. Your par value is not requested on all orders, and is usually expressed as “No Par Value” or some dollar amount per share such as “$1.00” or “$0.10.” Some states require that you do not issue your stock for less than the par value. Some states also base their fees on the number of shares authorized, multiplied by the par value. We can help you meet the requirements set forth in your state.
Will I Need an EIN?
If you incorporate, your corporation is required to have an Employer Identification Number (EIN). This number is sometimes also called your Federal Tax Identification Number. It is used so that the IRS can track payroll and income taxes paid by the corporation. Another way to think about an EIN is as a Social Security number for your business entity.
If you need to establish or renew an EIN, we provide two EIN services:
- Basic EIN Service – We prepare and email your SS4 (EIN application) & easy one-page instructions for obtaining your EIN. You need only review, sign and fax or call in the information to the IRS to get your EIN.
- Full EIN Service – We actually obtain your company’s EIN for you. We handle the entire process from start to finish.
What Steps Should I be Ready to Take Immediately Following Incorporation?
Following the incorporation of your business, you need to begin actually administering it as state law and operating agreements require. As a threshold matter, you must have your initial shareholder(s) meeting to elect your director(s), if your director(s) haven’t been designated in the articles. Then, you must have your initial organizational meeting of your directors. At this meeting, you will need to elect your officers, adopt your company’s bylaws, and issue your stock (among other actions).
How Do I Get Started with Incorporation?
Once you have decided on a name, please reach out to the accountants and CPAs of the Cook CPA Group. Once we receive your paid order, we verify the availability of your name choices, draft your articles, file them with the state and send you all appropriate documents after they have been filed. We can handle the process from start to finish. To discuss how we can assist with the incorporation of your business, please call the Cook CPA Group at 916-724-1665 or contact us online.