A corporation or LLC not only does it protect you from personal
civil and financial liability but it's also the best way to
reduce your tax liability.
In general, you can deduct health insurance premiums, new
equipment, travel, and many other expenses. In addition,
if you or your corporation has excessive income, you can split
it between yourself and your corporation and save thousands in
taxes.
Though, you probably need more than what is listed below, you
absolutely must comply with the list so as your corporation is legal and
protects you against tax and civil claims for your personal assets.
Please Note: there are time limits for
each of the steps below
For a Regular Profit Corporation You must:
1. Register:
A. The Articles of Incorporation
B. A Statement of Officers
C. Notice of Stock Transaction
2. Issue Shares
3. Obtain an IRS tax ID and a State I.D.
4. Hold A first Directors' Organizational Meeting adopting
the bylaws and entering the Minutes.
5. Sign a Corporate Resolution and Have a Tax I.D. to Open a
Bank Account
For a NonProfit Corporation the Rules are much more Complex And
You Must Comply so as To Continue having the Corporate Protection and the Tax
exemption.
In Addition:
Corporation rules
require that all corporations establish a board of directors, write bylaws, hold
"recorded" board meetings, appoint officers, meet legal requirements for
paperwork, and Register Articles of Incorporation with state agencies. For profit corporation must separate directors from shareholders (directors from stock-owning shareholders),
maintaining a stock ledger, and holding an annual shareholder meeting.
Creation - Create by Registering articles of
incorporation with the Secretary of State.
Maintenance of corporate status -- Must comply
with statutory formalities.
Ownership -- Shareholders own the corporation
and elect the Board of Directors
Government - The Board of Directors governs the
corporation elect the officers
Management - The officers manage its day to
day activities. Shareholders manage the corporation in some case of
extraordinary circumstances.
Corporate structure: Corporations in California
may have only one shareholder who can be the sole director, and have three
capacities as an officer. He or she can be all three: the president, the
treasurer (chief financial officer) and the secretary officer of the
corporation. Of course, as the sole shareholder, he elects himself to be the
sole director, and subsequently, as a director, he elects himself to be all
three officers: president, treasurer, and secretary.
If a corporation has a total of two shareholders, the law requires two
corporate directors, and if a corporation has a total of three or more
shareholders, there must be at least three directors. This helps in creating a
balance in the corporation. For example, if there are three shareholders, and
one has the majority of the shares, he can still be outvoted from the other two
directors -- since all three directors are required when there are three
shareholders. This helps shareholders with smaller # of shares to make
important decisions such as the sale of stock and / or the election of
officers.
Tax considerations: The current maximum
federal corporate tax rate is 35%. The California corporate tax rate is 9.3%.
Tax savings: If the business fails, individual
shareholders may offset up to $50,000 ($100,000 on a joint return) from their
ordinary income.
Limitation of Liability: To limit their
liability to the initial investment capital, the shareholders must follow
statutory formalities, such as meetings of the shareholders and directors, etc.
If they fail to follow these formalities, the shareholders may be personally
liable for the debts or other claims against the corporation. The liability of
the directors to shareholders may be limited by a certain procedure included in
the bylaws and/or other legal documents.
Additional investment: To attract more
investors, the corporation may sell or issue additional shares of stock to new
investors or to a venture capitalist ( preferred stock).
S Corporation
Under California corporate law, the S corporation is not classified as
such. The designation "S" signifies Federal tax treatment of the
corporation. With an "S" corporation, shareholders may offset their profits
and losses from other personal ventures. Income is "passed through" to the
shareholders and is taxed only once -- as oppose to a "C" corporation that is
taxed on its profits and the shareholder is taxed on any dividends he receives
from the profits of the corporation ( i.e., "double" taxation.) Losses are
also passed through to offset each shareholder's income or loss to the extent of
his ownership of the shares of stock.
Requirement for an "S" corporation:
Can have no more than 35 shareholders,
A Shareholder must be an individual, estate, or a trust,
A shareholder may not be a nonresident alien,
The corporation may not have more than 80% or more owned subsidiaries,
and
The corporation can have only one class of stock outstanding.
Limitations of an "S" Corporation:
An "S" corporation cannot attract venture capitalists because it has only
one type of stock -- common stock. ( venture capitalist financing requires
preferred stock). In addition, any corporate earnings that remain in the
corporation as working capital ( as opposed to earnings being distributed to the
shareholders ) are taxed to the shareholders. Moreover, shareholders cannot
enjoy tax deductible (to the corporaton) fringe benefits because they are not
considered employees of an "S" corporation and / or split their corporation
income to lower their tax bracket and save on taxes. Shareholders can be
employees of an "C" corporation, split income to save taxes and enjoy
fringe benefits.