Most LLCs have only the first two characteristics.
Formation of an S Corporation or an LLC can offer many benefits including limited liability and tax savings. An LLC also provides liability protection like a corporation.
To learn more about the characteristics of S corporations and LLCs, click here.
To view a side-by-side comparison chart of the similarities and differences of S corporations, C corporations and LLCs, click here.
4. Do I need an Attorney to form a Corporation or LLC?
No. The formation of corporations and LLCs is a high-profit portion of the law practices of many corporate lawyers. Click&Inc was founded by a corporate attorney who replicated his business incorporation services for entrepreneurs who want to get the same incorporation services a business attorney would provide and save nearly 90% in the process.
Many business incorporation attorneys elicit the necessary information from a client who wants to incorporate a business, then hand the information off to a legal assistant or secretary to cut and paste the required documents together.
Click&Inc's Corporation Center takes the place of the live attorney and gathers the information from the client. With that information, the articles, bylaws, corporate minutes, stock certificates, and federal forms are drafted and customized for each individual business automatically, thus eliminating the need for legal assistants and secretarys—which is how Click&Inc can provide the same type of services you'd get from a business incorporation lawyer, but at a deep discount.
Obviously, because of the automated portion of parts of our service, we cannot add in clauses to your bylaws, operating agreements, or corporate minutes that are of a highly specific-nature. For such specific matters that arise, you should seek the advice of good corporate lawyer. After your incorporation is completed you should hire a lawyer for drafting contracts, employment agreements, and other legal documents that a growing business needs.
If you have questions prior to incorporating about which type of entity is right for you, the tax consequences of a particular entity selection, or other questions that our help screens and FAQ page don't answer for you, you should contact a business attorney or tax professional.
5. What are Articles of Incorporation and Articles of Organization?
The Articles of Incorporation (for corporations) and the Articles of Organization (for LLCs) declare an individual or group to become a corporation or LLC. These documents spell out certain minimum information about the corporation or LLC that is required by the laws of the state in which the business entity if formed.
6. What are Corporate Bylaws and Operating and Member Control Agreements?
Bylaws (for corporations) and members agreements (for LLCs) are documents which govern the internal workings of the company. Such matters as voting, when meeting are held, how officers and directors are elected or removed, and how the company's owners may transfer their ownership interests, are set forth in these documents.
Bylaws and Member Control Agreements are typically not filed with the states and exist solely for the corporation/LLC and its shareholders/members.
7. What do Shareholders and members do?
The shareholders of a corporation and the members of an LLC are the individuals (or other entities) who have as ownership interest in the company. In many cases these people paid for stock or purchased an ownership interest, providing financial capital for the company to operate. Shareholders and members elect the Board of Directors or Board of Governors (LLC). In smaller corporations, shareholders / members serve on the board or directors/ governors and hold the offices of the company.
8. What do Directors do?
The board of directors manages the corporation or LLC and make business decisions. They in turn choose the officers (President, Vice President, Secretary, and Treasurer), whose responsibility it is to run the day-to-day operations of the corporation or LLC.
Most LLCs don’t have a board of directors as the internal structure is a bit less formal, but LLCs can have boards. In the LLCs we create the members (owners) choose the officers.
9. How many Directors, Shareholders and Officers does a corporation or LLC need?
All states allow a corporation to have one shareholder. Most states allow an LLC to have only one member.
All states allow one person to hold all offices and comprise the entire Board of Directors.
10. What is a Registered Agent?
A registered agent is a person designated to receive legal notices, services of process, and other official documents delivered to the corporation. All corporations must have a registered agent on file with the Secretary of State. The address of the registered agent must be a physical address, not a PO box.
The person designated to be the registered agent may be an employee, officer, director, or shareholder of the corporation or LLC, or he or she may not be affiliated at all with the corporation or LLC at all.
Additionally, the registered agent must be available during normal business hours. If you do NOT have a person who can act as a registered agent in the State in which you are incorporating, Click&Inc can provide one for you simply by clicking on that option during the order process.
11. What are Shares of Stock? What is par value? Who sets the stock price?
Shares of stock represent the percentage of a corporation a shareholder owns (in LLCs there aren’t shares of stock per se, instead a member simply has an ownership interest, which can but doesn’t have to be indicated on a certificate). Shares of stock are written articles that represent the amount of money invested in the corporation by an individual shareholder. The corporation determines, at the outset of incorporating, how many shares it shall issue and what classes of shares (No Par, Par, Common, Preferred, Participating, etc.) it will issue
Each share represents ownership in the company, and it entitles the holder to certain types of rights (voting rights, dividends, etc). A stock certificate is the document which indicates the number of shares a shareholder of a corporation owns.
Par value is the minimum amount of money for which a share of stock can be sold. Shares can always be sold for an amount greater than the par value. Stock that has no par value is stock means that there is no specific minimum value assigned to it.
The stock price is set by the board of directors of a corporation (the managers or members of an LLC would determine the price of ownership in an LLC). Prospective shareholders can purchase shares for money or obtain them in exchange for goods or services provided to the corporation or LLC.
12. Do I need a tax ID number?
Yes, all corporations and LLCs must have a federal tax ID number to do business. This number will be required to fill out payroll reports, pay taxes, open a business checking account, etc.
IRS Form SS-4 is the one which is used when applying for an EIN number. Click&Inc is the only online incorporation service that drafts the SS-4 for you at no additional charge, regardless of what incorporation package you select.
13. How do I know if my Company name is unique?
No state will allow you to incorporate your business if you have a corporate name that is the same or similar to a corporation or fictitious name already registered in that state.
If you choose our Entrepreneur package, we tell you exactly how to quickly check with your state of incorporation to determine whether or not our chosen name is available.
If you choose our Ultimate Entrepreneur Package, we check the name availability for you an work with you and the state to choose a substitute corporate name if your first choice is not available.
Even if your chosen corporate name is available, this does not mean that a corporation in another state hasn’t registered it as a corporate name in another state.. Further, the registration of our corporate name isn’t a guarantee against trademark infringement if someone else has been using and/or registered your corporate name with the U.S. Patent and Trademark Office.
14. If I incorporate in Nevada or Delaware (or any other state) but operate my business in the state in which I actually live, do I need to also register with my state?
Yes. If you incorporate in State X but operate your business in State Y (where you live), you will need to register as a foreign corporation in your home state. This will likely require filing out a form and paying a filing fee (usually $100 or less).
Each state has different requirements as to when a corporation must register and include situation where you have an office, sales representatives, etc. Check with the state in which you want to register as a forgiven corporation ensure the proper requirements are satisfied.
For more information on when you may need to file as a foreign corporation read the answer to question #19 below.
15. Do I need a Corporate Seal?
This may be one of the most misunderstood elements of any incorporation. The fact is, you will rarely, if ever, need a corporate seal. Corporate seals are the embossed stamps that contain the name of a corporation and it’s date of formation. No state’s require corporate seals any more. Many online incorporation sell corporate seals because there is a high profit margin...and for no other reason. You don’t need a corporate seal, but if you really want one, we have high quality, steel ones for just $45.
To order one go to www.corporate-seal.net. If any online incorporation service tells you that you need a corporate seal, run away as fast as you can.
16. What do I have to do on an Annual basis?
Your corporation will have to file an annual tax return (IRS Form 1120 or 1120S). Annual tax returns are also filed by sole proprietorships (Schedule C to IRS Form 1040), limited liability companies (IRS Form 1065) and general partnerships (IRS Form 1065).
Almost all states require all business entities to file an annual report each year which updates the address of the corporation, its officers and directors, and its registered agent for service of process. There is a small fee (in most cases).
Finally, Click&Inc suggests that you consult your accountant for any additional information required for filling out corporate tax returns, quarterly tax payments, employment payroll records, etc.
17. Can I own / participate in the ownership of a corporation or LLC if I am not a U.S. citizen?
Generally, there are no restrictions on foreign ownership of a company formed in the United States. The procedure for a foreign citizen to form a company in the United States is the same as for a U.S. resident. It is not necessary to be a U.S. citizen or to have a green card to own a corporation or limited liability company formed in the United States. To receive pass-through profit distributions, a foreign citizen may form a limited liability company. In contrast, all profit distributions (called dividends) made by a C Corporation are subject to double taxation. (Under U.S. tax law, a nonresident alien may own shares in a C Corporation, but may not own any shares in an S Corporation.) For this reason, many foreign citizens form a limited liability company (LLC) instead of a C Corporation.
A foreign citizen may be a corporate officer and/or director, but may not work in the United States or receive a salary or compensation for services provided in the United States unless the foreign citizen has a work permit (either a green card or a special visa) issued by the United States. Some work permits allow a foreign citizen to work only for a sponsoring employer. Such work permits generally do not enable a foreign citizen to also work for a new, unrelated company formed by the foreign citizen. The foreign citizen would need to obtain a separate work permit to work for the new company. We do not provide immigration advice.
18. Does it matter where (in which State) I incorporate?
Not really. Incorporating in a state other than the one where you live and work will generally involve additional costs. You must have registered office / registered agent in the state in which you incorporate. Unless you have a person (over 18) in the state of incorporation who will agree to be your registered agent, it’ll cost about $125-$200 per year to have a registered agent.
Further, the state in which you live and actually operate your business may require that you file as a foreign corporation if you incorporate in another state (technically, your business is registered in a different state). This can cost between $50-$200 (depending on the state).
For the home and small business person there is not compelling reason to incorporate in Nevada or Delaware, despite what you have heard. You nor your assets are any more protected by being in one of these state than you would be in your own state.
19. How do you know when you are doing business as a foreign corporation?
Here are a few scenarios that you can "generally" apply. Keep in mind that if you have an uncertainty with regard to your status, you should consult an attorney and/or contact the Secretary of State's office of the State in question.
A corporation formed in one State will nearly always be subject to another State's laws, including all taxes, if it is determined to be doing business in that other State.
A Minnesota corporation, with an employee, a warehouse, an office or mailing address in Pennsylvania, will generally have sufficient association with Pennsylvania to bring it under Pennsylvania's jurisdiction as to business or sales done in Pennsylvania.
A California corporation, with an independent contractor sales person, operating in Texas, where orders are taken in Texas then sent to the corporate headquarters in California for acceptance and delivery will generally not be considered as doing business in Texas.
Merely having a Bank Account in Iowa will not, by itself raise sufficient nexus to establish "Doing Business" in Iowa. You are generally evaluated by your level of human resource, capital and asset investment in that State.
Generally, mail order sales from Kentucky, mailed to a corporation in Oregon will not be sufficient nexus (connection) to raise Kentucky jurisdictions.
Remember, if you are not sure, consult with an attorney performing small business in your State and experienced in foreign corporation operating procedures.
20. What is a "C" Corporation?
The term C Corporation refers to the way in which the corporation is taxed. There is a corporate level income tax on the profits of a C Corporation. In addition, if a dividend is paid to shareholders from retained earnings, the dividend is included on the personal tax return of each shareholder. Thus, the profits of a C Corporation are subject to potential double taxation. Your corporation will be taxed as a C Corporation this year unless you timely file IRS Form 2553 to elect tax treatment as an S Corporation.
To learn about the characteristics of a C corporation, click here.
To view a side-by-side comparison chart of the similarities and differences of C corporations, S corporations and LLCs, click here.
21. What is an "S" Corporation?
The term S Corporation refers to the way in which the corporation is taxed. An S Corporation is a pass through entity. There is no corporate level income tax. Instead, a pro rata portion of the annual profit or loss of the S Corporation is included on the personal tax return of each shareholder. If IRS Form 2553 is filed within 75 days after incorporation, the corporation will be treated as an S Corporation for tax purposes. Many start-up businesses benefit by making the election to be taxed as an S Corporation.
To learn about the characteristics of a S corporation, click here.
To view a side-by-side comparison chart of the similarities and differences of S corporations, C corporations and LLCs, click here.
22. What is an LLC?
An LLC is frequently referred to as a hybrid of a corporation and a partnership. The members of a limited liability company are shielded from personal liability and profits and losses may pass directly to the members without taxation of the LLC itself. That's another way of saying that an LLC is not double taxed. In other words, income is taxed at the member level.
As mentioned above, an LLC offers two primary benefits. First and foremost, an LLC provides the members protection from personal liability. Additionally, an LLC provides certain tax benefits. That is, an LLC allows for pass through taxation.
An LLC is similar to a corporation because it has:
- limited liability
- free transferability
- continuity
- centralized management
To learn about the characteristics of an LLC, click here.
To view a side-by-side comparison chart of the similarities and differences of LLCs, S corporations and C corporations, click here.
23. How do "C" Corporations differ from "S" Corporations?
Click here to view an easy to read chart which shows the similarities and differences of S corporations and C corporations.
24. Does incorporating in Delaware or Nevada allow me to avoid taxes in my home State?
NO!! Corporations are created by each state under its own rules and laws. If an out of state corporation (Foreign Corporation) wants to do business in another state, it must first qualify in that other state. At the moment the foreign corporation qualifies, it becomes subject to all the laws and taxes of that state. No state will permit a foreign corporation to evade its tax law.
In other words, if you incorporate in Delaware, that is fine, but remember that if you live and work in Ohio, you still have to qualify your corporation in Ohio in order to conduct business there and you will pay tax there just as you would had you incorporated there in the first place. So, when all is said and done, you'll probably find it much easier to incorporate in Ohio. Still, the choice is yours.
25. What do I do if I need to change my S corporation to a C corporation?
There are only a few circumstances in which you would likely need to make such a change:
- You plan on having more than 75 shareholders (e.g. new investors are coming in);
- Foreign nationals (non U.S. citizens / resident aliens) are going to become shareholders;
- Other corporate entities (LLCs or other corporations) are going to purchase shares.
While there is no official form to file, the company should send a letter to the IRS stating the following:
- It is revoking its S election under IRS Code Section 1362(a).
- The total number of shares of issued stock at the time the revocation is made.
- The specific date on which you’d like the revocation to be effective.
- The name, address, and tax ID number (EIN) of the corporation.
Note that some states also have their own S-election forms, so you will need to check with them about their conversion policies. We suggest that if you are planning on converting your entity like this that you contact a lawyer or tax professional.
26. What are the differences in how LLCs are treated for tax purposes versus an S corporation?
First, the following is VERY general. For specific information, see an accountant or tax advisor. As an LLC, you will be treated as a sole proprietor (if you are a one member LLC) or as a partnership (two or more members) for tax purposes. Thus, you will still have to pay self-employment tax, but you will enjoy the limited liability protections of a corporation. As an LLC you can also choose to be taxed like an S or C corporation by filing IRS Form 8832.
One big advantage to an S-corporation is that you don’t have to pay self-employment tax. Of course, you should pay yourself some kind of a salary, which will be subject to FICA (goes toward Social Security and Medicare benefits). But, you can pay yourself some income in the form of a dividend, etc. without incurring additional FICA payments.
27. Why do a lot of real estate investors choose LLCs?
Rental income from real estate generally isn’t considered self-employment income. Therefore, real estate investors get all of the limited liability protection, but none of the tax burdens.
