What type of entity should I use?
There are several types of entities you may want to consider when asking Fantini Incorporators to form a company for you. Please remember, though, we are not attorneys and cannot tell you which type of entity will best meet your needs. Your legal or accounting professional will do this for you. Each type of entity has specific tax implications, may provide different levels of liability exposure and may require a different type of record keeping. However, you may use the following information to help acquaint yourself with the types of entities available to you.
The major types of entities you may want to consider - and those we can assist you with forming and/or filing - include:
1. “C” Corporation
A “C” Corporation is a corporation taxed for income tax purposes by the Internal Revenue Services (IRS) at corporate tax rates, which may be higher than the tax rates for other types of entities. Owners take either a salary (which then necessitates the filing of quarterly and annual payroll tax filings) or dividends using after tax dollars. If no other tax status is selected by the corporation and approved by the IRS, it will by default be a “C” corporation. A “C” corporation will provide limited liability for its owners.
A “C” corporation allows for the easy transfer of ownership through the sale of stock and will continue to survive past the deaths of individual shareholders.
A “C” corporation is the most rigidly structured and organized. Complete and accurate record keeping is imperative in order to preserve the liability protection available to its owners. Each year, the shareholders must hold an annual meeting or take action by written consent (depending on the corporation’s by-laws and applicable state statutes) to ratify actions taken on behalf of the business for the previous year. A separate bank account must be maintained and there may be no co-mingling of personal and corporate funds. All assets of the corporation (such as bank accounts, automobiles, credit cards, loans) must be in the name of the corporation, although a shareholder may be asked to guaranty payment of corporate borrowing. It is important to remember, a corporation is an “alter ego” of the owner and when a corporation does not act like a separate entity, courts may decide to “pierce the corporate veil”, thereby taking away the limited liability protection afforded a corporation. Fraud may also result in the corporate veil being pierced.
2. Limited Liability Company (LLC)
An LLC is more flexible than a corporation and simpler to maintain, yet still provides its members the limited liability protection available to a corporation while enjoying the pass-through tax treatment of a sole proprietorship or partnership. An LLC is run under an Operating Agreement rather than corporate by-laws. Members of an LLC are the owners of the company, who generally report tax liability on their personal tax returns, thereby paying taxes at the lower personal rate. Members can draw funds from the LLC without the double taxation of a “C” corporation. The type of entity may be selected on IRS Form SS-4, Application for Employer Identification Number. In some instances, it may be necessary to file IRS Form 8832, Entity Classification Election.
3. “S” Corporation (also known as Sub Chapter S Corporation)
“S” corporation status is one afforded by the IRS. To become an “S” corporation, first a regular or close corporation is formed, then a Form 2553 is completed and filed with the IRS to declare “S” status. An “S” corporation is not taxed as a separate entity by the IRS, but its profits “pass through” to the individual stockholders and are taxed at each individual taxpayer’s income tax rate. Profits and losses are passed through to the stockholders’ personal income tax returns. With an “S” corporation, shareholders may take a “reasonable” salary as well as shareholder distributions. Payroll expenses will be assessed against a shareholder’s salary, as with any other employee.
An “S” corporation, despite its distinct taxing structure, provides limited liability for its owners, just as a “C” corporation does. As with a “C” corporation, complete and accurate record keeping is essential for limited liability to be protected.
A corporation selling stock to the public, having more than 100 shareholders or having more than one class of stock may not be an “S” corporation. A corporation considering “going public” should take these restrictions into consideration when determining whether to be a “C” or an “S” corporation at the time of formation. (For a complete listing of who may elect to be an “S” corporation, please review the IRS Instructions for Form 2553 – http://www.irs.gov/pub/irs-pdf/i2553.pdf).
“S” election must generally be made within 75 days of the state filing organizing the corporation and the form must be signed by all shareholders of the corporation. Again, it is advisable to check with your attorney or tax professional with regard to the elections you make and the forms you file.
4. Close Corporation
A close corporation is a regular corporation with special provisions, which may be set out in the certificate of incorporation. To be a close corporation, you must elect to be subject to these special provisions. Special provisions include (a) the requirement that the number of stockholders must be specified and can not exceed a specific number, (b) specific restrictions on transfer of stock will apply to all stock of the company, and (c) there may be no public offing or trading of stock, within the meaning of the United States Securities Act of 1933, as amended. Shareholders in a close corporation will generally take an active part in the management of the company. A close corporation provides owners with the same limited liability protection as a regular “C” corporation. Good record keeping is required to maintain status as a close corporation.
5. Non-Profit Corporation
A non-stock corporation (called a not-for-profit or non-profit corporation in some states) is formed and then the appropriate application for recognition is completed and filed with the IRS. Non-profit status is granted by the IRS. Contrary to the sound of its title, a non-profit corporation may end its fiscal year with money or assets in hand. A non-profit corporation is different from a regular or close corporation in that there are no stockholders to whom “profits” may be passed. When forming a non-profit corporation, it may be necessary to include language in your formation document agreeable to the IRS and pertinent to the exemption you will be requesting. Check with your attorney or accountant to determine the correct wording and exemption form or go to the IRS website for further information. Only the IRS can determine whether your corporation qualifies for tax-exempt status.
For those entities applying for exemption under Section 501(c)(3) of the Internal Revenue Code (IRC), a Form 1023, Application for Exemption, must be filed within 15 months of formation of the entity.
If you are forming a non-profit corporations that may not be applying for tax exempt status under Section 501(c)(3) of the IRC, you may read about other 501(c) organizations at http://www.irs.gov/publications/p557/ch04.html.
Churches are automatically afforded tax exempt status and are not required to file a Form 1023 or annual tax return.
Homeowner associations are not considered non-profit corporations by the IRS and are required to file a Form 1120-H with the IRS.
6. Professional Corporation (PC)
Professionals may consider forming a professional corporation. With a professional corporation, the entity is subject to the same general statutory provisions as a regular corporation and the professionals are afforded the limited liability of a regular corporation. Requirements may differ by state but it is usually necessary for those persons forming a PC to show proof of professional license. Those not members of the applicable profession will not be allowed to be stockholders in and officers and directors of the PC.
7. Limited Liability Partnership (LLP)
When two or more persons will be co-owners of a business, they may choose to form a general partnership. Generally, all of the partners of general partnership are jointly and severally liable for the debts of the partnership and the actions of the other partners. While a general partnership should include the drafting of a partnership agreement, such agreements are not always filed with the applicable secretary of state’s office. To have a partnership where the partners are afforded protection from the debts of the partnership, an LLP may be formed. A statement of qualification will be filed with the appropriate secretary of state’s office indicating the partners wish to have their partnership classified as an LLP. Many LLPs are formed by professional persons such as lawyers, doctors or accountants who, historically, participated in general partnerships.
What is a resident agent?
Most states require corporations, LLCs and certain other legal entities have an address registered to receive tax and legal notices during business hours. This address, or rather the individual or company maintaining it, is known as the “registered agent”
The registered agent receives: governmental mail, annual reports, tax documents, notification of legal actions taken against a company, and court summons. The last two items are known as “Service of Process.” Once received, these items are forwarded on to the client. For various reasons, many clients prefer not to have these items delivered directly to their place of business, particularly service of process, hence utilizing Fantini Incorporators as their registered agent.
Fantini Incorporators, through its affiliate relationships, can be your registered agent in all 50 states and the District of Columbia. It is important to note, a registered agent may be required in each jurisdiction where a company is qualified to do business.
Once Fantini Incorporators is your registered agent we can provide additional valuable services including:
Compliance Verification Service, Mail Forwarding Service, Electronic Mail Service and Headquarter Services.