This article assumes that you've already chosen a corporation as your preferred entity type—instead of a limited liability company (LLC), partnership, sole proprietorship, and the like—and would like the Internal Revenue Service (IRS) to treat your corporation as an S Corp for tax purposes. (For further information on how to pick the corporate entity type that's best for your particular situation, see our section on choosing your business structure.)
The very first thing you should do before starting an S Corp is to determine whether your company will meet the legal standards required by the IRS. To operate your business as an S Corp, you must initially file your company as a regular corporation (also called a "c corporation") in your selected state of incorporation.
To be eligible for S Corp status, the IRS requires that your corporation meet certain specific criteria, including the following:
If you formed your business as an LLC, you might still be able to elect to be taxed as an S corp. Many states allow LLCs to convert to corporations. If you're in one of these states, you can convert your LLC into a corporation—usually by filing paperwork with the state. After the conversion, you must file Form 2553, Election by a Small Business Corporation. (For additional information on the potential tax advantages of an S Corp, see why you might choose S corp taxation for your LLC.)
The primary attraction of having the IRS treat your company as an S Corp rather than as a regular corporation is more favorable tax treatment. In general, S corps provide more benefits than costs. But there can be situations where electing to be taxed as an S corp isn't the best choice for your business.
You can learn more about c corporations in our article on how corporations are taxed.
The IRS treats a corporation as a person for federal tax purposes, which results in double taxation for its shareholders. In other words, the IRS will:
In contrast, an S corp benefits from pass-through taxation from the IRS, meaning it won't be taxed at all at the entity level. Electing S-Corporation status passes the income or losses of the corporation to the shareholders who recognize the income or loss on their personal tax returns. This election is advantageous if the corporation expects to show a loss at first. The loss can offset the shareholder's income from other sources, including a spouse's income.
Passing income through to shareholders can be a disadvantage in some instances. If the business is profitable, shareholders will be required to pay income tax on their share of the profits, even if that money isn't distributed to them. In a C corporation, profits can be used to expand the business, and shareholders aren't required to pay taxes until distributions are made. (To learn more, see our article on S corporation shareholders and taxes.)
Reasonable salaries paid to employees are deductible business expenses for both S corps and C corporations. However, some fringe benefits might not be tax deductible for an S corp in the same way they'd be with a C corporation.
In addition, even though losses pass through to shareholders in an S corp, those losses aren't deductible by shareholders who don't materially participate in the business. This discrepancy could result in higher taxes overall.
If, at some point in the future, your company or its stakeholders pay more taxes as an S corp than it would as a C corporation, you can revoke your election with the IRS. You'll need to submit a statement of revocation with the IRS to revert back to C corporation taxation.
Having an accountant or tax attorney advise you both during and after the incorporation process will allow you to best determine the potential tax benefits of electing S Corp status. Once you've determined that taxation as an S Corp is the best choice for you, your adviser can also show you how to best take advantage of these tax benefits.
Among other things, a tax adviser can:
Importantly, your accountant can file your S corp taxes for you. It's best to keep up with your tax professional throughout the year so they can make a timely filing.
To have the IRS treat your C corporation as an S Corp for tax purposes, you'll need to make a Form 2553 tax election when filing the company’s federal tax returns. You must complete the filing by a specific deadline to elect the tax status for the current year. Form 2553 must be signed by all of the company’s shareholders.
Your accountant or tax attorney can assist you with this tax election process.
If you're contemplating having one or more investors help capitalize your business, or could potentially seek investors at some point in the future, then forming an S Corp could prove problematic.
As an S corp, you're limited in the kinds of investors you can have. For liability, tax, and personal reasons, investors often make their investments through corporate entities (for example, C corporations, LLCs, or partnerships), not individually. Because the shareholders of an S Corp can only be individuals or certain allowable trusts and estates, this limits the universe of investors that'd be available to you.
Also, the S corps only allow for U.S. residents to be shareholders. This restriction would prevent any non-U.S. residents from investing in your corporation unless you choose to abandon the company’s S Corp status.
Investors typically want a return on their investment (ROI) as quickly as possible and seek to contractually protect their ROI.
To protect their ROI, investors might require a corporation to create different classes (or series) of shares. The idea would be that the corporation would then issue the class of shares to the investor that has superior or preferential, rights. However, this option isn't available under an S corp because S corps can only have one class of shares. As a result, investors might find S corps less appealing.
An investor might want to be fully repaid for their investment before any other shareholders receive distributions on their shares. Sometimes an investor will agree not to receive any ROI until the company is sold or liquidated, in which case no other shareholders would get a penny until the investor has been repaid in full.
Remember that, in general, investors might demand corporate control in exchange for their financial contributions. Investors typically want to further protect their ROI by demanding certain control rights regarding:
These investors’ rights are usually memorialized in a shareholders’ agreement (sometimes called a "stockholders’ agreement" in some jurisdictions), an investors’ rights agreement, or a similar document. Sometimes the investor requires the company to amend or restate its articles of incorporation (called a "certificate of incorporation" or "charter" in some jurisdictions) to reflect these rights.
If S corporation restrictions become an issue when attracting investors, seek out professional help. A tax adviser can guide you through the added complexity of safeguarding investor ROI under a more restrictive S Corp structure or assist you in converting your S Corp into a more flexible entity (for example, a C corporation or an LLC). An attorney can also help you negotiate alternative solutions with investors.
]]>Your corporation's name can't be more than 80 characters long (including punctuation and spaces). The name must end with one of the following terms or its abbreviation:
The name can't state or imply that the corporation is organized for some purpose other than the one specified in its articles of incorporation. (Ga. Code § 14-2-401 (2024).)
Your corporation's name must be distinguishable from the names of other business entities already on file with the Georgia Secretary of State (SOS) Corporations Division. You can check which names are available by searching the Corporations Division's business name database.
If you're not ready to form your corporation but you've picked out a name, you can reserve your name for 30 days with the SOS. You can reserve a name online or by mail by filing a Name Reservation Request. As of 2024, the filing fee to reserve your name online is $25 and by mail is $35. You can learn more about the process on the reserve a business name webpage of the Georgia state website. (Ga. Code § 14-2-402 (2024).)
Every Georgia corporation must have an agent for service of process in the state (called a "registered agent"). This agent is a person or business that agrees to accept legal papers on the corporation's behalf if it's sued. The registered agent can be either an individual resident or a business entity that's registered or authorized to do business in Georgia. (Ga. Code § 14-2-501 (2024).)
You should make sure the agent agrees to accept service of process on your corporation's behalf before you designate them as your corporation's registered agent. You'll indicate your registered agent on your corporation's articles of incorporation.
Your corporation is legally created by filing articles of incorporation with the SOS's Corporations Division. You can file your articles online via the SOS's eCorp website. You can also file a physical form by mail or in person.
The articles must include:
(Ga. Code § 14-2-202 (2024).)
Georgia doesn't have an articles of incorporation fillable form for applicants to use. If you're filing by mail instead of online, you must draft your own articles on 8.5" x 11" paper. A detailed guide prepared by the Corporations Division, titled Filing Procedures, explains how to draft your articles. You must include a Transmittal Information Form (Form CD227) if you file your articles by mail.
As of 2024, the fee to file your articles of incorporation is $100 online and $110 by mail or in person. Registration generally takes 7 business days to process online and 15 business days by mail.
The incorporator must publish notice of the filing of articles of incorporation: Georgia, unlike many other states, requires an incorporator to publish notice of the filing of the articles of incorporation with a local newspaper. You must file a request with the publisher within one business day of filing the articles of incorporation. The notice must appear in the paper at least once a week for two weeks. The publisher must be located in the same county where the corporation will have its registered office. The incorporator must also notify the SOS of the publication. (Ga. Code § 14-2-201.1 (2024).)
For more details and instructions, check out the register a corporation webpage on the Georgia state website.
Unlike other states, Georgia requires corporations to adopt initial bylaws. Bylaws are an internal corporate document that set out the basic ground rules for operating your corporation. While corporations are required to have them, you don't need to file your bylaws with the state. (Ga. Code § 14-2-206 (2024).)
Apart from being required by state corporation law, having bylaws comes with other advantages. Bylaws establish your corporation's operating rules, including how decisions are made and how profits are distributed. This internal document also helps show banks, creditors, the Internal Revenue Service (IRS), and others that your corporation is legitimate. Finally, bylaws help demonstrate that your corporation is its own entity separate from its officers, directors, and shareholders—preventing others from piercing the corporate veil and holding individuals in the corporation liable for corporate debts.
Keep your bylaws, meeting minutes, and other important corporate papers in a corporate records book. You can use a three-ring binder or you can order a special corporate records kit through a corporate kit supplier. Keep this book at your corporation's principal office.
The incorporator—the person who signed the articles—must appoint the initial corporate directors. These directors will serve on the board until the first annual meeting of shareholders (when new board members are elected by the shareholders to serve the next term).
The company's incorporator should complete an “Incorporator’s Statement” showing the names and addresses of the initial directors. The incorporator should sign the statement and place a copy in the corporate records book. You don't need to file the statement with the state.
The corporation's initial board of directors will need to hold a meeting. The board's first meeting should be held to:
The incorporator or another director will need to record all of the board's decisions and actions in corporate minutes. If you want your corporation to be taxed as an S corporation, the directors should approve the election of S corporation status at the first meeting as well.
Once you've registered your corporation and had your first directors' meeting, you should issue stock in return for capital contributions. Once a person or business has been issued stock, they become a shareholder (also called a "stockholder"). Shareholders can contribute cash, property, services, or all three.
Small corporations usually issue paper stock certificates. Enter each shareholder's name and contact information in the corporation’s stock transfer ledger. Your certificate needs to have your corporation's name, the name of the person receiving the shares, and the number and class of shares being issued. The certificate will need to be signed by an officer or director of bear the corporate seal. (Ga. Code § 14-2-625 (2024).)
Georgia corporations can create shares with or without par value. A share's par value is its minimum legal value or the lowest price it can be sold for. (Ga. Code § 14-2-621 (2024).)
Georgia corporations have the option of establishing a par value for their shares. If desired, the par value can be listed in the articles, but this isn't required. If you don't set a par value, then you can say "no par value" on the stock certificates.
Typically, a share of stock in your corporation is classified as a security under state and federal securities laws that regulate the offer and sale of corporate stock. Securities laws require corporations to follow certain rules when issuing stock, such as registering the sale with the U.S. Securities and Exchange Commission (SEC).
In general, the SEC is in charge of federal securities laws while the SOS's Securities Division regulates the state’s securities laws and exemptions.
Private offering exemption: Many small corporations don't have to worry about securities laws because federal law exempts private offerings from being classified as securities. A "private offering" is a non-advertised sale to a limited number of people (generally 35 or fewer). See our corporations FAQ for more details.
Invest Georgia Exemption (IGE): The IGE exempts sales of up to $5 million in securities to Georgia residents. To claim this exemption, you must file Form GA-1 with the SOS's Securities Division before the offering is made. You can find more information about this exemption and others under Georgia’s Rules and Regulations.
Within 90 days of incorporation, you must file an annual registration form with the SOS. You must list at least three principal officers on this form.
In addition to the initial registration, you must file an annual registration for your corporation each year between January 1 and April 1. You have the option to file for your current year, for the next two years, or for the next three years. (Ga. Code § 14-2-1622 (2024).)
You can file your annual registration either:
As of 2024, the fees to file an initial registration or an annual registration are $50 online and $60 by mail.
Check out the SOS's How to Guide: File Annual Registration for more details.
Your corporation must apply for a federal employer identification number (EIN). You can get an EIN by completing an online application on the IRS website. There's no filing fee. Once you apply, the IRS will immediately assign your corporation an EIN.
All Georgia corporations and foreign corporations doing business in Georgia must pay state taxes to the Georgia Department of Revenue (DOR). You can register your business with the DOR and file and pay most business taxes using the Georgia Tax Center (GTC).
Georgia corporate income tax and net worth tax: Georgia corporations must pay taxes on their Georgia-based income. Depending on your corporation's net worth, you could also need to pay a net worth tax. Regardless of whether you owe a net worth tax, you must file a return. Use 600 Corporation Tax Return to file your income and net worth taxes. You can file online via the GTC. For more, see the corporate income and net worth tax section of the DOR website. You can also read our article on Georgia state business income tax for additional guidance.
Georgia sales and use tax: If your corporation will sell taxable goods and services to customers in Georgia, you'll need to collect and pay sales tax to the DOR. Register your corporation through the GTC to receive your sales and use tax number. You'll use the GTC to file and pay your sales tax. Most taxpayers submit their sales tax returns every month. For more, review the sales and use tax FAQ page on the DOR website.
Withholding employee wages in Georgia: If your corporation has employees, you'll need to register with the DOR using the GTC. Once registered, you'll need to file withholding taxes on a periodic basis—for example, semi-weekly, monthly, quarterly, or annually. You must also submit Form G-1003 each year to reconcile your company's tax withholding. See the DOR's Employer's Withholding Tax Guide for additional instructions and information.
Georgia's unemployment insurance (UI) tax: Georgia corporations with employees must register with the Georgia Department of Labor (DOL) to file and pay the state's UI tax. Register for your UI tax account online using the Online Employer Tax Registration system. You must report and pay taxes to the DOL every quarter. Find answers to frequently asked questions on the DOL's Employers FAQ UI webpage.
Corporations, as opposed to other business structures, require a relatively significant amount of initial preparation. During this process, you might find it helpful to talk to a Georgia business lawyer. A local attorney can help you prepare your register your corporation in Georgia, prepare your internal documents, and advise you on securities laws.
For further education, check out Incorporate Your Business: A Step-by-Step Guide to Forming a Corporation in Any State, by Anthony Mancuso (Nolo). This book provides you with many corporate forms, like bylaws, and explains the benefits of incorporating your business.
]]>The purpose of an employer identification number (EIN)—also known as a "taxpayer identification number" or "TIN"—is to allow the IRS to track wages and other payments from your business to the business's employees and owners. An EIN is also helpful in establishing a business bank account that's separate from your personal bank account.
Whether you're required to get an EIN for your business depends on how your business is set up. Many businesses must have an EIN. But some businesses—specifically, some single-owner companies—might not be required to get an EIN.
When you don't have an EIN for your company, you instead use your Social Security number (SSN) on your business accounts and government filings.
All C corporations and S Corporations need an EIN.
All general partnerships and limited partnerships need an EIN.
If you have a limited liability company (LLC), then multiple factors will determine whether you need to get an EIN. Many single-member LLCs can simply use their owner's SSN for IRS purposes. But if your LLC will hire employees—or if it'll have multiple members—you need to apply for an EIN for the LLC. Below are the details.
Multiple-member LLCs. If you're forming an LLC with multiple members, your LLC will need to obtain an EIN from the IRS, whether or not you have (or will eventually hire) employees.
Single-member LLCs with no employees. If you're forming a single-member LLC and you don't plan on hiring employees (and you won't have a Keogh plan or run a trucking, transport, or similar company that will owe federal excise taxes), you don't need to apply for an EIN for your business. You can use your own SSN for federal tax purposes (don't worry, you won't need to use your SSN on any public documents). However, know that some lenders and banks that you do business with might require you to have an EIN. You can always get an EIN for your LLC if you wish, either to make doing business with banks easier or just to separate your personal finances from your business's finances as much as possible.
If you're converting a sole proprietorship to an LLC and you already had an EIN for your sole proprietorship, you can use that one for your LLC, as long as your LLC doesn't have employees.
Single-member LLCs with employees. If your one-member LLC plans on hiring employees in the next 12 months, your LLC will need to apply for an EIN. In this case, the IRS might actually assign you two EINs: one for the LLC and one for you, the sole owner. Employment taxes must be reported under the LLC's EIN, and any monies paid from the LLC to the LLC member must be reported under the member's EIN number.
Note that if you're converting your sole proprietorship to an LLC and you've hired (or plan on hiring) employees, but you already have an EIN, you might need to apply for another EIN. Any monies paid from the LLC to you as sole owner must be reported under your EIN as owner. Employment taxes must be reported under the LLC's EIN.
For more guidance, check out our article about when a single-member LLC needs an EIN.
If your LLC elects to be taxed as a corporation. If your LLC elects corporate-style taxation, it'll need to apply for an EIN.
As a sole proprietor, your EIN requirement will depend on whether you have employees.
If your sole proprietorship won't have employees. If you don't plan on hiring employees (and you won't have a Keogh plan or run a company that will owe federal excise taxes), you don't need to apply for an EIN. You can use your own SSN for federal tax purposes. (You won't need to use your SSN on any public documents.) But keep in mind that some lenders you do business with could require you to get an EIN for your business.
If your sole proprietorship will have employees. If your business plans on hiring employees in the next 12 months, you'll need to apply for an EIN.
You can apply for an EIN for any business—regardless of whether it's required. If you plan to have an EIN in the future (perhaps you're considering hiring an employee, but not quite yet), it's a good idea to submit your application now to avoid the hassle of changing account numbers later. An EIN allows you to keep your personal information safe. Without an EIN, you'll use your SSN on your business filings and accounts.
An EIN might benefit your business financially. When reviewing loan applications, some lenders prefer to see an EIN rather than a SSN. Having an EIN also allows you to build the business's credit score, which is separate from your personal credit score. A strong business credit score can lead to better interest rates and loan opportunities.
For single-member LLCs, an EIN can help maintain the personal liability protection for the owner that the single-member LLC normally provides. The added protection is helpful when a court is considering whether the LLC owner treated the business like a sole proprietorship or as a separate business entity. If a judge decides the former, the judge might hold the owner personally responsible for the debts and obligations of the business. While an EIN is no guarantee that liability protection will always result in intact liability protection, having the number is a simple step to take to decrease the likelihood of losing protection.
You can apply for an EIN from the IRS in various ways. The easiest way to apply for an EIN is online through the IRS website. If you apply online or by phone, you'll receive your EIN immediately. For more detailed instructions, read our article on how to get an EIN.
In most cases, you'll be able to figure out whether your business needs an EIN. However, your circumstances might be complicated. Or, you might not be required to get an EIN but you want advice on whether it makes sense for your business. In these instances, it might be a good idea to talk with a business attorney. A lawyer will help you work through your options and advise you on your legal obligations to the IRS.
]]>You must file your BOI report online through FinCEN’s BOI E-Filing System.
If you filed a document with a U.S. state, territory, or federally-recognized Indian tribe (as defined by 25 U.S.C. 5130) to either create your company or to register your company to do business in that state, then you qualify as a “reporting company” and you must submit a BOI report.
The most common types of companies that need to file a BOI report include corporations and limited liability companies (LLCs). You might also be required to file a BOI report if your company is a:
If you never needed to file a document with the state (usually through the secretary of state’s office), then you don’t need to file a BOI report. For example, you don’t usually need to file paperwork with the state to create a sole proprietorship or general partnership. So if your business entity is a sole proprietorship or general partnership, the BOI reporting requirement doesn’t apply to your business.
It’s important to note that some states might differ in their registration requirements. For instance, one state might require you to file paperwork with the secretary of state’s office to form a trust while another state might have no such requirement. FinCEN’s BOI reporting requirement only applies to companies that had to file documents. Typically, these documents would include:
Filing documents to get a business license or register a trade name (or DBA) doesn’t count as filing a document for the purpose of this reporting requirement.
Some companies that would otherwise be required to file a BOI report might be exempt from the reporting requirement. FinCEN provides 23 exemptions to its reporting rule. Most exemptions cover companies that are already heavily regulated, such as banks, credit unions, insurance companies, and publicly traded companies. Nonprofits and inactive companies are also exempt.
Your company probably also qualifies for an exemption if it:
While there are many exemptions, most registered small businesses will need to file a BOI report.
The BOI report is an informational report that must be filed by any company registered to do business in the United States. The report is broken up into three sections. In these sections, you must provide information about:
You’ll need to provide identifying information for each section.
In the BOI report, you must provide basic information about your business, including your company’s:
As mentioned earlier, for the BOI report, your business will be considered the “reporting company.”
The second section of the BOI report is only required for companies formed on or after January 1, 2024. If your company was formed before this date, then you can simply skip this section.
But if this section is required for your company, then you have two options: You can provide your FinCEN identifier (FinCEN ID) or you can answer all questions in this section of the application. If you don’t have one already, you can apply for a FinCEN ID by creating an account with login.gov. You’ll need to provide four pieces of personal information to receive your FinCEN ID.
The “company applicant” for a reporting company is the person who directly filed the document to create the reporting company with the state. The person who filed the articles of incorporation with the secretary of state’s office would be considered the “company applicant” for a corporation, for example.
If more than one person was involved in filing the company’s formation documents, then the person who’s primarily responsible for directing or controlling the filing would be considered the company applicant. (If your formation filing was done by an attorney or accountant, then that person would likely be considered the company applicant.)
Be prepared to provide the following information about your company applicant:
You must upload a copy of the form of identification. You’ll also need to separately specify the document number and what governing body issued the identification. For example, if your identifying document is your driver’s license, then you’ll need to upload a picture of your license and type in your license number and the state that issued your license.
As with the previous section on company applicant, you can enter your FinCEN ID in place of completing this section of the application. But if you don’t have a FinCEN ID to report for a beneficial owner, then you must answer all of the questions in this section of the BOI report.
To accurately complete this section, you need to determine who qualifies as a beneficial owner of a reporting company for the purpose of this report.
A “beneficial owner” of a reporting company is someone who directly or indirectly either:
FinCEN describes several situations where an owner would be considered to have substantial control over a company. Typically, an owner has substantial control when the owner either:
You’ll provide the same information about each beneficial owner as you provided about the company applicant, including their name, date of birth, address, and identification.
The deadline to file your BOI report depends on when your company was formed:
If you miss the deadline or you fail to update your report when information changes, then you might face civil and criminal penalties. These penalties can include hefty daily fines and a prison sentence of up to two years.
Your business needs to first determine whether it’s required to file a BOI report. Ask yourself whether you had to file paperwork with the state to create your business or to qualify it to do business. If you did have to file documents, then ask yourself whether your business qualifies for one of the exemptions.
If you did file paperwork to register your business and your company doesn’t qualify for an exemption, then you simply need to submit the BOI report before the applicable deadline. For most businesses, the deadline will be January 1, 2025. File your report through FinCEN’s website.
The FinCEN website has many helpful resources available on its website for small businesses regarding the beneficial ownership information reporting requirement. You can find answers to general and specific questions about the BOI reporting requirement. on the bureau’s FAQ page. You can also find more guidance, including flowcharts and questionnaires, in FinCEN’s Small Entity Compliance Guide.
Most business owners will likely be able to navigate the reporting process themselves. But if you’re not sure whether you qualify for one of the exemptions or whether you qualify as a beneficial owner, talk to a business attorney. They can help you figure out whether this reporting rule applies to your business and what information you need to provide.
FinCEN’s BOI reporting rule will be new for all businesses in 2024. Here are some answers to some frequently asked questions that can help you determine your business’s reporting obligations.
You must report any changes to any of the information related to your company or its beneficial owners. You don’t need to report any changes related to the company applicant.
You report these changes by submitting a new, updated BOI report to FinCEN. You must submit an updated report within 30 days of the change being reported.
If you discover an inaccuracy in any part of your initial report, then you must correct the inaccuracy. The inaccuracy must be corrected within 30 days of when you become aware of it.
No. As of 2024, there’s no requirement for businesses to submit a report every year. A business that qualifies as a reporting company must submit an initial BOI report before the required deadline. Your business is responsible for updating the information in its BOI report as needed. Any updates must be reported within 30 days of the change occurring.
A federal, state, local, or tribal official can request access to the information contained in your BOI report for limited purposes. An official can request access for national security, intelligence, or law enforcement reasons.
In some cases, a financial institution, and a regulator supervising the financial institution, can access your beneficial ownership information as long as you give permission.
The BOI report is a requirement of the Corporate Transparency Act, enacted by Congress in 2021. The Act aims to prevent money launderers and other bad actors from using “shell” companies or similar means to conceal both their identities and their crimes.
A “FinCEN ID” (or FinCEN identifier) is a number issued by FinCEN, a bureau of the U.S. Department of Treasury, that uniquely identifies an individual or a reporting company. You’re not required to obtain a FinCEN ID.
You, as an individual, can apply for a FinCEN ID by submitting your name, date of birth, address, and an identification document to the bureau. Similar to when you apply for an EIN, you’ll automatically be assigned a FinCEN ID once you submit the application. Reporting companies can receive a FinCEN ID by requesting one on their BOI report.
If the information you used to obtain your FinCEN ID changes or is incorrect, you must update or correct the information.
]]>Your corporation's name must include either the word "Incorporation," "Incorporated," "Company," or "Limited" (or an abbreviation thereof) at its end.
Your corporation's name must be recognizably different from the names of other business entities already on file with the Secretary of the Commonwealth Corporations Division. Names may be checked for availability by searching the Massachusetts business name database and the Name Reservations database. You may reserve a name for 60 days by filing an Application for Reservation of Name. The filing fee is $30. The reservation can be extended by an additional 60 days by paying an additional $30 fee before the initial 60 day period expires. The application must be filed by mail with the Secretary of The Commonwealth Corporations Division.
Your corporation is legally created by filing Articles of Organization with the Secretary of the Commonwealth Corporations Division. The articles must include: the corporation's name; its purpose; the number of shares the corporation is authorized to issue and their par value; the classes of shares and minimum consideration; any restrictions on transfers of shares; the effective date; the name and street address of the initial registered agent for service of process; the names and addresses of initial directors, president, treasurer and secretary of the corporation; the fiscal year end; the type of business; the street address of the corporation's principal office; and the street address in the state where corporate records will be kept.
The articles may be filed online or by mail. The filing fee is $275 for up to 275,000 shares plus $100 for each additional 100,000 shares or any fraction thereof.
Every Massachusetts corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. A registered agent may be an individual who resides in Massachusetts, or a domestic or foreign corporation authorized to do business in Massachusetts. The agent should agree to accept service of process on your corporation's behalf prior to designation.
Bylaws are an internal corporate document that set out the basic ground rules for operating your corporation. They are not filed with the state. Your corporation is not legally required to have corporate bylaws, but you should adopt them because they (1) establish your corporation's operating rules, and (2) help show banks, creditors, the IRS, and others that your corporation is legitimate. For corporate bylaw forms, see Nolo’s website or Incorporate Your Business, by Anthony Mancuso (Nolo). Corporate kits also typically contain sample bylaws.
The incorporator—the person who signed the articles—must appoint the initial corporate directors who will serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders). The incorporator must fill in an “Incorporator’s Statement” showing the names and addresses of the initial directors. The incorporator must sign the statement and place a copy in the corporate records book. The statement need not be filed with the state. For a sample Incorporator's Statement, see Incorporate Your Business, by Anthony Mancuso (Nolo).
At the first board meeting, the directors appoint corporate officers, adopt bylaws, select a corporate bank, set the corporation's fiscal year, authorize issuance of shares of stock, and adopt an official stock certificate form and corporate seal. Share issuances by small privately held corporations are usually exempt from federal and state securities laws--see the Nolo Corporations FAQ.
Record the directors' actions in corporate minutes prepared by the incorporator or any of the directors. For corporate meeting minute forms, see Nolo’s website or refer to Incorporate Your Business, by Anthony Mancuso (Nolo).
Every corporation authorized to transact business in the commonwealth must file an annual report with the Corporations Division within two and one half (2 1/2) months after the close of the corporation’s fiscal year end. The report can be filed online, or by mail. The filing fee is $125.
Your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.
]]>Your corporation's name must end with one of the following terms or its abbreviation: "Incorporated," "Corporation," "Company," or "Limited."
Your corporation's name must be distinguishable from the names of other business entities already on file with the North Carolina Secretary of State. Names may be checked for availability at the North Carolina Secretary of State business name database.
You may reserve a name for 120 days by filing an Application to Reserve a Business Entity Name with the North Carolina Secretary of State. The application may be filed online or by mail. The filing fee is $30.
Your corporation is legally created by filing Articles of Incorporation with the North Carolina Secretary of State. The articles must include the corporate name and address; the name and address of agent for service of process; the number of shares the corporation is authorized to issue; the address of the principal office, if any; the name and address of each incorporator; and the effective date of the articles.
The articles may be filed online or by mail. The filing fee is $125.
Every North Carolina corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. A registered agent may be an individual who resides in North Carolina, or a domestic or foreign business entity authorized to do business in North Carolina. The registered agent must have a physical street address in North Carolina. The agent should agree to accept service of process on your corporation's behalf prior to designation.
Domestic and Foreign North Carolina corporations must file an Annual Report with the North Carolina Secretary of State. The annual reports are due by the due date for filing your corporation's income and franchise tax returns. You may file the Annual Report online at the Secretary of State's Online Annual Report portal. Alternatively, you may file a paper copy directly with the Department of Revenue, along with your corporation's tax return. The filing fee is $25.
Your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.
]]>Your corporation's name must contain the word “Corporation,” “Company,” “Incorporated,” “Limited,” or an abbreviation of one of those words. Your corporation's name must be recognizably different from the names of other business entities already on file with the Illinois Secretary of State. Names may be checked for availability by searching the Business Services name database. You can also email or call to do a preliminary name check. You may reserve a name for up to 90 days by filing an Application for Reservation of Name (BCA-4.10) with the Secretary of State and paying a $25 fee.
Your corporation is legally created by filing Articles of Incorporation (BCA 2.10) with the Illinois Secretary of State. The articles may be filed online or by mail. The articles must include the corporate name; the name and street address of an agent for service of process; its purpose; the number of shares the corporation is authorized to issue and the consideration (money or property) the corporation will receive for the shares; and the names and addresses of the incorporators. The filing fee is $150 plus an initial franchise tax payment assessed at rate of $1.50 per $1,000 of paid-in capital represented in Illinois.
Technically, the minimum initial franchise tax is $25. However, there is a franchise tax exemption amount for each year as follows: $30 for 2020, $1,000 for 2021, $10,000 for 2022, $100,000 for 2023, and no tax due for 2024 and later. If the tax amount minus the exemption amount is 0 or less, no franchise tax is due.
Every Illinois corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. A registered agent may be an individual who resides in Illinois, or a domestic or foreign corporation authorized to do business in Illinois. If a corporation, its articles must authorize it to act as an agent. The registered agent must have a physical street address in Illinois. The agent should agree to accept service of process on your corporation's behalf prior to designation.
Bylaws are an internal corporate document that set out the basic ground rules for operating your corporation. They are not filed with the state. Your corporation is not legally required to have corporate bylaws, but you should adopt them because they (1) establish your corporation's operating rules, and (2) help show banks, creditors, the IRS, and others that your corporation is legitimate. For corporate bylaw forms, see Nolo’s website or Incorporate Your Business, by Anthony Mancuso (Nolo). Corporate kits also typically contain sample bylaws.
Keep your bylaws, articles, stock certificates, minutes of shareholder and director meetings, and other important papers in a corporate records book. You can use a three-ring binder or order a corporate records kit through a corporate kit supplier.
The incorporator—the person who signed the articles—appoints the initial corporate directors who serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders). The incorporator should complete and sign an “Incorporator’s Statement” showing the names and addresses of the initial directors. The statement need not be filed with the state--keep it in the corporate records book. For a sample Incorporators Statement, see Incorporate Your Business, by Anthony Mancuso (Nolo).
At the first board meeting, the directors appoint corporate officers, adopt bylaws, select a corporate bank, set the corporation's fiscal year, authorize issuance of shares of stock, and adopt an official stock certificate form and corporate seal. Share issuances by small privately held corporations are usually exempt from federal and state securities laws--see the Nolo Corporations FAQ.
Record the directors' actions in corporate minutes prepared by the incorporator or any of the directors. For corporate meeting minute forms, see Nolo’s website or refer to Incorporate Your Business, by Anthony Mancuso (Nolo).
All corporations doing business in Illinois must file an annual report with the Secretary of State and pay a $75 fee. Domestic corporations file Form BCA 14.05D, Domestic Corporation Annual Report. Foreign corporations file Form BCA 14.05 FOR, Foreign Corporation Annual Report.
The report must be filed by the corporation's anniversary date or a late-filing penalty will be imposed. The report can be filed online or by mail. However, if your corporation owns property outside of Illinois or transacts business outside of Illinois, you must file by postal mail.
Your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.
]]>A name appearing to be that of a natural person and containing a given name or initials may not be used as a corporate name except with the addition of a corporate ending such as Incorporated, "Inc.," "Limited," "Ltd.," Company," "Co.," "Corporation," "Corp." or other words that identify it as not being a natural person.
Your corporation's name must be distinguishable from the names of other business entities already on file with the Nevada Secretary of State. Names may be checked for availability by at the Nevada Secretary of State business name database.
You may reserve a name for 90 days by filing a Name Reservation Request form with the Nevada Secretary of State. The application may be filed online through the Nevada SilverFlume Business Portal website or by mail. The filing fee is $25.
Your corporation is legally created by filing Articles of Incorporation with the Nevada Secretary of State. The articles must include the corporate name and address; the name, address, and signature of an agent for service of process; the number of shares with or without par value the corporation is authorized to issue; whether the corporation is a close corporation which will operate without a board of directors (see Nevada Revised Statutes 78A.090); the names and addresses of the board of directors; and the name and address of the incorporator.
The articles may be filed online or by mail. The filing fee is based on the number of shares the corporation is authorized to issue with an initial minimum of $75 for $75,000 or less of authorized shares.
You must file an Initial List of Officers, Directors, and Registered Agent and State Business License Application with the Secretary of State at the time you file your articles. The form is included with the Articles of Incorporation forms packet and is filed with the articles. The initial list of officers fee is $150; the business license fee is $500.
Every Nevada corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. The registered agent must be a Nevada resident, or a business entity authorized to do business in Nevada. The registered agent must have a physical street address in Nevada. The agent should agree to accept service of process on your corporation's behalf prior to designation. The registered agent must complete and sign a Registered Agent Acceptance, which is included with the Articles of Incorporation forms packet.
Bylaws are an internal corporate document that set out the basic ground rules for operating your corporation. They are not filed with the state. Your corporation is not legally required to have corporate bylaws, but you should adopt them because they (1) establish your corporation's operating rules, and (2) help show banks, creditors, the IRS, and others that your corporation is legitimate. For corporate bylaw forms, see Nolo’s website or Incorporate Your Business, by Anthony Mancuso (Nolo). Corporate kits also typically contain sample bylaws.
Keep your bylaws, articles, stock certificates, minutes of shareholder and director meetings, and other important papers in a corporate records book. You can use a three-ring binder or order a corporate records kit through a corporate kit supplier.
The incorporator—the person who signed the articles—appoints the initial corporate directors who serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders). The incorporator should complete and sign an “Incorporator’s Statement” showing the names and addresses of the initial directors. The statement need not be filed with the state--keep it in the corporate records book. For a sample Incorporators Statement, see Incorporate Your Business, by Anthony Mancuso (Nolo).
At the first board meeting, the directors appoint corporate officers, adopt bylaws, select a corporate bank, set the corporation's fiscal year, authorize issuance of shares of stock, and adopt an official stock certificate form and corporate seal. Share issuances by small privately held corporations are usually exempt from federal and state securities laws--see the Nolo Corporations FAQ.
Record the directors' actions in corporate minutes prepared by the incorporator or any of the directors. For corporate meeting minute forms, see Nolo’s website or refer to Incorporate Your Business, by Anthony Mancuso (Nolo).
All corporations doing business in Nevada must file an Annual or Amended List and State Business License Application every year with the Nevada Secretary of State. These can be filed online at the Nevada Secretary of State website or by mail. The annual list fee is based on number of authorized shares. There is also a $500 state business license fee payable with the annual list fee.
Your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.
]]>For each state's specific rules on starting a corporation, see our state guide to forming a corporation. We include several states as examples in this article.
The name of your corporation must comply with the rules of your state's corporations division. You should contact your state's office for specific rules, but the following guidelines usually apply:
Your state's corporations office can tell you how to find out whether your proposed name is available for your use. In addition, you can usually, for a small fee, reserve your corporate name for a short period of time until you file your articles of incorporation.
Besides following your state's corporate naming rules, you must make sure your name won't violate another company's trademark rights. For instance, opening a grocery store called “Piggle Wiggle” would likely infringe on the Piggly Wiggly trademark. (For information about trademark law and general advice on picking the right business name, see our FAQ on choosing a business name.)
If you’re unsure about which name to choose or have questions about name availability, you should talk to an attorney. A small business lawyer can run a quick name search and file the appropriate paperwork to claim your name. An intellectual property attorney can conduct a more intensive search of trademark and corporate databases to help you determine if moving forward with your chosen name is a good idea.
After you've chosen a name for your business, you must prepare and file articles of incorporation with your state's corporate filing office—typically, the department or secretary of state's office. While most states use the term "articles of incorporation" to refer to the basic document creating the corporation, some states use other terms, such as "certificate of incorporation" or "charter."
No state requires a corporation to have more than one owner. For single-owner corporations, the sole owner simply prepares, signs, and files the articles of incorporation themselves. For co-owned corporations, the owners can either all sign the articles or appoint one person to sign them. Whoever signs the articles is called the "incorporator" or "promoter."
Articles of incorporation don't have to be lengthy or complex. In fact, you can usually prepare them in just a few minutes by filling out a form provided by your state's corporate filing office and paying a fee.
Typically, the articles of incorporation must specify just a few basic details about your corporation, such as the:
If you need help creating or submitting your articles of incorporation, you can hire a local business attorney to write and file your articles for you. The lawyer can also be your registered agent.
Before you start operations, you’ll need to appoint the corporation’s directors. Directors make major policy and financial decisions for the corporation and represent the corporation’s shareholders. A board of directors, the corporation’s governing body, is responsible for:
Typically, the incorporators—the persons who signed the articles—appoint the initial corporate directors to serve on the board until the first annual meeting of the shareholders. The incorporators should complete and sign an Incorporator’s Statement showing the names and addresses of the initial directors. You don’t need to file the statement with the state, but you should keep this document with your corporate records.
For a sample Incorporators Statement, see Incorporate Your Business, by Anthony Mancuso (Nolo).
Most states permit a corporation to have just one director, regardless of the number of owners. In other states, a corporation can have one director only if it has one owner; a corporation with two owners must have at least two directors, and a corporation with three or more owners must have three or more directors.
You should review your state’s laws along with your corporation’s formation documents to determine the structure and procedure for your board. You’ll need to find the rules and requirements for:
For example, your state might require that a corporation have at least one director and that the directors be elected at each annual shareholders’ meeting. Many states generally allow a corporation’s articles or bylaws to largely dictate how a corporation’s board is elected and run.
When building a board, you should pick directors that fit your corporation’s needs. If your corporation’s organizers have knowledge or experience gaps in one or more areas, such as legal or marketing, consider a candidate who can fill that gap.
If you’re a small company, a formal selection process might not be necessary. But if you’re a larger corporation that’s looking beyond its organizers to fill the director positions, you’ll probably need to follow a standard procedure that includes:
If you need legal advice on recruiting and appointing directors for your board, consider contacting a small business attorney with experience working with corporate boards. They can help you establish a review process and outline your company goals.
Next, you should draft your company’s bylaws. Bylaws are the internal rules that govern the day-to-day operations of a corporation. Typically, the bylaws are adopted by the corporation's directors at their first board meeting.
Your bylaws can detail:
If you have knowledge and experience creating rules for a corporation or drafting formation documents, you can probably write the bylaws yourself. But if you’re unsure about what to include or need legal advice working through the details, you should talk to a small business attorney.
After the owners appoint directors, file articles of incorporation, and create bylaws, the directors must hold an initial board meeting to handle a few corporate formalities and make some important decisions. At this meeting, directors usually:
Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status. (For information on whether your corporation should adopt S corporation status, read our article on understanding S corporations.)
You shouldn’t start doing business as a corporation until you’ve issued shares of stock. Issuing shares formally divides up ownership interests in the business. It’s also a requirement of doing business as a corporation—and you must act like a corporation at all times to qualify for the legal protections offered by corporate status.
If you’ll have more than one shareholder, you should draft a shareholders’ agreement (also called a “stockholders’ agreement”). This agreement outlines shareholders’ rights and restrictions. It can set rules for:
Issuing stock can be complicated, and it must be done in accordance with securities laws. Large corporations must register their stock offerings with the federal Securities and Exchange Commission (SEC) and the state securities agency. Registration takes time and typically involves extra legal and accounting fees.
Fortunately, most small corporations qualify for exemptions from securities registration. For example, SEC rules don’t require a corporation to register a "private” offering. In a private offering, a company—in an unadvertised sale—can sell unlimited securities to up to 35 nonaccredited investors and to as many accredited investors as it wants. The SEC generally defines an accredited investor as someone who can reasonably be expected to take care of themselves because of their net worth or income-earning capacity. (17 C.F.R. § 230.506.)
Additionally, most states have enacted their own versions of this SEC exemption. In short, if your corporation will issue shares to a small number of people who’ll actively participate in running the business—as opposed to a passive shareholder—it’ll almost certainly qualify for federal and state exemptions to securities registration.
When you're ready to issue the actual shares, you'll need to document the following:
Finally, you'll prepare and issue the stock certificates. In some states, you might also have to file a "notice of stock transaction" or similar form with your state corporations office.
If you're selling shares of stock to passive investors (people who won't be involved in running the company), complying with state and federal securities laws gets complicated. If you need advice on shareholders’ rights or whether you’ll need to register your securities offerings, you should talk to a small business lawyer. They can help you draft your shareholders’ agreement and help you comply with federal and state securities laws.
For more information about federal securities laws and exemptions, visit the SEC website. For more information on your state's exemption rules, go to your secretary of state's website. (You can find links to every state's site at the website of the National Association of Secretaries of State’s website.)
After you've filed your articles, created your bylaws, held your first directors' meeting, and issued stock, you're almost ready to start your corporation. But you still need to obtain the required licenses and permits that anyone needs to start a new business.
You might have to obtain:
You might also need to obtain licenses and registrations that are specific to your profession—such as a real estate license—or industry. For instance, if your company produces hazardous waste, you’ll likely need a permit from your state.
To learn more about your state's requirements, check out our state guide to small business license requirements.
Starting a corporation involves many steps that can quickly become complicated or overwhelming. If you need legal advice or help to draft documents or submit forms, you should reach out to a small business lawyer. They can help you with one particular step (like issuing shares) or with the whole process, from choosing a corporate name to obtaining your licenses and permits.
]]>You and your co-owners should draft a buy-sell agreement—also known as a “buyout agreement”—to lay out the rules and procedures to follow when one or more owners leave.
A buyout agreement protects business owners when a co-owner wants or has to leave the company and protects the owner who's leaving. If a co-owner leaves, a buyout agreement acts as a sort of "premarital agreement" to protect everyone's interests—setting the price and terms for a buyout.
Every day that value is added to a business without a plan for future transition, the owners' financial risk increases. An agreement will reduce uncertainty and can help avoid uncomfortable negotiations between the owner who leaves and the owners who remain.
Additionally, if a company doesn’t have a buy-sell agreement in place, it’s at the mercy of its state’s laws. Your state’s laws might not correspond with the future you or the other owners see for your business. For instance, some states require a partnership to dissolve when a partner leaves. If you don’t want the default rules of your state to decide your business’s fate, you’ll need an agreement that says what’ll happen.
A buy-sell agreement can be either a separate agreement or a section within a company’s governing document. This agreement is a legally binding contract among a business’s owners that provides the rules and procedures for:
Let’s take a closer look at each of these buyout agreement topics.
Broadly speaking, there are two situations in which an owner will leave a company. Either the owner will voluntarily leave or be forced out—either by the other owners or by outside circumstances.
An owner might decide to leave for different reasons such as:
Typically, a buy-sell agreement will provide rules for how and when the owner must provide notice of their intent to leave to the other owners. Everyone will hopefully walk away relatively pleased.
But sometimes an exit is a little messier—particularly when the owner is being forced to leave the company. A buy-sell agreement usually lists circumstances that will “trigger” a forced buyout that requires an owner to give up their share of the business.
These circumstances usually include:
When an owner is forced to give up their ownership in the company, they might put up a fight. Having a buy-sell agreement that clearly lists out the circumstances that require an owner to surrender their interest can help eliminate much of the back-and-forth between the owners.
In addition to covering the circumstances under which an owner can or must leave the company, your buy-sell agreement should address who can buy the departing owner’s interest.
Generally, you have three options for who can buy the departing owner’s share:
Your agreement should specify who can or must buy the business. Many companies will require the departing owner to first offer their interest to the other owners or to the company in what’s known as the “right of first refusal.” Then, if the other owners or the company decide not to purchase the interest, the departing owner can offer their share to someone outside of the company.
When creating a buy-sell agreement, you and your co-owners should decide which option would work best for you. With larger companies (particularly corporations with shareholders), it might not be as important to require owners to offer their share back to the company or other owners. With smaller companies where the owners are actively running the business together—like partnerships and limited liability companies (LLCs)—it often makes sense to require the departing owner to offer their share to the other owners.
If you require the departing owner to offer their company share back to the other owners or to the business, you should specify whether the other owners or the company have to buy it. Requiring the other owners or the business to buy the share simplifies and speeds up the buyout process. On the other hand, not requiring the purchase can open the business and its owners to outside business opportunities.
An owner is leaving the business and you’ve established who can purchase their share. But how do you determine how much money should the departing owner get for their share?
It can be hard to settle on a price in a buy-sell agreement before your business has even gotten off the ground. You probably don’t know how successful the business will be or what its true value is.
Fortunately, you don’t have to put a specific value on the price of an owner’s share if you don’t want to. Instead, your buyout agreement can state that the value of an owner’s share will depend on the company’s value.
Usually, the price for an owner’s share is determined by:
Once you put a price on the business’s value, you can calculate the departing owner’s buyout share. Usually, the departing owner will receive an amount proportional to their ownership share. For example, if a business is valued at $100,000 and the departing owner owns 30% of the business, they’d probably receive $30,000 for their share.
But an owner’s buyout can depend on other factors that the owners have agreed to. For instance, sometimes an owner’s distribution (profit) share doesn’t equal their ownership interest. Likewise, an owner’s buyout price doesn’t have to match their ownership interest.
When an owner leaves, what becomes of the company? Generally, there are two outcomes: the company ends (dissolves) or continues. While the answer might be obvious to some, it’s still worth spelling out in the buy-sell agreement.
Usually, whether the business should end or continue after an owner departs depends on the company’s business structure. For corporations and LLCs, the company usually continues on without the owner or with a new owner in their place. LLCs and corporations are more resilient to ownership changes. With their limited liability and flexible management structures, it’s usually not hard to find an immediate or eventual replacement owner.
For example, suppose Buzz, Woody, and Andy own the LLC, Pizza Planet, LLC. For the pizza joint, Buzz develops the recipes, Woody takes care of the marketing, and Andy handles the accounting. One day, Andy decides to retire and sells his share of the company back to Woody. Instead of the company ending, Buzz and Woody can hire an accountant to take over Andy’s responsibilities and business can go on as usual.
But for general and limited partnerships (and limited liability partnerships), a partner’s withdrawal can mean the end of the company. Some partnerships require their company to wind up and dissolve if a general partner exits because a general partner’s role in the business is so critical to the business’s operations.
For instance, returning to our Pizza Planet example, now suppose Buzz is a general partner and Woody and Andy are limited partners who don’t help run the business. Buzz decides to retire. Because Buzz made the pizza and managed the staff—and was the face of the restaurant—it’d be difficult for Woody and Andy to carry on the business without him.
If you don’t include what happens to your business when an owner exits, your state’s laws will step in to provide the answer. Be sure to include this determination to avoid your business prematurely ending.
Buyout agreements can be for any business with more than one owner. The main types of buy-sell agreements are:
While these buyout agreements all contain many of the same elements, they can differ in their rules and procedures. For example, a shareholder buyout agreement might provide a different method for determining a share’s value than a partnership buyout agreement. Or different events might trigger an LLC owner buyout than a shareholder buyout.
As mentioned earlier, a buy-sell agreement might actually appear as a provision within the company’s governing document. If you want to take this route, business owners often put a buyout provision in one of the following documents:
As you’re negotiating your buy-sell agreement with your co-owners and considering the potential issues that might crop up down the road, you might have a few questions.
In some states, yes, and the former spouse can succeed in getting it, too. In community property states, all earnings during marriage and all property acquired with those earnings are considered community property—owned equally by husband and wife. When property is divided during a divorce, each spouse can claim a right to all community property. So, if the owner’s business share is considered community property, their former spouse might have a claim on it.
Even in non-community property states, a spouse could argue for a partial interest in the business, because marital property laws generally require property to be divided equitably during divorce.
To avoid this prospect, a good buy-sell agreement requires the former spouse of a divorced owner to sell any interest received in a divorce settlement back to the company or the other co-owners. The ex-spouse will usually be compensated based on the valuation method specified in the agreement.
Potentially. In the worst-case scenario, a bankruptcy trustee, who’s appointed to oversee and manage the bankruptcy, could liquidate the business (sell its assets) to pay the bankrupt owner's debts. However, usually, a trustee can usually only sell the entire business if it’s structured as a partnership and the trustee has the court’s permission. Otherwise, typically only your share of the business is at stake.
Regardless of your business structure, to head off the possibility of your company getting tied up in bankruptcy court, the owners can sign a buy-sell agreement that requires a co-owner who faces bankruptcy to notify other co-owners before filing. Usually, under the terms of this agreement, the owner filing for bankruptcy must sell their interest in the company back to the other owners before they file. After severing ties with the owner, the business can proceed.
Requiring an immediate 100% lump-sum cash payout can prevent even the most successful company from buying back a departing owner's interest. Having flexible payment terms built into a buy-sell agreement, created in advance, can help.
For instance, the agreement can provide for a down payment of 20% to 30% of the buyout price. The remaining amount can be paid out in installment payments for three to five years at a reasonable rate of interest defined or specified in the agreement.
Separately, it’s common for a company or its owners to take out life insurance policies on each owner. Assume the co-owners of a business have taken this step, naming either the business or its owners as the beneficiaries of the policies. If one owner dies, their share of the business passes to their heir or estate. But the company gets life insurance proceeds that it can use to purchase the deceased owner’s company share. Again, the procedure for this type of buyout would need to be included in the buy-sell agreement.
In the past, family or intergenerational businesses (like family LLCs) sometimes successfully used buy-sell agreements to lower (or altogether avoid) estate taxes when an owner died. An intergenerational business is one where at least one co-owner plans to leave their interest to heirs who will remain active in the business.
The key to this estate planning strategy was to choose a conservative price or valuation formula for the business in the buy-sell agreement. The IRS then used that relatively low valuation when calculating whether federal estate tax was due, and how much.
But for buy-sell agreements entered into or modified on October 9, 1990 or later, the rules are more stringent. For example:
(26 U.S.C. § 2703.)
In other words, there’s no longer as much leeway in valuing the family business to avoid estate tax.
Fortunately, not many people need to worry about federal estate tax. In 2023, only estates worth more than $12.92 million ($25.84 million for married couples) will trigger the federal estate tax. (In 2026, if no further legislation is passed, this threshold amount is set to essentially halve, but it’s still a fairly high threshold for most Americans.) Some states also impose separate state estate taxes at a lower threshold, but the tax rate is much lower than the federal estate tax.
If it seems likely that you’ll owe estate tax when you die, consult a business attorney who’s experienced with estate tax. And if you already have a buy-sell agreement dated before October 9, 1990, think twice and consult an attorney before modifying it, since you risk losing some of the valuation leeway that still applies to these older agreements.
Yes. You should have a short sentence in your agreement that says the agreement can be changed by a written amendment with the owners’ approval. As your business grows or new owners join, you might notice issues or opportunities you missed before. You’ll want to have an agreement that you can reasonably change to reflect these new discoveries.
For example, suppose the ROFR clause in your agreement doesn’t apply when an owner dies, meaning a deceased owner’s heirs can join your company as owners. One of your co-owners dies and leaves their interest to their nephew who immediately starts making poor management decisions, putting the business into serious debt. You might want to alter your agreement to have the ROFR clause extended to the owners’ estates so you can avoid this kind of situation in the future.
If you’re starting a business and you’re looking to create a buy-sell agreement, talk to your co-owners. You’ll need to sit down with them and discuss the terms of the agreement. In all likelihood, this conversation will be much friendlier now than when someone leaves. If you and the other owners are on the same page about most or all of the buyout terms and you have some experience writing legal agreements, you can probably draft a buy-sell agreement yourself.
If you’re interested in further guidance and in a buy-sell agreement that you can fill in, check out Business Buyout Agreements: Plan Now for All Types of Business Transactions, by Bethany Laurence & Anthony Mancuso (Nolo).
If the owners are in disagreement or you’re not sure which terms are best for your particular situation, you should consult a small business attorney. They can help you negotiate terms with your other owners and draft an agreement for you. They can also advise you on the potential tax implications of your buyout agreement and suggest alternative terms to the ones you’re considering.
]]>When your corporation issues shares, you should have the share recipient sign a shareholders' agreement.
A shareholders' agreement is an agreement made among a corporation's shareholders (called "stockholders" in some jurisdictions) about how the company will be run and what rights and obligations the shareholders have to the corporation and each other.
A shareholders' agreement will typically cover:
Corporations will commonly have a shareholders' agreement in addition to its articles of incorporation and bylaws. Your corporation might also have a buyout (buy-sell) agreement that details what happens to the corporation's shares when a shareholder dies, retires, or wants to sell their shares.
The bulk of your corporation's shareholders' agreement should remain the same as you issue shares. However, the identifying information of this agreement will differ depending on who's receiving the stock, how many shares are being issued, and for how much.
If you're the company’s only shareholder, you don't necessarily need a shareholders’ agreement. In general, shareholders’ agreements exist to establish and describe the respective rights of two or more shareholders. Also, having a shareholders’ agreement would usually be unnecessary if you're the majority stockholder (owning at least 50% of the company) and the other shareholders have little to no leverage to influence how you can run the corporation or pay them dividends.
Just as corporate bylaws are useful in communicating how a corporation is run to internal and external players, a shareholders' agreement can also be beneficial to have in place. You might be more likely to attract investors with a shareholders' agreement. In addition, putting a shareholders' agreement in place at the beginning can make expansion easier as your company changes and grows.
A fellow shareholder might expect (or require) a shareholders’ agreement under the following common circumstances:
In these situations, other shareholders can have leverage to demand a shareholders’ agreement. Also, a majority stockholder can use this agreement to solidify certain critical rights in their favor.
Below are some standard, important topics that can be addressed in a shareholders’ agreement.
Shareholders’ agreements can be critical in determining who controls the company and its operations. In a corporation, the management structure works as follows:
It's a common misconception that a corporation’s president or CEO is always the most powerful person in the company; the reality is that the directors who appoint (and remove) these officers have ultimate management authority. It's important to have an agreement in place that lays out the chain of command and how each player can obtain, keep, and lose their power.
Setting the number of directors. A shareholder's agreement can establish how many directors a corporation can have. Typically, a corporation will have an odd number of directors to avoid tie votes.
Appointing directors. The agreement can also specify which shareholders get to appoint directors to the board—whether individually or as groups of stockholders—and how many directors can be appointed by each. For example, if your corporation issues common stock and preferred stock, your shareholders' agreement might say that only holders of common stock can vote for directors.
Establishing how votes pass. The shareholders’ agreement can also determine what percentage votes will be required for the board of directors to pass certain initiatives. In other words, some actions might require a majority vote of the directors (for instance, three out of five directors) while others could require a unanimous vote. For example, your agreement might require the approval of two out of three of your corporation's directors to hire an officer but require a unanimous vote to dissolve the corporation.
For many legitimate reasons, shareholders usually want to prevent other stockholders from transferring or selling shares. Primarily, people don’t want to let new stockholders into the company if they don’t know them. Shareholders would much prefer having a say in who else is introduced as an owner of the company.
Another reason why shareholders want to limit stock transfers is to prevent any shifts in the company’s balance of power that would result from one shareholder transferring shares to another existing owner.
For instance, suppose there are five shareholders in a corporation that own the following percentages of stock:
Under this scenario, any initiative voted on by the shareholders (such as electing or removing a director or approving a major asset sale) can be passed by a simple majority of the shareholders. Under their current distribution, no single shareholder can pass an initiative without securing at least one other shareholder's vote (depending on their stake). But now suppose Shareholder A wants to sell all of their shares to Shareholder B. Now Shareholder B would have 60% of the company's shares and would be able to pass any vote by themselves. It would be in the interest of the other shareholders to prevent this scenario so they don't lose all of their voting power.
Shareholders' agreements are typically structured so that all stock transfers are prohibited unless the proposed assignment falls into a specific exception. The most common exception is that shareholders can transfer shares for trust and estate planning purposes (for example, to their heirs when they die or to a legal entity that's wholly owned by the stockholder.
Often a shareholders’ agreement will allow an owner to transfer stock, but only if the shareholder first offers to sell the stock to the corporation, the other stockholders, or both. This arrangement is called a "right of first refusal" (ROFR).
If your shareholders' agreement includes a ROFR clause, then any shareholder who wants to sell their shares must first give the corporation or other shareholders the opportunity to buy the shares. If the shareholder has received an offer from an outside buyer, the shareholder must give the corporation and other shareholders notice of the offer. The notice must include the terms of the offer, including the purchase price.
Typically, in a situation where an ROFR applies, a shareholder looking to sell their stock must make their shares available in the following order:
In cases where the corporation is granted an ROFR, the corporation would have the right to buy the shareholder's shares on the same terms as those stated in the offer (a redemption). A corporation might find this option desirable, to prevent an unknown or unwanted owner from joining the company.
If the corporation doesn't redeem some or all of the shares within the time frame established in the shareholders' agreement, then the other shareholders can claim the shares. These shares would become available to the remaining shareholders based on their then-existing ownership percentages.
One or more of these remaining shareholders could elect to buy additional shares from the selling shareholder to either increase their ownership stake in the company or prevent a new owner from entering the company. Any remaining shares not redeemed by the company or purchased by the other shareholders could then be transferred to a third party.
Preemptive rights are often included in shareholders’ agreements to allow shareholders to protect themselves from dilution when a corporation wants to sell either additional stock or other securities that are convertible into stock. Preemptive rights are sometimes called "anti-dilution rights" or "subscription rights."
When the corporation desires to sell additional stock to any person, preemptive rights require that the corporation first notify the existing stockholders of the terms of the issuance, including the purchase price. As with an ROFR, the shareholders would have a specified amount of time to exercise their right to purchase their pro rata portion of the additional stock. The shareholders would have the option to purchase the stock on the same pricing and other terms stated in the notice.
Shareholders who exercise their preemptive rights in full would maintain their percentage ownership of the company. Shareholders who either decline the offer or elect to purchase less than their pro rata portion of the additional securities would see their ownership percentage decrease.
It's standard for shareholders’ agreements to include drag-along rights (sometimes referred to as "drags"), tag-along rights (sometimes referred to as "tags"), or both.
Drag-along rights. Drags are important to a shareholder who owns a controlling equity stake in the corporation (typically a majority). If a controlling stockholder wishes to sell all of their shares to a third-party buyer (which effectively results in a sale of the company), then a drag-along provision requires that the minority shareholders sell their shares at the same time. This provision facilitates the ability of the controlling shareholder to sell the company to a buyer who wants to own 100% of the corporation's stock.
Tag-along rights. Conversely, tags are important to minority shareholders because they work in the opposite way as drag-along rights. If a controlling stockholder wishes to sell all of their shares to a third-party buyer, then a tag-along provision gives the minority shareholders the option to sell their shares at the same time for the same sale price. This provision can be vital to minority shareholders because it allows them to take advantage of what might be a rare opportunity to sell their shares and earn an ROI.
Without a tag provision, a third-party buyer who merely wants a controlling stake in the company could conceivably purchase shares solely from the controlling shareholder. This move would deny the minority shareholders the chance to enjoy an ROI and also subject them to a new, perhaps unknown, majority shareholder.
As with all contracts, a shareholders' agreement will include miscellaneous, boilerplate provisions. These provisions will typically cover:
Your agreement will also include basic information about the parties involved and the transaction taking place. For example, the shareholders' agreement will likely include the name of the person receiving the shares, the corporation issuing the shares, the date, the number of shares being issued, and the price.
Your corporation's shareholders agreement, like its other formation documents, is critical in determining the future trajectory of your company. It's important to draft this agreement effectively to account for your corporation's current state and its future growth and changes. You'll want to make sure that your shareholders' agreement fits your corporation while planning for any scenario that your corporation might come across sooner or later.
You can find many shareholders' agreement templates online for free. The U.S. Securities and Exchange Commission (SEC) usually has a few examples of simple and comprehensive shareholders' agreements that you can apply to your company. Many corporations can come up with these agreements on their own or with the help of free resources. But if you have questions specific to your corporation, you should talk to a local business attorney. They can review your pre-drafted or shareholders' agreement or create one for you.
]]>Follow these eight steps to create your corporation in California.
Your corporation's name can't be the same as, or too similar to, an existing name on record with the California Secretary of State (SOS). Your name also can't be misleading to the public, such as implying a connection with a state or local government or using the word "bank" when your company isn't an authorized financial institution.
The corporation's name can—but doesn't need to—include the words (or an abbreviation of them):
(Cal. Corp. Code § 201 (2023).)
The SOS provides a business entity name regulations guide that provides an explanation of the various rules and laws related to naming your corporation.
You can do a free preliminary check on the availability of a proposed name through the SOS's business search database. Before registering your corporation, you can reserve a name for 60 days by filing a Name Reservation Request Form with the SOS. You can mail in the completed form or file the form online using bizfile Online.
Every California corporation must have an agent for service of process in the state. A registered agent is an individual or company that agrees to accept legal papers on the corporation's behalf if the corporation is sued. A corporation can't serve as its own agent for service of process. Your agent should agree to accept papers on behalf of your company and understand their name and address will be public information before they accept the designation.
Your corporation's registered agent can be:
The agent must have a physical street address in California, not a post office box. Small corporations typically name a director or officer to serve as the initial agent. A different agent can always be named later.
The SOS maintains a list of private service companies that can act as the agent for service of process; however, not all such companies are on the list.
Your corporation is legally created by filing Articles of Incorporation - General Stock (Form ARTS-GS) with the SOS. You must include the submission cover sheet when you file your articles. You can submit your articles by mail or online with bizfile Online. As of 2023, there's a $100 filing fee to submit your articles of incorporation.
Your articles must include:
(Cal. Corp. Code § 201 (2023).)
The articles on the SOS website include a broad purpose statement. If your corporation will issue different classes or series of shares, you should specify the designation of each series or class and list how many shares can be issued under each class or series. If a class or series has special rights, privileges, preferences, or restrictions, you should include this information as well.
Every corporation has a set of rules that it must follow that lays out how the corporation will operate. These rules are outlined in a corporation's bylaws. Bylaws are an internal corporate document and don't need to be filed with the state.
Your corporation isn't required to have bylaws but it's highly advantageous to have them. This document gives officers, directors, shareholders, and outside investors an agreed-upon roadmap for how your corporation will be run and how decisions will be made. Having bylaws also shows banks, creditors, the IRS, and others (like investors) that your corporation is legitimate. This document can also help demonstrate that your corporation is its own entity separate from its officers, directors, and shareholders—preventing others from piercing the corporate veil and holding individuals in the corporation liable for corporate debts.
Also, set up a corporate records book where you can keep all of your corporation's important papers, including minutes of director and shareholder meetings. You can use a three-ring binder or you can order a special corporate records kit through a corporate kit supplier. Keep it at your corporation's book principal office.
The incorporator (the person who signed the articles) must appoint the corporation's initial corporate directors. These directors will serve on the board until the first annual meeting of shareholders when the shareholders will elect new board members (or elect the current board members for a new term).
The incorporator should complete an “Incorporator’s Statement” showing the names and addresses of the initial directors. The incorporator must sign the statement and place a copy in the corporate records book. You don't need to file the statement with the state.
The first meeting of the corporation's board of directors should be held to:
Record all decisions made and actions taken by the directors in corporate minutes. If you want your corporation to be taxed as an S corporation, the directors should approve the election of S corporation status at the first meeting as well.
After all the initial matters have been decided at the first directors' meeting, you should issue stock to the shareholders in return for their capital contributions. Shareholders can contribute cash, property, services, or all three.
Although not legally required in most states, small corporations usually issue paper stock certificates. Log each shareholder's name and contact information in the corporation's stock transfer ledger. California corporations don't need to establish a par value for their stock—a set amount below which the stock can't be sold. The board sets the value and number of the initial shares.
Federal and state securities laws classify shares of corporate stock as a security. So, you'll need to keep in mind applicable securities laws as you issue stock for your corporation. However, federal law exempts "private offerings": a non-advertised sale to a limited number of people (generally 35 or fewer). Thus, if you’re issuing shares to 35 or fewer people, you don’t have to worry about federal securities laws.
California has its own version of this federal exemption. To claim a limited offering exemption under state law in California, you must file a Section 25102(f) Notice Filing - Limited Offering Exemption Notice (LOEN) with the California Department of Business Oversight. You should file the notice within 15 days after your corporation issues stock.
You can file the notice online. As of 2023, there's a filing fee of $25 to $300. For more information, see the securities FAQ page on the Department of Financial Protection and Innovation website.
Every California corporation and foreign corporation registered in California must file a Statement of Information (Form SI-55) with the SOS:
The form can be completed and filed online, or printed from your computer for mail or drop-off submission. As of 2023, the filing fee is $25. If your corporation has more than one director, you'll need to attach Form SI-550A as well.
All California corporations and foreign corporations doing business in California must pay California taxes to the California Franchise Tax Board (FTB).
Annual minimum tax: Every corporation that's registered or doing business in California must pay an $800 annual minimum franchise tax during the first quarter of each accounting period. The minimum tax applies to corporations regardless of whether they conducted business in California (unless the corporation's tax year was 15 days or less). For new corporations that qualify or incorporate with the SOS, the minimum tax doesn't apply. Instead, a new corporation's tax is measured based on its income for the first year and subject to estimate requirements. For all subsequent years, the minimum tax is $800.
Additional taxes: Corporations with income over certain levels must pay an additional fee based on their total annual income.
Filing procedures: Regular corporations must file a California Franchise or Income Tax Return (Form 100) by the 15th day of the fourth month after the close of their taxable year. Corporations that have elected to be taxed as S corporations file California S Corporation Franchise or Income Tax Return (Form 100S). For details and forms, see the FTB website.
EIN: Your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There's no filing fee.
California Employment Development Department (EDD): A California corporation becomes subject to the state's payroll tax requirements if it pays more than $100 in wages in any calendar quarter. This rule applies even if a corporation operates without any employees except for the corporate president. The EDD issues employer account numbers (sometimes called "state employer identification numbers" or "SEINs") and administers California's payroll taxes, including Unemployment Insurance, Employment Training Tax, State Disability Insurance, and California Personal Income Tax withholding. For details, see the EDD website.
For more information, read our article about California state business income taxes.
Corporations, as opposed to other business structures, require a relatively significant amount of initial preparation. To form your corporation, you'll need to know how many shares your corporation will be allowed to issue. After incorporation, you should prepare various documents, such as bylaws, an incorporator's statement, meeting minutes, and a shareholders' agreement. You'll also need to consider securities laws when you do issue stock. During this process, you might find it helpful to talk to a business attorney. They can help you prepare these documents or advise you on the language you need to include to stay compliant.
You can also use our online California corporation service, which will form a corporation for you, providing you with everything you need, including a corporate name check, articles, bylaws, a corporate records book, an incorporator's statement, minutes of the first meeting of the board of directors, stock certificates, and a stock transfer ledger.
For further education, check out Incorporate Your Business: A Step-by-Step Guide to Forming a Corporation in Any State, by Anthony Mancuso (Nolo). This book provides you with many corporate forms and explains the benefits of incorporating your business.
]]>Delaware is a popular state to form a corporation because it offers many benefits. Many larger corporations have chosen to incorporate in Delaware—usually setting up their headquarters in another state.
The primary reason so many companies decide to incorporate in Delaware is the state's friendly tax laws. Corporations that don't do business in Delaware don't have to pay the state's corporate income tax, even if the company is incorporated there. Instead, corporations pay a small franchise tax.
Additionally, Delaware doesn't have a state sales tax or property tax, lowering the cost for many corporations who do decide to do business in the state. Even corporations that do business within the state can avoid paying corporate income tax.
Moreover, Delaware's laws around corporations are more developed than other states. Delaware even has a separate court system, the Court of Chancery, that handles cases related to corporate matters.
To form a corporation in Delaware, you need to take the steps set forth below.
Your corporation's name must include at least one of the following (or an abbreviation):
Alternatively, your corporation's name can include a word or its abbreviation of a similar meaning in another language, provided it's written in Roman characters or letters. Your corporation's name can't be deceptively similar to the names of other business entities already on file with the Delaware Secretary of State (SOS). (Del. Code tit. 8, § 102 (2023).)
You can check whether your proposed business name is available by searching the SOS's business name database. You can apply online to reserve a business name for 120 days through the Delaware Division of Corporations (DOC) website.
Every Delaware corporation must have an agent for service of process in the state. This agent is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it's sued. The agent should agree to accept service of process on your corporation's behalf prior to designation.
The agent can be an individual Delaware resident or a business entity authorized to do business in Delaware. The registered agent must have a physical street address in Delaware. However, if your corporation is physically located in Delaware, it can act as its own registered agent. There's a list of Delaware Registered Agents on the DOC website.
Your corporation is legally created by filing a Certificate of Incorporation - Stock Corporation with the SOS. Articles can be filed online or by postal mail and you must include a Filing Cover Memo (this is created automatically when you file online).
As of 2023, there's a $109 minimum filing fee for:
After these thresholds, the fee increases based on the number of shares of no par stock or the value of par value stock. (See the Delaware Corporate Fee Schedule.)
The articles of incorporation must include:
(Del. Code tit. 8, § 102 (2023).)
The preprinted articles form on the SOS website also includes a line to list the par value of the corporate shares. However, the use of par value is optional in Delaware (see "Issue Stock" below). If you want to issue shares without par value, cross out the line "a par value of $___ per share" on the form and add "no par value."
There are two sample Certificate of Incorporation forms on the SOS website: One includes an optional directors liability provision which protects directors from personal liability for breaches of their duty of care.
Bylaws are an internal corporate document that set out the basic ground rules for operating your corporation. They're not filed with the state, and your corporation isn't legally required to have them. Nevertheless, you should adopt bylaws for your corporation because they:
You might want to consult with a business attorney to help you create your bylaws. If you want to draft your bylaws yourself but need some extra help, check out Incorporate Your Business: A Step-by-Step Guide to Forming a Corporation in Any State, by Anthony Mancuso (Nolo). Corporate kits also typically contain sample bylaws.
Keep your bylaws, meeting minutes, and other important corporate papers in a corporate records book. This book can be a simple three-ring binder or corporate records kit you order through a corporate kit supplier. Keep these important documents at your corporation's principal office.
The incorporator—the person who signed the articles—must appoint the initial corporate directors who'll serve on the board until the first annual meeting of shareholders (when the board members who'll serve for the next term are elected by the shareholders). The incorporator must fill in an “Incorporator’s Statement” showing the names and addresses of the initial directors. The incorporator must sign the statement and place a copy in the corporate records book. The statement need not be filed with the state.
At the first meeting of the corporation's board of directors, the directors should:
The directors' actions must be recorded in corporate minutes prepared by the incorporator or any of the directors and approved by the board of directors. Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status. For sample Incorporator's Statement and corporate meeting minute forms, refer to Incorporate Your Business, by Anthony Mancuso (Nolo).
Issue stock to each shareholder in return for their capital contributions of cash, property, services, or all three. Small corporations usually issue paper stock certificates. Enter each shareholder's name and contact information in the corporation’s stock transfer ledger.
Delaware gives corporations the option of establishing a par value for their stock or issuing no par value shares. Par value is a set amount below which the stock can't be sold—it has nothing to do with the stock's actual value. Par value is an antiquated legal concept used in some states. If the shares are issued with no par value, "no par value" should be printed on the stock certificates.
A share of stock in your corporation is classified as a security under state and federal securities laws that regulate the offer and sale of corporate stock. However, federal law exempts "private offerings:" a non-advertised sale to a limited number of people (generally 35 or fewer). See our Corporations FAQ for more details.
Delaware exempts from state registration unadvertised share sales to any number of accredited investors, provided the shares are purchased for investment. Accredited investors include corporate officers, directors, and wealthy investors (those worth at least $1 million or who earn $200,000 per year if single, $300,000 if married).
If shares are sold to 35 or fewer unaccredited investors in an unadvertised sale, no registration is required but the corporation must file Form LOE, Notice of Limited Offering Exemption with the Investor Protection Unit of the Delaware Department of Justice within 15 days of the first sale. No filing fee is required. (For more information, see the Investor Protection Unit of the Delaware Department of Justice.)
All corporations incorporated in Delaware must file an annual report and pay a franchise tax along with it. The taxes and annual reports must be received by the DOC no later than March 1 of each year. Foreign corporations are required to file an annual report by June 30 of each year. The annual report is filed online.
As of 2023, the annual report filing fee for domestic corporations is $50 plus franchise taxes due upon filing of the report. The filing fee for foreign corporations is $125.
As of 2023, the minimum franchise tax is $175 with a maximum tax of $200,000. Corporations owing $5,000 or more pay estimated taxes in quarterly installments with 40% due June 1; 20% due by September 1; 20% due by December 1; and the remainder due March 1. Consult the Delaware Franchise Tax Calculator for details.
The penalty, as of 2023, for not filing a completed annual report on or before March 1st is $200. Interest at 1.5% per month is applied to any unpaid tax balance. Foreign corporations are assessed a penalty of $125 if the annual report is not filed.
Your corporation must obtain a federal employer identification number (EIN). You can obtain an EIN by completing an online application on the IRS website. There's no filing fee.
When forming a corporation, you'll need to make important decisions such as how many shareholders your company will have, how your corporation will be taxed, and what to put in your corporate bylaws. Many business owners make these decisions and file the appropriate paperwork across the various departments and agencies on their own. However, it can be helpful to consult with an attorney on one or more of these topics, such as drafting corporate documents.
You can also use our online corporation service service, which will form a corporation for you with everything you need. For answers to questions about our service, check out our online Delaware corporation FAQ.
]]>Professional corporations are usually similar to regular corporations but have certain special requirements. In Florida, professional corporations follow the rules set by the Professional Service Corporation and Limited Liability Company Act as well as general state laws for corporations.
To form a professional corporation in Florida, you must meet specific legal requirements. Florida’s legal requirements for professional corporations are similar to those of other states.
You can form a professional corporation—also called a “professional services corporation”—in Florida to provide professional services in a specific area. (Fla. Stat. § 621.05 (2023).)
In Florida, professional services include any type of personal service that requires you to have a license or legal authorization. For example, professional services would apply to the following occupations:
(Fla. Stat. § 621.03 (2023).)
The corporation can also have non-licensed employees who perform non-professional services for the company. These employees can include:
(Fla. Stat. § 621.06 (2023).)
For example, suppose you have an architectural firm registered as a foreign corporation in Florida. Your firm can hire employees to handle the company’s bookkeeping, customer service, and other tasks needed to carry out your business. These employees don’t have to be licensed architects. But anyone in your firm performing architectural services does have to be licensed.
Florida law restricts who can own a professional service corporation. Shares of a professional service corporation can be owned only by:
Therefore, a corporation can only issue shares to a professional corporation or LLC or to a licensed individual. Likewise, shareholders can sell or transfer their shares only to these types of professional businesses and individuals. (Fla. Stat. §§ 621.09 and 621.11 (2023).)
For example, if the professional corporation provides veterinarian services, all of the shareholders must be licensed veterinarians or a professional entity that provides veterinarian services.
However, shareholders aren’t required to perform services for the professional service corporation. Instead, shareholders can take a more passive role. Other employees or agents of the corporation can provide these services as long as they’re licensed or authorized professionals in that area. (Fla. Stat. § 621.06 (2023).)
Once you’ve determined that you want to register your professional corporation, you should start the process of incorporating your business.
For more information on the general steps to register your corporation (many of which apply to professional corporations), read our article on how to form a Florida corporation.
Florida has specialized naming rules for professional corporations. These rules specify what you can, can’t, and must include in your business name.
What you can include in your professional corporation’s name. Your business name can contain the last name of some or all of the shareholders, including retired or deceased shareholders.
What you must include in your professional corporation’s name. In Florida, a professional corporation must contain the words "chartered," "professional association," or "P.A."
What you can’t include in your professional corporation’s name. Florida law specifically prohibits you from using the following words in your professional corporation’s name:
(Fla. Stat. § 621.12 (2023).)
You should choose a name that’s different from any name that’s already registered with the Florida Department of State (DOS). Choosing a unique name can give you stronger rights to the name. Also, if someone else is already using your chosen name, they can sue you for trademark infringement and make you give up your name.
For help with naming your professional corporation, read our FAQ about choosing a business name.
To form your professional corporation, you must file articles of incorporation with the Florida Division of Corporations. You can download a Profit Articles of Incorporation form from the DOS website. You can file your articles online or mail the articles and a cover letter to the Division of Corporations. As of 2023, the filing fee is $35.
Your articles must include the following:
(Fla. Stat. § 607.0202 (2023).)
You can find more information about the process to incorporate your business on the Florida Sunbiz website. There, you’ll find forms, filing fees, information on how to e-file, and the mailing address for sending in your articles of incorporation.
Call or check the websites of city and county government offices in your area to ask about local permit and business license requirements. The Florida Small Business Development Centers also have permitting and licensing information for counties and cities under their jurisdiction.
Other agencies with helpful information include the:
You can use these agencies' websites to find information on license requirements, search records, apply for or renew a license, and locate exam information. For further information about new and existing businesses and links to state agencies, visit Florida's official state website.
For more guidance, check out our article on how to get a small business license in Florida.
Once you’ve formed your professional corporation, you’ll need to comply with tax and other regulatory requirements that apply to professional corporations in Florida. You can find helpful tax information at the following resources:
Every year, you’ll need to renew your corporation’s registration with the DOS. You can complete this process online. You should also prepare all internal documents, including bylaws and shareholders’ agreements.
You can probably complete the incorporation process on your own. But if you need help understanding the legal requirements for professional corporations, consider talking to a Florida business attorney. They can help you navigate naming requirements, file official paperwork, draft your bylaws, and apply for licenses.
If you’re interested in reading further about starting a corporation, check out Incorporate Your Business: A Step-by-Step Guide to Forming a Corporation in Any State, by Anthony Mancuso (Nolo).
]]>California requires certain professionals—such as lawyers, accountants, and engineers—to create a professional corporation rather than the traditional corporation. Unlike many other states, California doesn't allow professionals to form a limited liability company (LLC) or professional LLC (PLLC).
California professional corporations are governed by the Moscone-Knox Professional Corporation Act. (Cal. Corp. Code §§ 13400 and following (2023.))
In California, you're required to form a professional corporation if you provide professional services that require a license, certification, or registration. However, importantly, California provides exceptions for some professions. For example, medical professionals (such as doctors, registered nurses, and pharmacists) aren't required to form a professional corporation. Instead, medical professionals must form medical corporations.
Other types of professions that aren't required to form professional corporations are:
This list isn't exhaustive. You can find a full list of excluded professions under the Moscone-Knox Professional Corporation Act (Cal. Corp. Code § 13401 (2023).)
Professional corporations must meet several requirements under California law.
Unless an exception applies, California professional corporations can be formed only to provide professional services (including secondary services) within a single profession. A professional service is defined as any service that requires a license issued by a California state regulatory licensing board, state court, or similar agency. To provide services, all California professional corporations must have a currently effective certificate of registration issued by the governmental agency regulating their profession.
Professional corporations are also governed by the governmental agency or board that's responsible for overseeing that profession. The agency might have additional requirements. For example, the board might have limitations on the professional corporation’s choice of name and require the professional corporation’s bylaws to specify who can be officers and own shares in the business.
Professional corporations must comply with applicable rules in the California Business and Professions Code. These rules vary by profession, but they all require that only licensed persons can be shareholders of a professional corporation. Check for any other applicable rules for your profession in the California Business and Professions Code. (Cal. Corp. Code § 13406 (2023).)
Unless an exception applies, a shareholder must be licensed in the profession that the professional corporation is engaged in. However, other licensed professionals can be officers, shareholders, directors, or professional employees in specified professions, as long as the total number of shares owned by these other licensed professionals isn't more than 49% of the corporation’s total shares. (Cal. Corp. Code § 13401.5 (2023).)
Officers and directors of professional corporations generally must be licensed to perform the professional activity that the corporation is engaged in. Unless the corporation has less than three shareholders, California professional corporations must have at least three directors on their board.
Professional corporations with one shareholder: If you have only one shareholder, that shareholder can also be the only director and can also serve as the president and treasurer of the corporation. The other officers of the corporation in that situation need not be licensed professionals.
Professional corporations with two shareholders: A professional corporation that has two shareholders can have those two shareholders appointed as the only two directors. Those two shareholders between them can fill the offices of president, vice president, secretary, and treasurer of the corporation.
(Cal. Corp. Code § 13403 (2023).)
The name of a professional corporation in California must comply with rules governing the profession and any name requirements issued by the licensing agency for that profession. It also must be distinguishable from the name of any other business entity on file with the California Secretary of State (SOS). (Cal. Corp. Code § 13409 (2023).)
You can request a free initial check on the availability of your professional corporation’s name by mailing a completed Name Availability Inquiry Letter form to the SOS. Email or online inquiries aren't currently accepted. You can reserve a name for 60 days by using the bizfile Online system.
Once you've determined that you're required to register as a professional corporation and you've chosen a name for your business, you'll need to submit the appropriate paperwork to the SOS.
To form a professional corporation in California, you must file articles of incorporation with the SOS and pay all applicable filing fees. You can complete and mail the Articles of Incorporation of a Professional Corporation to the SOS. You can also submit the filing online through bizfile Online. As of 2023, the filing fee is $100.
Your articles must include the corporation's
If an individual person is listed as the agent for service of process, the agent’s California street address (not a P.O. box) must be included where documents can be served.
Your corporation must also file a Statement of Information, along with applicable filing fees, within 90 days of filing the articles of incorporation. You can file online or mail in the completed form to the SOS You need to file this form every year. As of 2023, the filing fee is $25.
The Statement of Information must include the following:
Once you've formed your professional corporation, you'll need to comply with tax and other regulatory requirements that apply to professional corporations in California. You should also create bylaws to govern your foreign corporation. For more information on the general requirements for forming a California corporation (many of which apply to professional corporations), see our article about how to form a corporation in California.
The rules and requirements for forming your corporation can vary across regulatory fields. You should check with the agency in charge of your profession before forming your professional corporation. If you have legal questions, consider speaking with a California business attorney. They can help you file formation paperwork, draft internal corporate documents, and comply with industry-specific rules.
]]>For state-specific information on qualifying as a foreign business in another state, see our state guide to qualifying your company to do business in another state.
When you do business in a state, your company is considered either “domestic” or “foreign” to that state. If you formed your company in that state, then you’re a “domestic entity.” If you formed your company in another state, then you’re a “foreign entity.”
For example, suppose your LLC is organized in Georgia and you do business both in Georgia and Texas. In Georgia, your business would be considered a “domestic LLC” because that’s where it’s organized. However, in Texas, your business would be considered “foreign” because your company wasn’t formed in Texas.
The are two main types of foreign businesses:
You can also have a foreign limited partnership, though foreign corporations and LLCs are more common.
If you plan on doing business in a state other than where you organized your LLC or incorporated your corporation, you'll have to check out the rules of the state where you'll be providing your goods or services. Every state has its own variations on when a business must qualify as a foreign LLC or corporation.
While every state is slightly different, all states generally follow the same basic principle: If a company is engaged in intrastate business in a state, that company must qualify to do business in that state. If the company’s operations or transactions in a state are merely incidental to a larger interstate business operation, they might not have to qualify.
Let’s define the terms intrastate and interstate so we can better understand the difference between the two types of businesses:
For example, suppose Gray Matter LLC is organized in New Mexico and runs a candy shop out of Albuquerque. The business also sells specialty candies online to customers across the United States. Even though Gray Matter LLC sells to customers in California and Illinois, these sales would likely be considered incidental to the company’s interstate online business operations. So, Breaking Sky probably wouldn’t have to qualify to do business as a foreign LLC in California, Illinois, or other states. Though, again, it’s a good idea to check each state’s rules for when you need to register.
Generally, your LLC or corporation must qualify to do business in any state where it’s engaged in intrastate business, meaning that at least part of your business is conducted entirely within that state's borders. For example, suppose your Nevada business has a warehouse in Oklahoma and you sell and ship from that warehouse to customers within Oklahoma. You’d be engaged in intrastate business in Oklahoma.
Typically, state foreign entities laws require you to register as a foreign business if you’re “transacting business” or “doing business” in that state. But most states don’t specifically define “transacting business” or “doing business” in relation to foreign registrations.
Many states require a foreign business to qualify as a foreign LLC or corporation if the business has a physical presence in—or nexus with—the state. Generally speaking, physical presence and nexus are synonymous, and mean having:
Some exceptions can apply and not every state has the same laws or metric for determining when a company must qualify to do business. Nevertheless, in general, if you have a physical location in another state, you’ll need to qualify your LLC or corporation as a foreign business in that state.
States exempt particular types of business from the definition of intrastate business. As discussed earlier, if your business takes part in intrastate business, you have to register with that state. But when states exempt an activity that would normally be considered intrastate business, you don’t have to register with that state if your business engages in only the exempted intrastate activity.
Here are some examples of the types of business activities that out-of-state corporations and LLCs can potentially conduct without having to qualify as a foreign business:
Some states—including Washington, North Carolina, Louisiana, Oregon, Kentucky, Nevada, and Michigan—exempt the activity of simply owning real or personal property in a state. In those states, if you own property but don’t do anything with the property, you wouldn’t have to qualify to do business in that state. But if you were leasing the property or producing income from it in some way, then you probably would have to qualify your business.
For example, suppose you have a business in California but you own a vacant building in Oregon with plans to eventually expand your business operations to Oregon. Currently, you don’t do business in Oregon and haven’t set up anything or done any activity out of or within the vacant building. Because you just own this vacant building in Oregon, you probably wouldn’t have to qualify to do business in Oregon.
It’s important to note that some states, like Louisiana, don’t recognize selling through independent contractors as an exempt type of intrastate business. So, if you sell goods or services through independent contractors in these states, you’d likely have to qualify as a foreign business.
On the other hand, a state can't make you qualify or pay business taxes in that state if you only engage in interstate business with other states—meaning that all of your business is conducted across state lines. For example, if you sell and ship merchandise from your home state to residents in other states, you’re engaged in interstate business, which generally can’t be regulated by other states.
Qualification is simply a registration process that involves filing paperwork and paying fees—similar to the procedures required for incorporating your corporation or organizing your LLC. The form you file with the state will usually be called a “foreign registration statement,” a “certificate of authority,” or something similar.
Generally, the form will ask you to provide the following information:
A person authorized to sign on behalf of your business will need to sign the form. You might also need to make other certifications about your business within the form. Qualification fees can range from $50 to $500 or more depending on the state.
Once you’re registered in a state, you must report and pay state income and sales taxes, as well as file state employment tax filings if you have sufficient payroll, property, and sales in the state.
Let’s look at the forms you’ll need to file and the fees you’ll pay (as of 2023) for some states.
If you do business in a state without authorization, there could be consequences.
Fines. You could be subject to financial penalties, sometimes known as “late-qualification penalties.” Some states have one flat fine while other states impose daily or monthly fines. Under California law, for example, there’s a late-qualification penalty of $250 plus $20 per day for willful (knowing, not inadvertent) failure to qualify. (Cal. Corp. Code § 2203 (2023).)
Not allowed to file lawsuits. Most states prevent companies that haven’t qualified in that state from starting a lawsuit in that state's courts. Under these laws (known as “door-closing statutes”), a court will delay or dismiss your lawsuit if the defendant objects because you didn’t qualify your business in the state.
You should review the rules in the states where your business is engaged in any intrastate business. If you think that your activities might be considered intrastate business in some states, it's best to qualify to do business in those states. Better to deal with the inconvenience and modest filing fees ahead of time rather than face penalties and court delays if the state determines that you should have qualified, but didn't.
If you want an extra opinion or legal advice, consider talking to a business attorney who’s licensed in the state where you want to do business. A lawyer can help you decide whether your business operations qualify as a non-exempt intrastate activity that requires registration. A lawyer can also file the appropriate forms for you and help you maintain your foreign registration.
]]>While a corporation can be involuntarily dissolved through the courts, this article covers voluntary dissolution by a corporation’s shareholders. Also, while there are special procedures for dissolving corporations that haven’t yet issued stock, are undergoing Chapter 7 bankruptcy, or have disposed of all assets and not conducted any business for the last five years, those procedures aren’t covered in this article.
Let’s go through the steps to dissolve your corporation in California. Keep in mind that your corporation’s articles of incorporation and bylaws might have additional requirements or procedures for your corporation to follow.
(For more general guidance on the dissolution process, read about how to dissolve a corporation.)
A corporation in California can voluntarily dissolve if shareholders holding at least 50% of the voting power vote in favor of the dissolution. (Cal. Corp. Code § 1900 (2023).)
For example, suppose Michael, Donny, Leo, and Rafael are shareholders in Ninja Turtle Corp. Michael owns 60% of the voting shares, Donny owns 20%, Leo owns 15%, and Rafael owns 5%. Ninja Turtle Corp. can be dissolved if only Michael votes to dissolve. Even though Michael only represents one-quarter of the shareholders, his shares equal 60% of the voting power—or at least 50%.
The shareholders can either:
Your articles of incorporation or bylaws can require a vote greater than a vote by shareholders holding at least 50% of the voting power. For example, your bylaws can require a vote by shareholders holding at least two–thirds of the voting power to dissolve the corporation. Additionally, your corporation’s organizational documents can require that the board of directors first pass a resolution to dissolve before the shareholders can vote on the dissolution.
Once the shareholders vote to dissolve the corporation, the shareholders must either:
(Cal. Corp. Code § 1903 (2023).)
When the shareholders adopt a resolution to dissolve the corporation at a meeting, there are some requirements that must be followed.
Notice of the meeting. You’re required to give between 10 and 60 days advance written notice to each shareholder entitled to vote on the dissolution. The notice must say the place, date, time, and purpose of the meeting. If the meeting will be virtual, the notice must provide instructions for remote communication. The notice can be given personally, by electronic means, or by first-class mail. (Cal. Corp. Code § 601 (2023).)
Who can call the special shareholders’ meeting. The board, chairperson of the board, the president, shareholders holding at least 10% of the voting power, or anyone allowed by the articles of incorporation or bylaws can call a special meeting for the corporation. (Cal. Corp. Code § 600 (2023).)
Where meetings can be held. Meetings can be held in person or by electronic means, such as by video or conference call. Your bylaws can set the location of meetings. (Cal. Corp. Code § 600 (2023).)
If the shareholders choose to give their written consent for dissolution instead of holding a vote at a meeting, then there’s no need to provide notice of such an action. To dissolve a corporation, California’s default rules call for written consent by shareholders holding at least 50% of the voting power—the same minimum requirement if there was a vote at a meeting. However, the corporation’s articles can require a higher voting percentage. (Cal. Corp. Code § 603 (2023).)
If written consent isn’t given by all shareholders, then before the dissolution can take effect, you’ll need to provide notice to the non-consenting shareholders of the shareholders’ approval of the dissolution.
California has an unusual requirement in its dissolution laws. Whenever a corporation has elected to wind up and dissolve, the corporation must file a certificate of election as evidence of the dissolution. The certificate of election can be filed either before or together with the certificate of dissolution.
The certificate of election says:
The certificate can be signed either by:
If the certificate is signed by a shareholder, then the certificate will contain a statement that says the shareholder is authorized to sign the certificate.
If all shareholders voted to dissolve the corporation, then you don’t need to file a certificate of election.
(Cal. Corp. Code § 1901 (2023).)
As soon as the shareholders have approved the dissolution, the board of directors must notify all shareholders by mail that the voluntary winding-up process has begun. In addition to notifying shareholders about the dissolution, the board must also provide mailed written notice to all known creditors and claimants whom the corporation has addresses for. (Cal. Corp. Code § 1901 (2023).)
Unlike other states, California doesn’t provide any instruction on how or within what time frame creditors should receive notice. California law also doesn’t say what information the notice must include or whether providing notice bars creditors' claims.
While there are no specific notice requirements, you should let creditors know that if they have a claim against your corporation, they should provide you with information about that claim. You should provide creditors with an address where they can send their claim and a deadline for when to send the claim.
While not required, you should also publish a notice of your corporation’s dissolution in a local newspaper. This publication can give creditors you don’t know about notice of your corporation’s dissolution. It’s in your best interest to settle all debts, both known and unknown, before you distribute assets to your shareholders. You can start the debt settlement negotiation process by notifying your creditors.
Once you’ve liquidated your corporation’s assets and notified your creditors of the dissolution, it’s time to settle your debts.
You should pay your business taxes first—though you’re not required to receive a tax clearance certificate or letter to file your certificate of dissolution.
If you have any known claims, talk to your creditors about settling the debt for less than what you owe. If any claims you didn’t know about come to your attention during the notice process, you should address these claims as well. You should prioritize your debts and try to reach settlement agreements with your creditors that’ll leave you with enough money to satisfy all debts and potentially disperse any leftover cash to the shareholders.
As long as all claims have been paid (or you’ve made provisions to pay them), you can distribute any leftover assets to the corporation’s shareholders. The shareholders should be paid according to their shares. So, if a shareholder owns 20% of the corporation’s stock, then they should receive 20% of the company’s remaining assets. (Cal. Corp. Code § 1905 (2023).)
At the end of the winding up and dissolution process, you’ll file your certificate of dissolution with the California Secretary of State (SOS).
If the vote to dissolve the corporation wasn’t unanimous, you’ll need to file a certificate of election along with your certificate of dissolution, if you haven’t already done so. If the vote to dissolve the corporation was unanimous, then you only need to file a certificate of dissolution.
You can find both forms on the SOS website. You can file these forms online through bizfile Online. The SOS also provides a combined form that includes both the certificate of election and certificate of dissolution along with instructions that you can complete and mail in as well.
The certificate of dissolution must be signed and verified by a majority of the corporation’s directors. The dissolution certificate must certify that:
(Cal. Corp. Code § 1905 (2023).)
As of 2023, there’s no fee to file the certificate of dissolution or the certificate of election.
You’ll need to file all final franchise tax returns with the California FTB. You can file these returns before or after you’ve filed your certificate of dissolution.
To close a California corporation, the FTB requires a business to:
You can find more information on how to close your business on the FTB website.
At this point in the process, you should’ve settled your debts and paid any leftover money to your shareholders. Your business bank account should be at zero. You should close your account.
If you have any business, professional, or occupational licenses or special permits in your business’s name, you should cancel them. You might be able to transfer or sell some licenses and permits.
If your corporation is registered or qualified to do business in another state, you must file the necessary forms to terminate those registrations. If you don’t file these forms, you’ll continue to be liable for annual fees and minimum business taxes in those states.
The process to dissolve your corporation in California is relatively straightforward. However, if you qualify for one of the special dissolution procedures, you might need additional help navigating the process. Additionally, if you voluntarily dissolve your corporation and have a long list of debts and obligations to sort through and assets to liquidate, you should consider talking to a business attorney. A lawyer can help you prepare and file the necessary paperwork, draft dissolution notices, sell your assets, and settle your debts.
You can find additional information, such as forms, mailing addresses, phone numbers, and filing fees on the business programs section of the SOS website.
Dissolving and winding up your corporation is only one piece of the process of closing your business. For further, general guidance on many of the other steps involved, check out our 20-point checklist for closing a business and our article on what you need to know about closing a business.
]]>While a corporation can be involuntarily dissolved administratively or through the courts, this article covers voluntary dissolution by a corporation’s shareholders. Also, while there are streamlined procedures for dissolving corporations that haven’t yet issued stock or started doing business, or have only two shareholders who each own 50% of the company’s stock (a “joint venture corporation”), those procedures aren’t covered in this article.
Let’s go through the steps to dissolve your corporation in Delaware. Keep in mind that your corporation’s articles of incorporation and bylaws might have additional requirements or procedures for your corporation to follow.
(For more general guidance on the dissolution process, read about how to dissolve a corporation.)
In Delaware, you can dissolve a corporation in one of two ways:
(Del. Code tit. 8, § 275 (2023).)
In both instances, only shareholders who are entitled to vote on the dissolution are allowed to vote. So, you only need a majority vote by shareholders entitled to vote or written consent by all shareholders entitled to vote.
The board of directors must give notice to the shareholders that there will be a meeting to vote on the dissolution. The notice must be given between 10 and 60 days before the meeting date and include the following information:
(Del. Code tit. 8, § 222 (2023).)
The notice can be delivered to the shareholders by U.S. mail, courier service, or by email. (Del. Code tit. 8, § 232 (2023).)
You should record the corporate action and vote and keep that record in your corporation’s books or files. For example, you should keep meeting minutes for the shareholders’ meeting.
After shareholders approve the dissolution of your corporation, you must file a certificate of dissolution with the Delaware Department of State (“DOS”). But before you can file your certificate, you must pay all your state taxes and file all annual franchise tax reports. (Del. Code tit. 8, § 277 (2023).)
You can find annual report and tax instructions on the Delaware Division of Corporations website. You should contact the Division to make sure you’re up to date on all fees and filings.
You’ll need to pay and file your tax obligations, but you’re not required to receive a tax clearance certificate or letter to file your certificate of dissolution.
For corporations that are voluntarily dissolving after they've issued shares and started doing business, there are two different certificates of dissolution available: the standard form and the “short form.” These two forms have different filing fees.
You can use the short form only if your corporation meets three requirements:
As of 2023, the fee to file the short form is only $10. (Del. Code tit. 8, § 391 (2023).)
If you don’t meet the above requirements, then you’ll need to submit the standard form. Both dissolution forms require the following basic information:
(Del. Code tit. 8, § 275 (2023).)
As of 2023, the filing fee for the standard form is $204.
You’ll need to complete and mail the appropriate dissolution form and a cover memo, along with the filing fee, to the Delaware DOS. You can find the dissolution forms and the cover memo on the dissolutions and cancellations section of the Division of Corporations website. The forms will need to be signed by an authorized officer of the corporation.
Note that dissolution, alone, doesn’t stop actions, suits, or proceedings begun by or against your corporation prior to dissolution or, generally speaking, for a period of three years after dissolution.
One of the first tasks in winding up of your business is notifying creditors of the dissolution. Giving notice is optional. However, providing notice will help limit your liability and also allow you to make final distributions to shareholders with more confidence.
Delaware law allows you to dispose of (bar) claims by notifying creditors of your corporation’s dissolution and giving them a chance to submit their claims to you. If the creditor doesn’t send in their claim by the specified deadline, then their claim is no longer valid or recognized.
Under Delaware law, you give notice by both sending a written document directly to known claimants and by publishing the same notice in a newspaper. The notice must include the following information:
You’ll need to mail the notice to known creditors by registered or certified mail, return receipt requested.
(Del. Code tit. 8, § 280 (2023).)
There are additional rules regarding giving notice, such as exactly where it must be published and how it must be sent to known creditors. Delaware also has intricate rules for how and when to respond to claims. Because many of these rules can be hard to understand, you should strongly consider getting assistance from a business attorney when giving notice to creditors.
Once you’ve liquidated your corporation’s assets and notified your creditors of the dissolution, it’s time to settle any of the company's recognized debts. If creditors have responded to your notice with claims that you don’t deny (or “reject”), then you’re required to pay these claims in full if you have sufficient assets to do so. If you don’t have enough money to pay all of the claims, then you must pay the claims according to their priority.
As long as all of the recognized claims have been paid and appropriate deadlines have expired, you can distribute any leftover assets to your corporation’s shareholders. The shareholders should be paid according to their shares. So, if a shareholder owns 10% of the corporation's stock, then they should receive 10% of the corporation’s remaining assets.
At this point in the process, you should’ve settled your debts and paid any leftover money to your shareholders. Your business bank account should be at zero. You should now close your bank account.
If you have any business, professional, or occupational licenses or special permits in your business’s name, you should cancel them. You might be able to transfer or sell some licenses and permits.
If your corporation is registered or qualified to do business in another state, you must file the necessary forms to terminate those registrations. If you don’t file these forms, you’ll continue to be liable for annual fees and minimum business taxes in those states.
Delaware has specific rules and conditions related to the dissolution process. Read the state dissolution laws carefully to make sure you’re completing each step correctly. If you need additional help, you should talk to a business lawyer who has experience dissolving corporations. They can walk you through the dissolution process, file any necessary forms, draft dissolution notices, and guide you in distributing your assets.
You can find additional information, such as forms, mailing addresses, phone numbers, and filing fees on the DOS website and the DOR website.
Dissolving and winding up your corporation is only one piece of the process of closing your business. For further, general guidance on many of the other steps involved, check out our 20-point checklist for closing a business and the our article on what you need to know about closing a business.
]]>You created a corporation by filing documents with your state and you'll need to go through a similar process to formally dissolve it. Otherwise, your corporation will continue to exist even if you no longer conduct any business through it.
If your company still legally exists, your state filings and other legal obligations continue and the corporation remains open to lawsuits and can incur additional liability. So it's important to follow through with the necessary filings once you decide it’s time to close up shop.
Ending your business happens in two phases:
First, you dissolve your corporation. Dissolution involves voting to dissolve your business and filing legal paperwork with the state.
Second, you wind up your corporation. Winding up involves settling your debts, distributing remaining assets, notifying creditors and customers of the closure, and closing your accounts, licenses, registrations, and permits.
Each state has its own rules so you might want to seek help from a business lawyer to make sure you follow your state’s requirements. Many states allow you to set your own rules and procedures in your corporation’s articles of incorporation and bylaws—with some limitations.
You’ll generally need to follow the steps described below to dissolve your corporation. States might differ some, so be sure to check your state’s dissolution laws for specific guidance. You can also check out our articles on how to dissolve a corporation in California and Delaware.
You’ll also want to make sure you keep good records, such as meeting minutes, of any corporate action taken on dissolution.
The first step in dissolving a corporation usually involves having your board of directors vote and adopt a resolution to dissolve the corporation. Generally, you start the dissolution process by holding a meeting of the board of directors to vote on a resolution to approve the dissolution of the corporation.
Your articles of incorporation or bylaws (or state law) might require a particular percentage of directors to approve the dissolution, such as a majority or two-thirds of the directors. Though many states don’t require a minimum vote from the corporation’s directors.
Once the board has approved the dissolution, the matter can then be submitted to the shareholders for their approval. Many states have rules for when and how the directors must give notice to the shareholders of the upcoming dissolution vote.
Typically, directors must provide the shareholders, regardless of whether they’re entitled to vote on the dissolution, written notice of the dissolution vote a number of days before the vote happens. Usually, the written notice must include information about the meeting like:
States differ on how many days' notice must be given. For instance, some states require between 10 and 60 days' notice while others might require 20 to 60 days' notice.
Your articles of incorporation or bylaws might have additional requirements. For example, your articles might require that notice for a dissolution vote be given by certified mail with return receipt requested.
Now that shareholders have notice of the dissolution, they must vote on it. State law or your corporation’s organizational documents likely require a certain number of shareholders to vote in favor of the dissolution for it to pass. Some states might even allow for dissolution by written consent of the shareholders without the need for a meeting.
Minimum required vote. Many states allow a vote to dissolve to pass as long as a minimum number of shareholders agree. For example, your state's laws might require approval from at least half or two-thirds of the shareholders. However, you can specify different voting requirements in your articles or bylaws as long as the vote required isn’t less than a majority.
Vote by written consent. Your state's dissolution laws might allow you to dissolve your corporation by the written consent of the shareholders. This method is an alternative to taking a vote at a meeting. Depending on your state's laws, you might be able to dissolve your corporation as long as a specified number of shareholders (such as a majority, two-thirds, or all) give their written consent.
Once you have the necessary corporate approval to dissolve your corporation, your next step is to file articles (sometimes called a “certificate”) of dissolution with the state. Most states have a dissolution form that you can file by mail or, in some states, online. In other instances, you might need to create your own dissolution document to submit to the state.
Check your secretary of state (SOS) website (or your state corporate filing office) for your state's dissolution form and filing requirements, including required fees. Even if a dissolution form isn’t legally required, it’s highly recommended that you file one with the SOS to complete the voluntary dissolution of your corporation.
After dissolution, your corporation continues to exist for the purpose of winding up its business. "Winding up" generally means resolving all outstanding claims and lawsuits against the company, distributing any remaining assets to shareholders, and closing any open accounts, licenses, permits, or registrations.
A key task in winding up your corporation is to give notice to anyone with a potential claim against your corporation—including both known and unknown creditors. While providing notice often isn’t legally required, usually states allow you to dispose of (dismiss or bar) claims from creditors when you follow the state’s notice requirements.
Generally, a notice to creditors must include the following information:
The type of notice you send out differs between creditors with known claims and creditors with unknown claims:
Providing notice also helps limit your liability and allows you to make final distributions of your corporate assets to shareholders confidently. States have strict rules about giving proper notice so you might want to consult with a business attorney if this is an issue for your corporation.
Some states require you to obtain tax clearance before you file your articles of dissolution. Typically, you can request for the state taxing authority (usually the department of revenue) to send you a letter or certificate that says you’ve paid all your business taxes and filed all of your returns. If you haven't paid all your taxes and filed all your returns, you'll need to do so before the state can clear your corporation of its tax obligations.
Other states simply require that you pay your taxes and file your returns during the winding-up process. These states don't require you to obtain a certificate. You’ll need to check your state rules on dissolution and tax clearance.
For all states, on your final state and federal tax filing, you should check the box marked “Final Return” to indicate that you’ve dissolved your corporation.
After selling off (“liquidating”) the corporation’s assets and taking care of any debts and liabilities, including paying taxes and creditor claims, the corporation should distribute its remaining assets to its shareholders. Shareholders are entitled to an amount proportional to their stock.
For example, suppose Danny, Tucker, and Samantha are the three shareholders of Phantom Corp. Danny owns 50% of the corporation’s shares, Tucker owns 30%, and Samantha owns 20%. Phantom Corp. has $100,000 of assets to distribute to its shareholders. According to those stock percentages, the corporation should distribute $50,000 to Danny, $30,000 to Tucker, and $20,000 to Samantha.
Make sure you close all your business bank accounts and credit lines and cancel any permits or licenses or anything else held in your business’s name. You’ll also want to notify your customers and vendors about your company’s dissolution.
If your corporation is registered or qualified to do business in another state, you must file the necessary forms to terminate those registrations. Otherwise, you’ll continue to be liable for annual fees and minimum business taxes in those states.
How you dissolve your corporation will depend on your corporation’s articles of incorporation and bylaws as well as your state laws. While holding a shareholder vote and settling debts might seem like obvious steps to the dissolution process, the procedure for carrying out these steps could be complex. Pay special attention to notice requirements, alternative voting methods, and when (or if) you need to receive tax clearance.
You’ll want to take the extra time and effort to close your business properly to avoid any future liabilities. If you need additional help, a business lawyer can walk you through the dissolution process, file any necessary forms, and draft dissolution notices.
]]>Shareholders are cautious about who they let into their company. It’s inevitable that one or more shareholders will eventually look to sell their stock, or an event will happen to trigger the sale. When this sale happens, it’s important to have rules and procedures in place for the stock transfer. To protect their interests and control who can buy into the company, shareholders should have a shareholder buyout—also called a “buy-sell”—agreement
This article discusses shareholder buyout agreements for corporations. For a more detailed discussion, see our article on buy-sell agreements for small businesses.
A shareholder buyout agreement is very similar to an LLC owner buyout agreement or a partnership buyout agreement. This agreement is a binding contract among a corporation’s shareholders that lays out the rules and procedures for what happens when a stockholder wants to sell their shares.
For a corporation, typically, a shareholder buyout agreement controls the following decisions:
A buyout agreement can be its own document or it can be included as a provision in the shareholders’ agreement, also known as a “stockholders’ agreement.”
It's inevitable that sooner or later your business will change. Chances are, one of your stockholders will eventually want to leave the company (and take their investment with them) before the rest of the shareholders are ready for their departure.
When one shareholder leaves—or dies, divorces, or goes bankrupt—and there’s no agreement, who decides whether the remaining owners have to buy out the departing shareholder, and for how much? Shareholders who anticipate and plan for these circumstances by creating a buyout agreement can avoid personal and professional discord.
In a corporation, stockholders vote on major company decisions, such as asset sales and acquisitions and board director appointments. Typically, a stockholder’s voting power is determined by how many shares they have.
For example, suppose Mako, Korra, and Lin are the three shareholders in a corporation with 1,000 outstanding shares. Mako owns 500 shares, Korra owns 300, and Lin owns 200. In this example, the voting power would be distributed as follows:
So, a stockholder who owns a considerable amount of shares can sway a vote. When this powerful stockholder decides to sell their shares, the recipient of these shares inherits the voting power too. Because they’ll be greatly affected by this shift in power, the remaining shareholders are motivated to take control over at least some of the terms of this stock sale.
If you don’t have a buyout agreement, then you’ll be forced to follow your state’s default rules for corporations. And there’s a good chance you might not agree with them.
For example, suppose a stockholder wants to sell their shares—which make up 60% of the corporation’s total shares—to an outsider (someone who’s not a shareholder). Your state’s laws might allow the stockholder to sell their shares without the approval of the majority of the other shareholders. But you’d probably prefer the stockholder to get shareholder approval for the sale, or, even better, require the stockholder to sell their shares back to the corporation or to other stockholders.
To avoid having your state’s laws decide the fate of your company, you need to create a buyout agreement for your corporation.
Typically, the events that trigger the buyout of a shareholder’s interest under a buyout agreement are:
Generally, these events will require a shareholder buyout. In other words, if one of these events happens, the affected shareholder will be required to sell their share or their share will be taken from them (such as when they die or their stock is seized to settle a debt).
Specify the timing of the buyout. When you list the events that trigger a buyout, you should also specify when the buyout happens. For certain events, timing is crucial. For example, if a stockholder is going through a divorce or filing for bankruptcy, you’ll want the buyout to happen before the divorce is settled or the bankruptcy is filed. Otherwise, you won’t have much control over what happens to their shares.
Require notice from the shareholder. You should also include a clause that requires a shareholder to give the other shareholders notice if any of these events are impending so you can plan accordingly. For example, you should require a shareholder to give notice if they plan to use their stock as collateral for a loan or purchase. If you know about this transaction before it happens, you can initiate a buyout early so you can avoid a messy foreclosure.
So, a stockholder wants to sell their corporate shares, or circumstances have caused them to lose their shares. But who gets their shares: the corporation, the shareholders, or an outsider?
In your buyout agreement, you should specify to whom the departing stockholder can sell their shares.
Many shareholder buyout agreements will opt for a right of first refusal (ROFR) clause. This clause requires the departing stockholder to first offer their stock to the other shareholders or to the corporation itself before they can sell it to an outsider.
Then the shareholders or company can decide whether they want to buy the stock or pass on (refuse) it. If the shareholders and corporation don’t want to buy the stock, then the stockholder can sell their shares to someone outside the company.
The ROFR gives the shareholders and the company the ability to keep the shares in-house if they choose to. If a lot of shares are at stake, your inclusion of this clause becomes particularly important.
If you require the departing stockholder to sell their share back to the other shareholders or to the corporation, then you should decide whether the other shareholders or the corporation are required to buy the stock. Requiring the shareholders or corporation to purchase the stock has its benefits and drawbacks for both sides.
Pros and cons for the departing stockholder. An advantage of requiring the stock purchase is that the departing stockholder will have an automatic buyer. A disadvantage is that an outside offer might be more appealing than what the other shareholders can or will offer.
Pros and cons for the remaining stockholders. A mandated transaction makes for a quicker and cleaner transition. But this requirement puts added pressure on the shareholders or corporation to come up with the money to buy the shares—a potentially significant cost.
Generally, it’s harder to value a corporate share—as opposed to an LLC owner’s membership interest or a partner’s partnership share. Unless your corporation is public and the share price is already known, you’ll need to decide on a way to value your corporation’s shares. The price of a share is linked to a business’s worth (value).
Some corporations look at comparable public companies to come to a fair number. Others calculate their company’s book value and divide that number by the number of outstanding shares to determine a share’s value.
Because measuring a share’s value can be difficult, some corporations opt to hire a valuation specialist with corporate expertise. If you opt to hire an expert, make sure that the person you choose is an uninterested third party that the shareholders agree to. For example, your buyout agreement should require the specialist to have certain credentials—such as a certification from a specific accredited organization.
Paying a lump sum vs. installment payments. Sometimes a shareholder’s stock can be worth more than what the other shareholders can currently pay. Even if you think affordability won’t be an issue, it’s wise for your agreement to allow for payment installments. For instance, you should give the purchasing shareholders the option to pay either a lump sum or a down payment with incremental payments over time (say, five years).
Tax implications of a shareholder buyout. If a departing stockholder sells their shares, then corporate officers and directors will likely need to make the appropriate tax adjustments for the corporation. You should include a clause in your buyout agreement that says who’s responsible for filing the appropriate tax forms and notifying the required tax authorities. For more tax guidance, read how corporations are taxed. You should also consider talking to an accountant or tax lawyer. They can help you understand your obligations and how your buyout terms affect your personal and business taxes.
As mentioned earlier, a buyout agreement can consist of several clauses in your written shareholders’ agreement or it can be a separate agreement that stands on its own. If you have experience drafting corporate documents, you might be able to write one yourself without assistance or with the use of a self-help resource.
If you’d like to try to draft one on your own but are looking for a little help, one good tool to use is Business Buyout Agreements: Plan Now for All Types of Business Transactions, by Anthony Mancuso and Bethany K. Laurence (Nolo). This book contains an agreement with fill-in-the-blank buyout clauses and instructions on how to incorporate them into your other corporate documents.
If you and the other shareholders can’t agree or the buyout terms you want are complex, consider consulting with a business lawyer. An attorney can help you negotiate with the other owners, advise you on the best terms for your business, and draft a buyout agreement for you.
]]>But it’s important to follow the appropriate procedure to formally shut down your limited liability company (LLC)—also known as "dissolving and winding up” the business. By dissolving your LLC, you’ll no longer be liable for:
If you don't dissolve your LLC, you could be looking at thousands of dollars in accumulated fees and penalties after a few years. Additionally, officially dissolving your business also puts creditors on notice that your business can no longer incur business debts.
There are two main types of LLCs: single-member and multi-member.
In a single-member LLC, the company has only one owner (or member). Single-member LLCs are usually formed by sole proprietors who want to take advantage of the limited liability an LLC offers. A single person can file articles of organization with their state to become an LLC and list themselves as the sole member. (For more information, see our article on the differences between sole proprietorships and LLCs.)
In a multi-member LLC, the company has more than one owner. A multi-member LLC doesn’t have a limit on the number of owners. They're usually formed by a group of two or more people who want to form a formal business. Multi-member LLCs are an alternative to partnerships and corporations.
You've decided to close your business, but you need to take care of several important steps to limit your liability for lawsuits and government fees.
You’ll need to dissolve your entity with the secretary of state (SOS) or the corporations division in your state by filing a form or two. In addition to filing the dissolution paperwork with the state, you must complete other practical steps to wind up your business. These steps include notifying your creditors, selling off inventory and equipment, and settling your debts.
If you fail to properly wind up your company, you and the other LLC owners might be personally liable for the debts of the business. For more information, review our checklist for closing your business.
Generally, you can follow the steps below to dissolve your LLC. But every state can differ in its requirements. For state-specific rules, check out our guide to dissolving an LLC in your state.
The first step to dissolving your company is for your members to officially agree to close the business. Check your company’s organizational documents—its articles of organization and operating agreement—for the dissolution protocol. In some cases, one of those two documents will contain a section with rules for dissolution, including the procedure for voting to dissolve the business.
If you've addressed your LLC's dissolution in your operating agreement, you probably listed triggering events that can dissolve your LLC, such as the death or retirement of a member or a bankruptcy filing.
Additionally, agreements will often include a specific voting requirement to dissolve the LLC, including rules for:
If your organizational documents are silent on when dissolution is triggered, your state’s LLC laws will provide rules in their place.
Often, states allow LLCs to dissolve by a vote of the members. But states differ on what kind of vote is needed to approve the dissolution. Some states, like North Carolina, don't specify that a vote of the LLC members can dissolve the company. So you should include a provision in your operating agreement that allows for a vote to dissolve. The following states can be dissolved through these common voting methods.
Consent, vote, or agreement by all members. Colorado, Illinois, Nevada, New Jersey, Ohio, and Wyoming allow LLCs to be dissolved with unanimous member approval. Virginia specifies that you need unanimous written consent to dissolve your LLC. In Michigan, a unanimous vote by members entitled to vote is required.
Majority vote by members. Tennessee is less strict and requires a vote by only a majority of the LLC members to dissolve the company.
Majority in interest vote. Connecticut requires a majority-in-interest vote to dissolve. A majority in interest doesn’t mean a majority of the members; it means a majority of the interest in an LLC. For example, suppose there are three members in an LLC. Member A owns a 60% interest in the LLC, and Members B and C own the remaining 40%. Even if Members B and C vote against the dissolution, a single vote by Member A can dissolve the LLC under Connecticut law because Member A owns more than a 50% interest in the LLC.
Regardless of the specific rule, the vote to dissolve the LLC should be recorded in a resolution in the minutes of a meeting or with a written consent form. You should keep the resolution in your LLC records book.
Some states require that you receive tax clearance from your state’s taxing authority (usually the department of revenue or other similar agency) before you can officially dissolve your LLC. Tax clearance simply means that the state confirms that you’ve:
While some states require you to receive a letter or certificate of tax clearance, many states don’t. For example, the following states don’t require you to receive tax clearance from your state taxing authority before you can dissolve your LLC:
You should be aware of a few exceptions. Specifically, Michigan and Tennessee do require you to obtain tax clearance before your LLC can dissolve. In these states, the SOS or corporations division will not allow your LLC to dissolve if you haven’t filed your last tax return (by checking the "final tax return" box and writing FINAL at the top of your return) and paid all business taxes owed.
Michigan: In Michigan, you’re required to submit a tax clearance request to the Michigan Department of Treasury. You must submit the request within 60 days of filing your certificate of dissolution.
Tennessee: You’re required to submit a tax clearance for termination or withdrawal with your articles of termination. You’ll submit a notice of dissolution first after your LLC members dissolve the LLC. Once you’ve finished the winding-up process, including paying your taxes and filing your returns, you can submit the tax clearance certificate issued by the Department of Revenue along with your articles of termination. The Tennessee Department of Revenue also requires that you pay some taxes and file final returns—such as for business taxes and sales and use tax—within 15 days of the business closing. (Tenn. Code § 48-245-503 (2023).)
Regardless of whether you're required to receive tax clearance, you should inform state and local taxing departments or agencies of your company’s dissolution. You might also need to close out a state business tax account. You should check your state tax agency’s website for details.
File final federal tax returnsWhen you resolve your state taxes, you should also file your final federal tax return with the IRS. For both your federal and state filings, you should indicate that it’s your business’s final return.
If you have a long list of assets and liabilities to report or you don’t have much experience doing your business’s taxes, consider talking to an accountant or other tax professional. They can file your taxes for you to make sure your final returns are submitted properly and you’re taking advantage of all business deductions.
Next, visit your state's SOS or corporations division website to find the appropriate dissolution form to file. This form might be called the:
You might also need to file more than one form. Check your state's laws for specific requirements.
In some states, you need to file the dissolution paperwork before you begin winding things up. Other states require that you file the dissolution form only after you’ve finished winding up your business—that is, after you’ve paid your debts, distributed your assets, and closed any business accounts, registrations, licenses, and permits.
States where you file dissolution paperwork before winding up the business: Colorado, Connecticut, Michigan, Nevada, North Carolina, Ohio, and Tennessee.
States where you file dissolution paperwork after winding up the business: Illinois and Virginia.
Other states have more unusual requirements.
New Jersey: Under New Jersey law, you’re required to submit a certificate of dissolution and statement of termination during the winding-up process to dissolve your LLC. The New Jersey Division of Revenue and Enterprise Services provides a single document called a “Certificate of Dissolution and Termination” that you can use to meet the filing requirement. (Nev. Rev. Stat. § 42:2C-49 (2023).)
Tennessee: Under Tennessee law, dissolving your LLC is a two-step process. Once an event triggers the LLC to dissolve (by vote or otherwise), you’ll need to submit a notice of dissolution to the Tennessee SOS. Once you’ve finished winding up your business, then you’ll submit articles of termination to finalize your business’s closing and dissolution. (Tenn. Code §§ 48-245-101 and following (2023).)
Wyoming: Unusually, there’s no requirement to submit any articles to dissolve your LLC in Wyoming. State law simply says that you “may” submit them as part of your winding up activities. While not required, you should still submit these articles of dissolution. Not filing your articles can leave you open to liabilities and affect your ability to do business in the future. (If you have specific questions about whether to file, you should contact a local attorney.)
Typically, the dissolution form merely asks for information that identifies you and your company, but some states also ask whether the owners have paid all debts and liabilities and whether the remaining assets, if any, were distributed. Most states charge a small fee for filing the form—check the form instructions for the amount.
When you file your dissolution paperwork with the state, add a cover letter with your business’s information including:
If there’s a fee, be sure to include it. If you’re mailing in the form (instead of submitting it electronically), send the form by certified mail, with return receipt requested. The state should send you back a certificate of dissolution or similar document, which you should file in your LLC records book. If you have questions about the paperwork, most states provide very clear rules for dissolution on their websites.
After filing your dissolution documents, you should notify your creditors that you’re closing your business. In most states, giving notice is optional. However, giving notice will help limit your liability. And if no creditors come forward with claims, you and the other LLC members can feel more confident taking any remaining assets for yourself.
Usually, providing proper notice can allow an LLC to dispose of (dismiss) any claims a creditor might have against them. For example, if you give a creditor notice of your dissolution and provide them with a deadline to submit a claim and they don’t, then they no longer have a valid claim against you. We'll discuss some of the deadlines for creditor claims below.
Laws vary slightly among states, but in most cases, one way to give notice is by sending a letter directly to known creditors (those you're aware of) after dissolving your LLC. Generally, the written notice should:
The following states require a minimum amount of time that you must give known creditors to submit their claims after you send notice of your LLC's dissolution:
Other states have different deadlines. You should look at your state's LLC laws to determine your state's rules for notifying known creditors.
In some states, you’re required to give notice to unknown creditors (those you're not aware that you owe money to), usually by publishing a notice of your LLC’s dissolution in a local newspaper. As with sending direct notice to known creditors, states can have specific rules for giving notice through publication. For instance, a state might specify what information you should include in the notice or when and where you should publish the notice.
The following states require a minimum amount of time that you give unknown creditors to submit their claims after you send notice of your LLC's dissolution:
Some states, like Nevada, don't give specific directions on when and how to notify creditors. In such cases, you should still notify creditors and give them a reasonable time to submit their claims.
Statute of limitations. Generally, if a claim is barred earlier than the above deadlines by a statute of limitations, then creditors will only have as long as the relevant statute of limitations allows. For example, suppose a creditor has a claim for rent that your LLC owes. The statute of limitations laws in your state says that a creditor has two years to submit a claim for unpaid rent. But the notice you provide that creditor gives them three years. Even though your notice gives them extra time, they're claim for unpaid rent will be barred after two years.
Providing notice before filing for dissolution. It’s important to check your state’s laws for notice at the start of the dissolution process. Some states require you to notify your creditors before you file for dissolution. For example, in Maryland, you have to mail a written notice to your creditors at least 19 days before you file your articles of cancellation. (Md. Code Corps. & Ass’ns § 4A-910 (2023).)
Once you’ve filed your dissolution paperwork and notified creditors, you should start settling debts and distributing any remaining assets. Take an account of your company’s assets. Sell any real and personal property belonging to the business, including:
Once you’ve sold (or “liquidated”) the company assets, you can have a good idea of what money you have available to pay your debts. If you’re able to satisfy all of your debts and there’s money left over, you can take what’s left and divide that amount among the LLC’s members.
Almost all states require that you first pay creditors before you distribute your assets to anyone else. If you have more debts than assets, you’ll need to prioritize your business debts and try to negotiate settlements with your creditors. Pay any debts that you might be personally liable for first. A benefit of forming an LLC is that you have limited personal liability for business debts and obligations. But there are some business debts that you might be personally liable for.
You might be personally liable for debts if:
If you have any secured debt, you can either return the secured property or sell it and pay off the remaining balance on your business loan. If your secured property is worth more than the money you owe on the property’s loan, you should sell it.
Perhaps where state LLC dissolution laws differ the most is in how assets are distributed. Almost all states require a specific order for how assets are distributed. However, Colorado doesn’t specify any order. And some states allow terms in your operating agreement to alter the order set out in state law—to a certain extent. You should review your state’s LLC laws or talk to an attorney about whether you should follow your operating agreement or state law.
All of the states discussed here require that you first pay creditors, including any LLC members who are creditors. It’s particularly important that you pay all taxes owed. Owing taxes can prevent you from dissolving your LLC. After paying creditors, your distribution order will depend on your state.
Illinois, New Jersey, and Wyoming: In these states, after paying creditors, you’ll first pay back members for any contributions they’ve made to the LLC, such as money paid to file forms or purchase equipment. Second, you’ll distribute any money left over to members in equal shares. Wyoming also has an unusual provision that allows for the possibility that distributions to members might be handled differently based on an authorized LLC representative's representations to the IRS. (805 Ill. Comp. Stat. § 180/35-10 (2023); Nev. Rev. Stat. § 42:2C-56 (2023); Wyo. Stat. § 17-29-708 (2023).)
Tennessee and Virginia: Once creditors are paid, you’ll distribute the remaining assets in three parts. First, you’ll pay out any distributions owed to members (including interim distributions). Second, you’ll pay back members for any contributions they’ve made to the LLC. Third, you’ll pay any remaining funds to the members proportional to their membership shares. (Tenn. Code § 48-245-501 (2023); Va. Code § 13.1-1049 (2023).)
Connecticut: After paying creditors, you’ll distribute the remaining assets to two groups. First, you’ll pay back members who have made contributions to the LLC that haven’t already been paid back. Second, you’ll distribute any money that’s left to the members and disassociated members in proportion to their membership shares. So, if one member has a 25% membership share, then they should receive 25% of what’s left over after creditors have been paid and contributions have been returned. (Conn. Gen. Stat. § 34-267f (2023).)
Ohio: After paying creditors, you’ll first pay back members who've made contributions to the LLC that haven’t been paid back yet. Second, you’ll distribute the leftover money to members in proportion to their share in distributions. Their share in distributions likely equals their membership share. (Ohio Rev. Code § 1706.475 (2023).)
Michigan: After paying creditors, you’ll first pay out any distributions owed to current and former members, such as distributions based on a previous agreement or vote. Second, you’ll pay what’s remaining to the members based on their share in the company. However, your operating agreement might provide a different distribution scheme. If your agreement does provide an alternate scheme, you should follow that order instead. Regardless of what your operating agreement says, Michigan law requires you to file your tax returns and pay your tax obligations before you distribute your LLC’s assets. (Mich. Comp. Laws § 450.4808 (2023).)
North Carolina: In North Carolina, you’ll have a simpler distribution order. After paying creditors, you’ll pay the balance to members as distributions. Members will be entitled to a distribution in proportion to their total contribution amounts as compared to other members. So, if one member contributed more than another, then that member should be entitled to a greater distribution amount. (N.C. Gen. Stat. § 57D-6-08 (2023).)
Nevada: The language in Nevada’s laws is a bit more complex. After paying creditors, you’ll pay LLC members in two parts. First, you’ll pay members in respect of their share of the profits and other compensation by way of income on their contributions. Second, you’ll pay members in respect of their contributions to capital. The distinction between these two payouts is complicated. If you’re dissolving a Nevada LLC, you should speak with a local business lawyer. (Nev. Rev. Stat. § 86.621 (2023).)
Once you’ve paid your debts and distributed any money that’s left over, your business bank accounts should have a balance of zero. Now’s the time to close your bank accounts.
If you have any business licenses or permits, you should cancel them as well. For example, if your state requires a general business license, you should cancel it.
Finally, if your LLC has qualified (registered) to do business in other states, you'll also need to file a form to withdraw your right to transact business in that state. This form might be called an “application of withdrawal,” “certificate of termination of existence,” “termination of registration,” or “certificate of surrender of right to transact business.”
If you don’t file these additional termination forms, you’ll continue to be liable for paying annual report fees and minimum business taxes to those states, even if you cease all operations.
Many LLCs are small, and some owners find that they can dissolve their LLCs on their own. But if you have a larger LLC with employees or a range of assets and liabilities to liquidate and pay off, consider talking to an attorney with experience dissolving LLCs.
The procedure to dissolve an LLC is specific to your state and an experienced lawyer can help you navigate these requirements to help limit your liability. They can also file the appropriate dissolution paperwork, help you notify creditors, and negotiate debt settlements.
You can find answers to many frequently asked questions about dissolving an LLC.
You “dissolve” your LLC by voting to end your company and filing the dissolution paperwork with your state. You “wind up” your LLC by wrapping up your company’s business obligations and operations. The winding-up process includes:
“Dissolving” an LLC refers to the process of voting to end your LLC and filing the dissolution paperwork with your state. “Terminating” an LLC can have different meanings.
Sometimes “terminating” an LLC is used interchangeably with “dissolving” an LLC and is meant to refer to the same process. In some states, you’ll file articles of termination rather than articles of dissolution to legally end your business with the state. Other times, “terminated” refers to when an LLC is completely dissolved and winded up and the business has ended its operations.
The filing fee varies by state. Usually, the fee ranges between $25 and $100. Some states, like California, have no filing fee. There might be other costs related to dissolving your LLC, such as the fee to obtain a tax clearance certificate, a publication fee, or attorneys’ fees.
Most states allow you to file for dissolution online. You can check your secretary of state’s website for more information on how to file your LLC dissolution.
The time it takes to dissolve an LLC depends on many factors. The dissolution process of voting to end the LLC and filing the paperwork can take as little as a day. The winding-up process usually takes longer, especially if you have to go through the process of selling off company assets or negotiating with creditors. The process could take weeks or months.
Yes, you need to dissolve your LLC. Failing to dissolve your LLC can leave you open to liability. If your LLC still exists with the state, you’ll be responsible for filing annual reports and taxes. Missing these filings can result in fines, and your LLC will be involuntarily dissolved (usually by a court).
An LLC is usually dissolved by a vote of a majority of the members. Your articles of organization or operating agreement might tell you how many members are required to vote in favor of dissolution. For instance, your LLC operating agreement might say that a majority vote by the members is required to dissolve the LLC. In that case, if you have three members, then two will need to vote to dissolve.
If your articles of organization and operating agreement don’t specify any requirements or procedures, then you should follow your state’s laws. Check your state’s laws on LLCs to find out whether one member can dissolve an LLC.
Your EIN will remain active and assigned to your business. The IRS doesn’t cancel or reassign EINs even if a company no longer has any use for its EIN. Instead, after dissolving your LLC, you should cancel your business account with the IRS by sending the IRS a letter with the following information:
Yes, as long as their claim is still within the statute of limitations. The statute of limitations for a claim is the amount of time a person has to file their claim before their claim is no longer legally valid or enforceable. For example, your state law might say that a person has three years from the date that you dissolve your LLC to file a claim. If they file after three years, then their claim will be dismissed.
States have different statutes of limitations and laws for how long someone has to file a claim against your business, even after it’s dissolved. You should check your state’s laws for more information.
The answer depends on your state’s laws. Some states allow you to reinstate your LLC only if it was administratively or involuntarily dissolved. Your LLC is administratively or involuntarily dissolved (usually by a court) when you don’t follow state requirements, such as filing annual reports or paying taxes.
Usually, you have to resolve whatever caused your involuntary dissolution before your LLC can be reinstated. For example, if your LLC was dissolved by a court because you didn’t file an annual report for the last two years, you’ll need to first file those reports and pay the filing fees before your LLC can be reinstated.
Some states allow you to reinstate your LLC if you voluntarily dissolved it. After a voluntary dissolution, you might want to reinstate your LLC rather than file for a new one if you want to take back your existing business name.
]]>Your corporation's name must include the word "Incorporation," "Incorporated," or "Limited," or an abbreviation.
Your corporation's name must be recognizably different from the names of other business entities already on file with the New York Secretary of State. Names may be checked for availability at the New York Department of State Division of Corporations business name database.
You may reserve a name for 60 days by filing an Application for Reservation of Name with the New York Department of State Division of Corporations. The application must be filed by mail.
Your corporation is legally created by filing a Certificate of Incorporation with the New York Secretary of State (SOS). The certificate must include the corporation's name; the corporate purpose; the county in New York in which its main office is located; the stock structure (see "Issue Stock"); the designation of the SOS as the corporation's agent for service of process; and the name and address of the person to whom the SOS should mail any process received.
The SOS has developed an optional Certificate form that includes a general purpose clause and authorizes the corporation to issue 200 shares of common stock with no par value. If more shares and/or a par value are desired, rewrite this portion of the form to insert the desired number of shares and a statement of their par value or that they are without par value.
The certificate may be filed online or by mail. The fee for filing the Certificate of Incorporation is $125.
Every New York corporation must appoint the New York Department of State as its registered agent for service of process in the state. The Department will accept and forward legal papers on the corporation's behalf if it is sued.
Bylaws are internal corporate documents that set out the basic ground rules for operating your corporation. They are not filed with the state. Your corporation is not legally required to have corporate bylaws, but you should adopt them because they establish your corporation's operating rules, and help show banks, creditors, the IRS, and others that your corporation is legitimate. For corporate bylaw forms, see Nolo’s website or Incorporate Your Business, by Anthony Mancuso (Nolo).
Keep your bylaws, meeting minutes, and other important corporate papers in a corporate records book. This can be a simple three-ring binder or corporate records kit you order through a corporate kit supplier. Keep it at your corporation's principal office.
The incorporator—the person who signed the articles—must appoint the initial corporate directors who will serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders). The incorporator must fill in an “Incorporator’s Statement” showing the names and addresses of the initial directors. The incorporator must sign the statement and place a copy in the corporate records book. The statement need not be filed with the state.
You should hold your first meeting of the corporation's board of directors at which the directors can appoint corporate officers, adopt bylaws, select a corporate bank, authorize the issuance of shares of stock, set the corporation's fiscal year, and adopt an official stock certificate form and corporate seal. The directors' actions must be recorded in corporate minutes prepared by the incorporator or any of the directors and approved by the board of directors. Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status. For corporate meeting minute forms, see Nolo’s website or refer to Incorporate Your Business, by Anthony Mancuso (Nolo).
Issue stock to each shareholder in return for their capital contributions of cash, property, services, or all three. Small corporations usually issue paper stock certificates. Enter each shareholder's name and contact information in the corporation’s stock transfer ledger.
New York corporations may issue stock with a par value or no par value. The certificate of formation must indicate which option is chosen. Par value is a set amount below which the stock cannot be sold--it has nothing to do with the stock's actual value. Shares without par value may be issued or sold at any price. See Nolo's article "What is Par Value Stock." Most small corporations issue no par value stock. This is reflected in the SOS certificate of incorporation form.
A share of stock in your corporation is classified as a security under state and federal securities laws that regulate the offer and sale of corporate stock. However, federal law exempts "private offerings:" a non-advertised sale to a limited number of people (generally 35 or fewer). See Nolo's Corporations FAQ for more details.
New York requires anyone selling securities to the public to register as a broker-dealer with the Investor Protection Bureau of the New York Attorney General. However, it is generally understood that this registration requirement does not apply to a small corporation planning the unadvertised private offering and sale of its initial shares that are exempt from federal registration. If you are unsure whether your corporation should register in New York, consult a qualified securities law attorney. For more information about New York registration requirements, see the Investor Protection Bureau Broker-Dealer and Securities Registration and Information Sheet.
All corporations doing business in New York must file a Biennial Statement with the Department of State every other year. The statement is due during the calendar month in which the corporation's original certificate of incorporation was filed. The statement is filed online.
Additional tax and regulatory requirements apply to your corporation. These include:
EIN: Your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.
New York State Taxes: New York State Tax Law requires a corporation to file franchise tax reports and pay franchise taxes annually even if the corporation does not conduct business or loses money. Franchise tax requirements begin on the date the corporate existence begins and continue until the corporation is legally dissolved by the Secretary of State. For more information, visit the New York Department of Taxation and Finance website.
]]>In these tough economic times, many small business owners are scrambling to keep their companies afloat or are closing down. If a corporation or LLC ends up having to shut its doors, the last thing a small business owner wants is to have to pay the business's debts. But when cash is tight and owners aren't careful, if an unpaid creditor sues for payment a court might "pierce the corporate veil" (lift the corporation or LLC's veil of limited liability) and hold the owners personally liable for their company's business debts.
Read on to learn the rules about piercing the corporate veil. (To learn about other ways you can become personally liable for corporate debt, see Nolo's article Are You Personally Liable for Your Business's Debts?)
Corporations and LLCs are legal entities, separate and distinct from the people who create and own them (these people are called corporate shareholders or LLC members). One of the principal advantages of forming a corporation or an LLC is that, because the corporation or LLC is considered a separate entity (unlike partnerships and sole proprietorships), the owners and managers have limited personal liability for the company's debts. This means that the people who own and run the corporation or LLC cannot usually be held personally responsible for the debts of the business. But, in certain situations, courts can ignore the limited liability status of a corporation or LLC and hold its officers, directors, and shareholders or members personally liable for its debts. When this happens, it is called piercing the corporate veil. Closely held corporations and small LLCs are most likely to get their veils pierced (corporations that are owned by one or just a few people are called closely held corporations, or close corporations for short).
If a court pierces a company's corporate veil, the owners, shareholders, or members of a corporation or LLC can be held personally liable for corporate debts. This means creditors can go after the owners' home, bank account, investments, and other assets to satisfy the corporate debt. But courts will impose personal liability only on those individuals who are responsible for the corporation or LLC's wrongful or fraudulent actions; they won't hold innocent parties personally liable for company debts.
Courts might pierce the corporate veil and impose personal liability on officers, directors, shareholders, or members when all of the following are true.
The most common factors that courts consider in determining whether to pierce the corporate veil are:
Some corporations and LLCs are especially vulnerable when these factors are considered, simply because of their size and business practices. Closely held companies are more susceptible to losing limited liability status than large, publicly traded corporations. There are several reasons for this.
Failure to follow corporate formalities. Small corporations are less likely than their larger counterparts to observe corporate formalities, which makes them more vulnerable to a piercing of their corporate veil. To avoid trouble, it's best to play it safe. It's important for small corporations and LLCs to comply with the rules governing formation and maintenance of a corporation, including:
Commingling assets. Small business owners may be more likely than their larger counterparts to commingle their personal assets with those of the corporation or LLC. For example, some small business owners divert corporate assets for their own personal use by writing a check from the company account to make a payment on a personal mortgage -- or by depositing a check made payable to the corporation into the owner's personal bank account. This is called "commingling of assets." To avoid trouble, the corporation should maintain its own bank account and the owner should never use the company account for personal use or deposit checks payable to the company in a personal account.
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]]>You can also use Nolo's Online Corporation Service, which will form a corporation for you, providing you with everything you need including a corporate name check, articles, bylaws, a corporate records book, an incorporator's statement, minutes of the first meeting of the board of directors, stock certificates, and a stock transfer ledger.
Your corporation's name must be distinguishable from the names of other business entities already on file with Connecticut's Secretary of the State. Names may be checked for availability by searching the Connecticut Secretary of the State business registry search.
You can reserve an available name for 120 days by filing an Application for Reservation of Name with the Secretary of the State. The form may be completed and filed by postal mail. The filing fee is $60.
Under Connecticut law, your corporation's name must contain one of the following designations: corporation, incorporated, company, Societa per Azioni, or limited; or the abbreviation corp., inc., co., S.p.A., or ltd.
Your corporation is legally created by filing a Certificate of Incorporation with the Connecticut Secretary of the State. The certificate must include the:
You can file the Certificate of Incorporation online or by mail. The filing fee is $250, which includes a minimum franchise tax of $150.
Every Connecticut corporation must have an agent for service of process in the state (also called a registered agent). This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. A corporation may not serve as its own agent for service of process. The agent should agree to accept service of process on your corporation's before your corporation names the agent.
The registered agent may be:
The agent must have a physical street address in Connecticut, not a post office box. Small corporations typically name a director or officer to serve as the initial agent. A different agent can always be named later.
Bylaws are an internal corporate document that sets out the basic ground rules for operating your corporation. They are not filed with the state. Your corporation is not legally required to have corporate bylaws, but you should adopt them because they establish your corporation's operating rules and help show banks, creditors, the IRS, and others that your corporation is legitimate. You can customize bylaws for your corporation on Nolo's website or read Incorporate Your Business, by Anthony Mancuso (Nolo).
Keep your bylaws, articles, stock certificates, minutes of shareholder and director meetings, and other important papers in a corporate records book. You can use a three-ring binder or order a corporate records kit through a corporate kit supplier (a corporate records book and company seal come with Nolo's corporate formation service).
The incorporator—the person who signed the articles—appoints the initial corporate directors of the board. These directors will serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders).
The incorporator should complete and sign an “Incorporator’s Statement” showing the names and addresses of the initial directors. The statement need not be filed with the state—keep it in the corporate records book. For a sample Incorporators Statement, see Incorporate Your Business, by Anthony Mancuso (Nolo).
At the first board meeting, the directors appoint corporate officers, adopt bylaws, select a corporate bank, set the corporation's fiscal year, authorize the issuance of shares of stock, and adopt an official stock certificate form and corporate seal. Share issuances by small privately held corporations are usually exempt from federal and state securities laws—see the Nolo Corporations FAQ.
Record the directors' actions in corporate minutes prepared by the incorporator or any of the directors. For corporate meeting minute forms, see Nolo’s website or refer to Incorporate Your Business, by Anthony Mancuso (Nolo). (Nolo's corporate formation service comes with filled-out minutes of the first meeting as well as an Incorporator's Statement.)
Connecticut corporations and foreign corporations authorized to do business in the state must file an annual report with the Connecticut Secretary of the State. Domestic corporations must file their first report online within 30 days after the corporation's organizational meeting. This report must be filing using the Organization and First Report form, which must include the corporation's name, its principal office, and the names and addresses of the directors and officers. All annual reports must be filed online through the Connecticut Secretary of the State Online Filing System.
The filing fee is $150 for Connecticut corporations and $435 for foreign corporations doing business in the state.
Your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.
]]>A corporation, also known as a c-corporation, is a type of business structure that exists as a separate entity from its owners, who are called shareholders. The corporation pays its own taxes, can own property or enter a contract as an entity separate from its owners, and is responsible for debts or wrongdoing. Shareholders become owners by acquiring shares of stock in the corporation. They play a very limited role in managing the corporation, and they pay taxes only on the profit distributions they receive from the corporation.
A business structured as an LLC is owned by one or more individuals or groups, known as members. LLCs are not separate from their members in the same way that shareholders are separate from the corporation. The LLC itself doesn’t pay taxes. Members pay taxes on the LLC’s profits on their personal income taxes, a process known as pass-through taxation. LLC members can run the company, although some LLCs choose different management structures.
Another type of corporation, an s-corporation, combines some elements of c-corporations and LLCs. Like c-corporations, an s-corporation is a separate legal entity, and shareholders have limited liability for the business’s debts and other obligations. But shareholders in an s-corporation are responsible for paying taxes on the business’s income in much the same way as members of an LLC.
The rules for ownership, management, and other operations are spelled out for corporations in a set of bylaws. LLCs use an operating agreement to define responsibilities and rules of operation.
In a corporation, the number of shares of stock determines the percentage of the company a shareholder owns. Let’s say a corporation issues 100 shares of stock and sells each share for $10. A shareholder who invested $250 would own 25 shares of stock or 25 percent of the company. If the corporation distributed annual profits to shareholders, this shareholder would receive 25 percent of the distribution.
LLCs don’t issue stock. The operating agreement details the percentage of ownership and the share of profits (or losses) to which each member is entitled. A member’s share of profits is usually based upon the percentage of ownership, but an LLC can divide up profits in a different way, provided it follows the IRS “Special Allocations” rules.
Shareholders of c-corporations are free to buy, sell, or transfer their shares to anyone on the open market.
LLC members can invest in the company or sell their investment only according to the rules established in the operating agreement (or the rules set by state law when no operating agreement exists). An LLC’s operating agreement might require members to sell their share back to the other members, or it might give the other members approval rights over any sale or buyer. A few states require LLCs to be dissolved and re-formed when a member leaves.
While c-corporations can issue all their stock to a few individuals or thousands, to individuals or other businesses anywhere in the world, s-corporations can’t have more than 100 shareholders, and their shareholders must be U.S. citizens. Ownership in s-corporations is also limited to individuals, and other business entities such as corporations, LLCs or partnerships can’t own stock in the company.
In general, corporations must follow detailed state laws concerning management practices. LLCs are subject to fewer government rules about how they are managed.
Corporations are required to have a board of directors and officers, such as a president and chief financial officer. The bylaws describe the rights and responsibilities of these executives, and most states require corporations to file their bylaws with the state.
Members of the board of directors are responsible for appointing the officers of the company and for overseeing and evaluating the direction of the business. A board of directors might get very involved if, for example, a corporation’s profits fall or the business records a loss. But it usually won’t participate in decisions like hiring, salaries, choosing vendors, and so on. Those day-to-day decisions are the responsibility of the officers of the company.
Shareholders might be asked to vote on decisions such as appointing new board members, but they typically don’t get involved in the day-to-day management of the company unless they are also officers.
Corporations are required by law to hold annual shareholder meetings and to keep minutes of those meetings. They also must issue annual reports.
The equivalent of corporate bylaws for an LLC is called an operating agreement. But unlike corporations, most LLCs are not required to file an operating agreement, although a few states do require LLCs to create one.
LLCs have a lot of flexibility in deciding how the company will be managed. In most states, they need not have a board of directors, company officers, annual meetings, or annual reports. An LLC might be managed by all, or just some of its members; and some LLCs hire an outside manager with no ownership in the company to manage it.
Though only a few states require LLCs to issue annual reports, most require other annual filings in order for the company to retain its LLC status.
The corporation, not the shareholders, pays taxes on the profits the business earns. But shareholders are required to pay taxes on any dividends that are paid to them. Many view this tax rule, known as double taxation, as a disadvantage of the corporate structure. Corporations are also allowed many tax deductions for business expenses that can offset the tax bill.
S-corporations, on the other hand, don’t pay corporate taxes. Profits earned by the business are passed through to the shareholders (as is done with an LLC).
In an LLC, all the business’s profits (and its losses) are also passed through to the members. Single-member LLCs are taxed as sole proprietors; they report and pay taxes on business profits on their personal income tax returns.
LLCs with more than one member can elect to pay taxes as a partnership or a corporation. When taxed as a partnership, LLC members pay taxes on the company’s profits on their personal income tax return, based on their share of ownership.
When an LLC elects to be treated as a corporation for tax purposes, the LLC pays corporate taxes, and members pay taxes on any distributed profits. Members are not required to pay taxes on earnings that are retained, so profits that are re-invested into the company are not taxed.
LLCs and corporations are both formed by filing a document with the responsible state agency, usually the Secretary of State. Corporations file articles of incorporation and LLCs form articles of organization. (The documents might be called by different names in some states.)
The documents typically cover basic information about the business, such as the name and location of the company, the address of members (in the case of an LLC) or directors and officers (in the case of a corporation), the type of business, and its purpose. Corporations also need to provide the number of shares of stock they intend to issue.
Filing fees for corporations vary by state and sometimes by the number of shares the corporation issues. A business in Arizona might pay as little as $60 to file articles of incorporation, while Texas charges $300.
Fees for filing articles of organization for an LLC typically range from $50 to $100, depending on the state.
Corporations and LLCs are also subject to other annual fees, such as annual report filing fees, franchise fees, and business license fees.
Corporations and LLCs each offer the advantage of limiting the owners’ personal liability. The entity that’s right for you will depend on your needs. Here are some factors to consider:
LLCs have fewer formalities and offer more flexibility. In general, LLCs don’t require you to hold meetings or issue annual reports. And they offer a lot of flexibility in managing the company, whereas corporations are required by law to have a specific management structure, hold meetings, and observe other formalities.
Tax compliance is usually simpler under an LLC. LLCs don’t pay taxes unless the members elect to be taxed as corporations. Most members pay taxes on the business profits on their personal income tax filing. Corporations are subject to double taxation because the corporation is taxed on earnings, and shareholders pay taxes on the profit distributions they receive.
It’s easier to attract investors as a corporation. Investors prefer corporations because they can buy into the business or sell their stock on the open market, without restrictions. Buying into or selling ownership in an LLC usually requires the approval of the other members, and other requirements might apply. S-corporations also have ownership requirements that make them less advantageous for investors.
Corporations have more options for providing employee benefits. Corporations can offer benefit plans like stock options that most LLCs can’t. Tax deductions for many benefit plan expenses are also available to corporations, whereas LLCs can usually deduct only a portion of the expense of any benefits they offer.
]]>Your corporation's name must include the words "Corporation," "Incorporated," or "Company," or the applicable abbreviation "Corp.," "Inc.," or "Co."
Your corporation's name must be recognizably different from the names of other business entities already on file with the Florida Department of State. Names may be checked for availability by searching the Division of Corporations business name database. Names may not be reserved ahead of time.
Your corporation is legally created by filing Profit Articles of Incorporation with the Florida Department of State Division of Corporations. The articles must include the corporation's name and principal office street address; its purpose; the number of shares the corporation is authorized to issue; the names and addresses of initial officers and/or directors (optional); the name, signature, and Florida street address of an agent for service of process; and the name and address of the incorporator. You can file articles online or by postal mail. Check the Florida Department of State Division of Corporations website for instructions for filing online or by mail.
Every Florida corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. A registered agent may be either an individual resident or business entity that is authorized to do business in Florida. The agent should agree to accept service of process on your corporation's behalf prior to designation.
Bylaws are an internal corporate document that set out the basic ground rules for operating your corporation. They are not filed with the state. Your corporation is not legally required to have corporate bylaws, but you should adopt them because they establish your corporation's operating rules, and help show banks, creditors, the IRS, and others that your corporation is legitimate. For corporate bylaw forms, see Nolo’s website or Incorporate Your Business, by Anthony Mancuso (Nolo).
Keep your bylaws, meeting minutes, and other important corporate papers in a corporate records book. This can be a simple three ring binder or corporate records kit you order through a corporate kit supplier. Keep it at your corporation's principal office.
You can appoint your initial corporate directors by naming them in your articles or your incorporator—the person who signed the articles—must appoint them after the corporation is formed. The initial directors serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders).
At the first meeting of the corporation's board of directors, the directors should appoint corporate officers, adopt bylaws, select a corporate bank, authorize issuance of shares of stock, set the corporation's fiscal year, and adopt an official stock certificate form and corporate seal. The directors' actions must be recorded in corporate minutes prepared by the incorporator or any of the directors. Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status. For corporate meeting minute forms, see Nolo’s website or refer to Incorporate Your Business, by Anthony Mancuso (Nolo).
Issue stock to each shareholder in return for their capital contributions of cash, property, services, or all three. Small corporations usually issue paper stock certificates. Enter each shareholder's name and contact information in the corporation’s stock transfer ledger.
The default rule in Florida is that corporate stock has no par value. Thus, the articles need not state whether the shares have a par value. However, Florida corporations have the option of establishing a par value for their shares. If desired, the par value can be listed in the articles, but this is not required. See Nolo's article "What is Par Value Stock."
A share of stock in your corporation is classified as a security under state and federal securities laws that regulate the offer and sale of corporate stock. However, federal law exempts "private offerings:" a non-advertised sale to a limited number of people (generally 35 or fewer). See Nolo's Corporations FAQ for more details.
Florida’s securities law exempts from registration private unadvertised share sales to no more than 35 in-state purchasers. The 35-purchaser limit does not include insiders (like directors or officers), accredited (wealthy) investors, or purchasers who invest more than $100,000. No Florida state securities filings are required for such exempt offerings. Thus, offerings exempt from federal registration should be exempt from Florida registration as well. State securities exemptions in Florida are regulated by the Office of Financial Regulation.
All Florida for-profit corporations must file an annual report yearly to maintain active status. The first report is due in the year following your corporation's formation. The report must be filed online between January 1st and May 1st. Reminder notices are sent to the email address you provide when you submit your articles of incorporation for filing.
Your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.
]]>Corporate meeting minutes are a formal record of your company’s important discussions and actions. They can and should be more than a formality—they can help you keep your company’s tax standing, avoid or settle disputes, and even aid in getting the best price when you decide to sell your business.
Corporate meeting minutes, or meeting minutes as they are often referred to, are a record of discussions held and actions taken during shareholder meetings, board of director’s meetings, and board committee meetings. They document important decisions such as the appointment of officers of the company or the election of board members, real estate purchases, the adoption of a pension plan, the sale of stock, and many other activities.
Most states require S-corporations and C-corporations to take meeting minutes whenever the company’s shareholders or board of directors meet, usually once a year for shareholder’s meetings and once a year for director’s meetings. (Delaware, Kansas, Nevada, North Dakota, and Oklahoma don’t require minutes.) Your company charter, articles of incorporation, or by-laws might require more frequent meetings, and if that’s the case, you’ll need to document those meetings as well.
Minutes serve as a record that explains when and why decisions were made or actions were taken, and they show that the shareholders or board members were informed about the issue and agreed to the decision. Even when you are not required to do so by law, it can be a good idea to take meeting minutes to protect your tax standing (more on this below), avoid internal disputes, and show potential buyers that your company has been managed responsibly and professionally.
Some of the reasons to keep meeting minutes, besides legal requirements, include:
Memories are short, and hindsight is always 20/20. A shareholder or board member might not remember what was agreed upon or have a change of heart about an important decision made weeks or months ago. The consequences are minor if someone forgets a routine decision like bringing a new vendor on board. But the stakes are much higher if, for example, the shareholders agreed to take on a $1 million loan and one or several of them believe the loan approved was half that amount—or not approved at all.
Safeguarding your personal liability protections. When your business entity is structured as a corporation, LLC, or certain types of partnerships, the individual owners are protected from personal liability for the business’s debts, bankruptcy, or lawsuits. But those protections (known as the corporate veil) can be removed, and creditors and courts can go after individual owners, if the company can’t show it followed the rules for keeping the business separate from the individual owners. Though other factors might be considered, meeting minutes are one way to show that decisions and actions were taken for and by the business, rather than the individual owners.
Keeping your company’s tax standing. If your company is audited, the IRS will check to see whether you’ve followed the tax rules for your business entity classification. The IRS can reclassify your business in a way that changes your tax rate if you haven’t been diligent. Suppose, for example, that the IRS looks at expenses your LLC claimed for travel to check out real estate you were thinking of buying. Meeting minutes that included a decision to investigate the property would help you show that the travel expenses were in fact related to the business of the LLC.
Attracting investors or boosting your sale price. Meeting minutes give investors and potential buyers a peek into the way your board of directors manages the company. Showing investors how and why the board makes decisions will build their confidence. If you are selling the business, a paper trail of regular and documented meetings will help support a good price.
You don’t have to include everyday, routine decisions, such as buying office furniture or hiring employees, in your meeting minutes. In general, you’ll want to include decisions that require the approval of the officers of the company or the board of directors, but your by-laws might require you to include other types of decisions as well. Examples of the decisions or actions that you should include are:
In large companies, the secretary of the corporation usually takes the minutes. But if your company doesn’t have a secretary, you should designate another person to do it.
It’s a good idea for the designated minutes-taker to obtain a copy of the meeting agenda in advance, and to follow the agenda items when taking minutes. Consider using a template like the one shown here to keep your minutes consistent and easier to produce.
In general, minutes should begin with the housekeeping aspects of the meeting:
For each agenda item, minutes should include:
Meeting minutes don’t have to include everything that was said, but they should show that each item was carefully considered.
Minutes should present the pros and cons raised during the discussion, but specific references to who said what should not be included.
It’s not a good idea to record or video-tape meetings, even if you are also taking written minutes. A full accounting of what was said during a meeting can prove embarrassing later, and individuals might be reluctant to voice their opinions when they know they are being recorded or taped.
Attorneys asked to make presentations at meetings are bound by confidentiality. Any privileged information they share with meeting attendees should not be included in the meeting minutes, because those minutes could be distributed to third parties.
Once the minutes are completed, distribute them for review to all the meeting participants. If your company operates with board committees, you might also consider distributing committee meeting minutes to the full board of directors, because the committee is acting on their behalf.
You’re not required to file meeting minutes with the state, but you should maintain them in a secure location along with your other important documents, such as articles of incorporation. It’s a good idea to keep minutes for seven years in the event of an audit. Companies whose exit strategy is a sale might want to keep minutes for a longer period.
]]>Your corporation's name must contain one of the following words: “Incorporated,” “Corporation,” “Company,” "Limited," or the abbreviation "Corp.," "Inc.," or "Co.," or "Ltd."
Your corporation's name must be distinguishable from the names of other business entities already on file with the Texas Secretary of State. Names may be checked for availability at the Texas Secretary of State SOSDirect website.
You may reserve a name for 120 days by filing a Name Reservation form with the Texas Secretary of State. The reservation may be filed online through the Texas Secretary of State SOSDirect website or by mail.
Your corporation is legally created by filing a Certificate of Formation For-Profit Corporation with the Texas Secretary of State. The certificate must include the corporate name; the name and address of the agent for service of process; the name and address of the initial directors; the number of shares the corporation is authorized to issue and whether they have a par value or no par value; the name and address of the organizer; and the effective date of the certificate.
The certificate may be filed online through the Texas Secretary of State SOSDirect website or it can be filed by mail. The filing fee is $300.
Every Texas corporation must have an agent for service of process in the state. This is an individual or corporation that agrees to accept legal papers on the corporation's behalf if it is sued. A registered agent may be an individual who resides in Texas, or a domestic or foreign business entity authorized to do business in Texas. The registered agent must have a physical street address in Texas. The agent should agree to accept service of process on your corporation's behalf prior to designation.
Bylaws are an internal corporate document that set out the basic ground rules for operating your corporation. They are not filed with the state. Your corporation is not legally required to have corporate bylaws, but you should adopt them because they establish your corporation's operating rules, and help show banks, creditors, the IRS, and others that your corporation is legitimate. For corporate bylaw forms, see Nolo’s website or Incorporate Your Business, by Anthony Mancuso (Nolo).
Keep your bylaws, meeting minutes, and other important corporate papers in a corporate records book. This can be a simple three ring binder or corporate records kit you order through a corporate kit supplier. Keep it at your corporation's principal office.
The incorporator—the person who signed the articles—must appoint the initial corporate directors who will serve on the board until the first annual meeting of shareholders (when the board members who will serve for the next term are elected by the shareholders). The incorporator must fill in an “Incorporator’s Statement” showing the names and addresses of the initial directors. The incorporator must sign the statement and place a copy in the corporate records book. The statement need not be filed with the state.
You should hold your first meeting of the corporation's board of directors to appoint corporate officers, adopt bylaws, select a corporate bank, authorize issuance of shares of stock, set the corporation's fiscal year, and adopt an official stock certificate form and corporate seal. The directors' actions must be recorded in corporate minutes prepared by the incorporator or any of the directors. Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status. For a sample Incorporator's Statement and corporate meeting minute forms, see Nolo’s website or refer to Incorporate Your Business, by Anthony Mancuso (Nolo).
Issue stock to each shareholder in return for their capital contributions of cash, property, services, or all three. Small corporations usually issue paper stock certificates. Enter each shareholder's name and contact information in the corporation’s stock transfer ledger.
Texas gives corporations the option of establishing a par value for their stock or issuing no par value shares. Par value is a set amount below which the stock cannot be sold--it has nothing to do with the stock's actual value. See Nolo's article "What is Par Value Stock." If the shares are issued with no par value, "no par value" should be printed on the stock certificates.
A share of stock in your corporation is classified as a security under state and federal securities laws that regulate the offer and sale of corporate stock. However, federal law exempts private offerings: a non-advertised sale to a limited number of people (generally 35 or fewer). See Nolo's Corporations FAQ for more details.
Texas exempts from state registration unadvertised sales to no more than 35 shareholders who are either sophisticated investors, or individuals with a preexisting relationship with the corporation or its founders, principal shareholders, officers or directors. No Texas state securities filings are required for such exempt offerings. For more information, see the Texas State Securities Board Exemptions from Registration webpage.
EIN: Your corporation must obtain a federal employer identification number (EIN). You may obtain an EIN by completing an online application on the IRS website. There is no filing fee.
Texas Franchise Taxes: Texas imposes franchise taxes on corporations, but only those who earn well over $1 million. However, all Texas corporations should register with the Texas Comptroller of Public Accounts and file an annual return by May 15 of each year even if no tax is due. You can register online, by mail, or in person at a Comptroller field office.
]]>Responsibility for the declaration of a cash dividend typically lies with the board of directors, unless the directors have delegated such matters to a board committee or subcommittee. Initially, the board should determine whether any corporate governance documents or contracts contain any restrictions on declaring the dividend. You or your counsel should review the company’s articles of incorporation (called a certificate of incorporation in some states), stockholders’ agreements (if any), and loan documents (if any), together with any outstanding options, warrants, promissory notes, or other relevant contracts, for any provisions that would restrict or otherwise prohibit a cash distribution. For example, in instances where your company has different classes of stock (for example, common stock and preferred stock), one or more of these documents could provide that the superior class of stock has preferential rights with respect to any cash distributions. In other words, the articles of incorporation or a stockholders’ agreement could provide that common stockholders can’t receive any dividends until the preferred stockholders have received a 100% return on their capital investment.
The next step is to determine whether or not disbursing the dividend would meet the solvency requirements of your state (if any). For example, a Florida corporation isn’t permitted to pay dividends to its stockholders if the effect of doing so would either:
Your state’s corporations statute might also specify permitted calculation methods for determining compliance with the solvency test. For example, a Florida company’s board of directors can rely on either:
Once you’ve determined that the dividend would satisfy any solvency or other requirements under state law, then it must be approved from a corporate governance perspective. Assuming that the directors haven’t delegated responsibility for the declaration of dividends to either a board committee or subcommittee, the board can typically approve the distribution, subject to the applicable corporate laws of your state.
The board’s approval of the dividend can be accomplished in various ways. The directors can do so at one of their regularly scheduled meetings, or they can call a special meeting to specifically address the matter. In either case, the meeting would have to satisfy the notice and recordkeeping requirements of your state. Alternatively, the simplest way for the board to approve the dividend could be by written consent, which must be signed unanimously in many states. In the interest of satisfying their fiduciary duties, the directors should make sure that the written consent includes detailed information regarding the methodology and reasoning underlying the approval of the dividend.
Next, the board of directors should determine the permitted sources for the dividend under state law. For example, in Florida dividends can generally be satisfied from a company’s balance sheet surplus, based on a calculation set forth in the Florida Business Corporation Act. (Fla. Stat. Ann. § 607.06401(3).) Note that if your company falls within certain regulated industries (for example, natural resource exploitation), your state’s laws might also have additional provisions regarding the sources from which dividends can be paid.
When declaring a cash dividend, the board of directors generally must:
Note that your state’s corporate statute might contain requirements that the dividend be paid within a certain number of days from the board’s authorization, the notice to stockholders, or the calculation of the solvency requirements. Furthermore, the notice of the dividend should include instructions for the stockholders to provide their preferred payment method (whether it be by check, wire transfer, or otherwise) and all relevant transfer details.
]]>Before you decide to form a benefit corporation, check with your state’s laws. Not every state recognizes benefit corporations, and some require additional paperwork and annual reports. If the benefit corporation entity is available, you can form a new benefit corporation from scratch; and if you already have a for-profit corporation, you can convert it with the approval of your shareholders.
In many ways, benefit corporations are similar to for-profit corporations. In both, the shareholders are the owners and the board of directors oversee the direction of the business. Both entities pay corporate income tax and file the same annual tax returns. As discussed below, the process for forming a benefit corporation is similar to a for-profit corporation.
Benefit corporations are different from for-profit corporations in terms of their purpose. In the former, the business’s sole purpose is to make a profit. The directors are legally required to put the interests of the stockholders first, which means making decisions that maximize profits (within the bounds of the law and fair dealing). In a benefit corporation, although one of the business’s purposes is to make a profit, it has a second purpose that serves the public.
Here’s an example. Let’s say you own a furniture company and you have the option to use recycled materials in manufacturing your sofas. If you have a for-profit corporation and the board of directors finds that using recycled materials means less profit, the board would have to vote against it because it would not be in the best interests of the shareholders. By contrast, if your company is a benefit corporation and one of your purposes is environmental sustainability, the board could recommend the use of recycled materials, even if it hurts the bottom line.
To help it make decisions, the board can create policies on how it will balance the sometimes competing interests of profits and the public good. For instance, the organization might set aside 5% of sales to contribute to a charitable cause, or set a goal of using 50% recycled materials in its products. Once the business meets the stated goals, the board will make decisions that maximize profits.
To qualify as a benefit corporation, your company must have a public benefit purpose and commit to creating annual reports that show your progress towards your stated mission. Your formation documents must include a statement of one or more public benefit purposes, such as:
Many states require benefit corporations to produce annual reports on their overall social and environmental performance. The report must be available to the corporation’s shareholders, and in some states, to the public.
Some of the advantages you will enjoy if you form a benefit corporation include:
A benefit corporation is not the best choice for every business. Some of the disadvantages you should consider include:
The process for forming a benefit corporation is similar to creating a for-profit corporation. The steps include:
View our articles on corporations for more information on forming a corporation in your state.
If you own a for-profit corporation and your state recognizes benefit corporations, you can convert the business. Typically, you must gain approval from your shareholders and board of directors. You will then file amended articles of incorporation with your state and pay a filing fee. Converting to a benefit corporation is more complicated when you own a nonprofit corporation, LLC, or other business type. Consult with an attorney in your state for more information.
]]>A shareholders' agreement helps owners of a small corporation decide and plan for what will happen when one owner retires, dies, becomes disabled, or leaves the corporation to pursue other interests. For more information, see Nolo's article Plan Ahead for Changes in Corporate Ownership.
After the owners appoint directors, file articles of incorporation, and create bylaws, the directors must hold an initial board meeting to handle a few corporate formalities and make some important decisions. At this meeting, directors usually:
Additionally, if the corporation will be an S corporation, the directors should approve the election of S corporation status. (For information on whether your corporation should adopt S corporation status, see S Corporation Facts.)
You should not do business as a corporation until you have issued shares of stock. Issuing shares formally divides up ownership interests in the business. It is also a requirement of doing business as a corporation -- and you must act like a corporation at all times to qualify for the legal protections offered by corporate status.
Issuing stock can be complicated; it must be accomplished in accordance with securities laws. This means that large corporations must register their stock offerings with the federal Securities and Exchange Commission (SEC) and the state securities agency. Registration takes time and typically involves extra legal and accounting fees.
Fortunately, most small corporations qualify for exemptions from securities registration. For example, SEC rules do not require a corporation to register a "private offering" -- that is, a non-advertised sale to a limited number of people (generally 35 or fewer) or to those who can reasonably be expected to take care of themselves because of their net worth or income earning capacity. And most states have enacted their own versions of this SEC exemption. In short, if your corporation will issue shares to a small number of people (generally ten or less) who will actively participate in running the business, it will certainly qualify for exemptions to securities registration.
If you're selling shares of stock to passive investors (people who won't be involved in running the company), complying with state and federal securities laws gets complicated. Get help from a good small business lawyer.
For more information about federal securities laws and exemptions, visit the SEC website at www.sec.gov. For more information on your state's exemption rules, go to your secretary of state's website. (You can find links to every state's site at the website of the National Association of Secretaries of State, www.nass.org.)
When you're ready to issue the actual shares, you'll need to document the following:
Finally, you'll prepare and issue the stock certificates. In some states you may also have to file a "notice of stock transaction" or similar form with your state corporations office.
After you've filed your articles, created your bylaws, held your first directors' meeting, and issued stock, you're almost ready to go. But you still need to obtain the required licenses and permits that anyone needs to start a new business, such as a business license (also known as a tax registration certificate). You may also have to obtain an employer identification number from the IRS, a seller's permit from your state, or a zoning permit from your local planning board. For more information, see the Licenses & Permits for Your Business area of Nolo's website.
If you're ready to incorporate your business, you can use Nolo's Online Corporation to create your corporation online or you can use Nolo's Corporate Bylaws to easily create your bylaws online. Another option is to use the following books which include all the forms and information you need:
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]]>If you want to structure your business as a corporation, one of the first formal steps you’ll need to take is to file a special document with a particular state office. In most states, the document is known as the articles of incorporation, and in most states it needs to be filed with the Secretary of State. However, your particular state may have a different name for the document (for example, “certificate of formation”) or a different state office where it needs to be filed (in Maryland, the State Department of Assessments and Taxation; in Arizona, the Arizona Corporation Commission). Virtually every state has a downloadable form that meets the state’s minimum requirements for articles of incorporation.
There is variation among the states, but most states require many if not all of the following pieces of information in articles of incorporation:
Providing the name of your corporation may seem simple. However, you must make sure that the name you provide doesn’t conflict with the name of a preexisting business that’s already registered in your state. For example, if you submit articles of incorporation for a company named Bassoon Lagoon, Inc., and there is already a Bassoon Lagoon, LLC in your state, your filing will be rejected. To avoid rejection, you will need to do a search of business names already registered in your state. This is typically a simple process that you can take care of online through your Secretary of State’s website.
This is simply the main location for your business. For many small businesses, it will be the one and only business location. You may be specifically required to provide a street address. (Some states do not require any business address information.)
A registered agent is someone who you designate to receive official papers for the corporation. These may include certain notices from the state—and certainly include documents related to lawsuits. The registered agent must be located in the state where your corporation is formed and you must provide a physical—street—address for the agent. You may well decide that an officer of your corporation will serve as the registered agent, and the address will be the corporation’s business location. Alternatively, you may choose to appoint either a separate individual, such as a lawyer, or a company to act as your registered agent. (For more information, check What is a Registered Agent.)
Most states do not require you to be specific about the purpose of your corporation, and it is generally not advisable to provide specific statements. A general statement such as “The purpose of the corporation is to engage in any lawful activity for which corporations may be incorporated in this state” is usually sufficient. In many states, this type of statement will be preprinted on the Secretary of State’s articles of incorporation form. If your state does require more specificity, you nevertheless should try to be as general as possible. For example, for a business that you initially expect to be focused on designing websites, consider a statement of purpose such as “To provide website design services and to engage in any other lawful activity for which corporations may be incorporated in this state.”
The duration is the length of time, in years, that your corporation will operate. Many states do not ask for a specific duration in the articles of incorporation, and states that do ask for it often do not require you to provided a limited duration. Instead, you may choose that the duration be “perpetual.” Moreover, in many states, if you do not provide a duration, it is assumed by default that the duration will be perpetual.
You are required to indicate how many shares of stock the corporation is authorized to issue. Many states also ask you to indicate if the corporation is authorized to issues more than one class of stock. Be aware that the number of authorized shares is not the same as the number of shares actually issued; you may choose to authorize more shares than you will initially issue to any shareholders. When deciding how many shares to authorize, keep in mind that, in many states, the cost for filing the articles of incorporation may in part depend on the number of authorized shares, and for small businesses it often makes sense to authorize only as many shares as will result in the minimum filing fee. For example, if your state allows you to authorize up to 10,000 shares for a minimum filing fee of $100, there very likely will be no need for you to authorize more than 10,000 shares. (You can authorize more shares later, if necessary.) Classes of stock generally relate to different shareholder rights and for many small businesses only a single class is necessary. However, if you expect to have a more complicated arrangement regarding, for example, which shareholders are entitled to vote on mergers or receive dividends, you should consult with an attorney or other expert before deciding on share classes.
An incorporator is a person or company that is responsible for incorporating a business; an incorporator is not necessarily the same as a corporation officer or director. Most states require you to provide the name and address of one or more incorporators. However, in some states, you have at least the option if not the requirement to provide name and address information for corporate officers or directors. For many small businesses, there will be just one incorporator. However, where there is more than one incorporator, each incorporator generally is required to sign the articles of incorporation.
As just mentioned, at least one incorporator needs to sign the articles, and if there are multiple incorporators, generally they all must provide their signatures along with their addresses.
Fees for filing articles of incorporation can vary widely among states, from less than $100 up to around $1,000. For more details, see Nolo's article, How Much Does It Cost to Incorporate Your Business?
Preparing and filing articles of incorporation is only one of several steps necessary to form a corporation. Other initial tasks include electing a board of directors and adopting bylaws. If you want further information about articles of incorporation in your particular state, as well as other steps involved in forming a corporation, check the 50-State Guide to Forming a Corporation. And, if you want even more detailed explanations regarding articles of incorporation or related corporation matters, check Incorporate Your Business, by Anthony Mancuso (Nolo) and The Small Business Start-Up Kit: A Legal Guide, by Peri H. Pakroo (Nolo).
]]>It is important to understand the rights and responsibilities of each position, and conduct the business in keeping with the rules, as failing to do so could put your liability protection at risk (meaning the owners could be personally responsible for the debts of the business). Running the business consistent with corporate structure isn’t just about protecting your personal assets—from a practical point of view, it will allow your business to run smoothly and efficiently.
In order to understand the structure of a corporation, you should familiarize yourself with the different corporate roles and how they work together. As explained in more detail below, the owners and managers of a corporation fall into one of the following categories:
The same person can serve in more than one capacity, but only if the laws of the state permit it (as explored below). For example, if permitted in your state, you could be a shareholder, the secretary (an officer position), and a board member.
The shareholders have invested money into the business and are owners of the company. Ownership interests are represented by “shares” of stock. A corporation may have a limited number of private investors, or a corporation can “go public,” meaning the general public can invest in the company in exchange for stock.
Shareholders participate in the corporation by voting on major corporate decisions, such as adding or removing board members, dissolving the corporation, or changing the bylaws. Unless shareholders also serve in another position, they do not take part in other business decisions or management of the corporation.
The shareholders elect a board of directors, which is a group of people responsible for oversight and financial decision-making for the corporation. For example, the board decides when to pay dividends to the shareholders, authorize stock issuance, and whether to merge with another corporation. Board members owe a duty to the shareholders to place the interests of the business above their own, and to keep the corporation running efficiently.
Check with the laws of your state to learn the requirements for your board. Some states allow corporations to only have one director, while others require three or more. Some states impose other restrictions, such as requiring all board members to be a resident of the state, over 18 years old, or both.
While the board is responsible for the overall direction of the company, the board appoints officers to handle the day-to-day operations. Officers have the option to hire employees to help with managing and running the business. Common officer positions include:
Again, check with your state’s laws to determine the officer requirements. Many states require a CEO, while a COO, CFO, or Secretary might be optional. Some states do not allow the same person to serve in more than one officer position, while other states allow overlap.
Bylaws are the internal rules for how you will run and manage your organization. They include provisions such as the minimum number of board members, how often the board meets, and the process for appointing officers. Bylaws must comply with the state’s minimum requirements, such as the number of directors and the frequency of meetings. If you do not have bylaws, or they are silent on an issue, your corporation will follow your state’s minimum requirements. To learn more about corporate bylaws, see our article Drafting Corporate Bylaws.
One of the main reasons to form a corporation is to protect the directors’ and shareholders’ personal assets from the liabilities and debts of the business. However, if a judge finds that a corporation is not following corporate formalities, such as failing to designate a board of directors or hold meetings, the court can “pierce the corporate veil” to hold owners responsible for business debts.
]]>Not long ago, an S corporation (S corp) was the only choice for these business owners. In recent years, however, S corps have been largely replaced by limited liability companies (LLCs). However, due to tax changes brought about by the Tax Cuts and Jobs Act (“TCJA”), S corps could make a come back.
You’ll learn what an S corporation is and how the S corp election can benefit you. This article also explains who’s eligible to become an S corp, how to make the election, and when to file.
An S corp is a regular corporation that has elected "S corporation" tax status. Forming an S corp lets you enjoy the limited liability of a corporate shareholder but pay income taxes as if you’re a sole proprietor or a partner in a partnership.
In a regular corporation (also known as a “C corporation”), the company itself is taxed on business profits. The owners pay individual income tax only on money they receive from the corporation as salary, bonuses, or dividends. (For more on corporate taxation, see how corporations are taxed.)
By contrast, in an S corp, all business profits "pass through" to the owners, who report them on their personal tax returns (like in sole proprietorships, partnerships, and LLCs). The S corp itself doesn’t pay any income tax. Although, if an S corp has more than one owner, it must file an informational tax return—like a partnership or LLC—to report each shareholder's portion of the corporate income.
Most states follow the federal pattern when taxing S corps: They don't impose a corporate tax, choosing instead to tax the business's profits on the shareholders' personal tax returns. A few states, however, tax an S corp like a regular corporation—such as New Hampshire, Tennessee, and Texas.
The tax division of your state’s treasury department can tell you how S corps are taxed in your state.
If you want limited liability and more favorable taxation, you should consider becoming an S corp. Operating as an S corp might be wise for several reasons:
Fortunately, a decision to elect to be an S corp isn't permanent. If your business later becomes more profitable and you find there are tax advantages to being a regular corporation, you can drop your S corp status after a certain amount of time.
An S corp has many benefits but not everyone can take advantage of them. Your corporation can elect to become an S corp only if it meets the following requirements:
If your corporation is eligible to become an S corp and the benefits align with your company’s needs, then you’ll need to elect the S corp status during the correct window of time to receive the tax benefits.
To create an S corp, you must first create a regular corporation by filing articles of incorporation with your Secretary of State's office or your state's corporations division. Then, to be treated as an S corp, all shareholders must sign and file IRS Form 2553.
The timing for filing an S election can be tricky. How the deadlines operate depends on whether the corporation is new and in its first tax year when it files the election, or whether it’s been operating more than one year and had a prior tax year before filing the election.
A new corporation must elect its S status no more than 2 months and 15 days after the beginning of its first tax year. Elections made after this deadline won't apply until the following year unless the corporation qualifies for special relief (as explained later).
Consider this example. Suppose Acme Corporation is a brand new corporation that began its first tax year on January 7, 2015. For it to timely elect S corp status for 2015, it must file Form 2553 sometime during the period from January 7 through March 21, 2015. (Acme’s 2-month period would end March 6 and 15 days after that date would be March 21.)
Because the corporation had no prior tax year, an election made before January 7 wouldn’t be valid. An election made after March 21, 2015, wouldn't apply until 2016 (unless it qualifies for special relief).
Corporations don't have to choose to elect S status right away. They can operate as regular C corporations for as long as they want to before making the election. However, for an S corp election to be timely for the current tax year, it must be filed either:
Consider the following example. XYZ Corporation was formed back in 2013 and has been operating as a regular C corporation. Its tax year corresponds with the calendar year, so its tax year always starts on January 1 and ends on December 31 each year.
XYZ wants to qualify as an S corp starting in 2016. To do so, it must file Form 2553 any time during 2015, or no later than March 15, 2016 (two months and fifteen days after January 1, 2016, the first day of its current tax year). If it files the election after March 15, 2016, the election won't be effective until 2017 unless it qualifies for special relief.
If you file for the election after the deadline but want the S status to take effect that current tax year, you might qualify for special relief. If you qualify, your S election status will take effect the current tax year—instead of the next year—despite the late filing.
The IRS will grant a corporation relief from the late filing of Form 2553 if it meets all of the following requirements:
The corporation must attach a statement along with Form 2533 explaining why it had reasonable cause for the late filing or that it inadvertently failed to timely file. The words, "Filed pursuant to Rev. Proc. 2013-30" must be added to the top of Form 2533. Both Form 2553 and the attached statement must be signed by every shareholder.
You can get the benefits of limited liability and pass-through taxation (including the pass-through tax deduction) by creating an LLC. Because an LLC offers its owners the significant advantage of greater flexibility in allocating profits and losses, and because LLCs aren't subject to the many restrictions of S corps, forming an LLC can be a better choice.
However, in some cases, an S corp’s shareholders might qualify for the pass-through deduction while an LLC’s owners with the same amount of income might not.
If you’re still unsure whether an S corp is right for you or have more questions about how and when to file, you should talk to a small business lawyer. They can explain how the S corp election applies to your specific situation and file the IRS paperwork for you.
]]>The list of professionals required to incorporate as a professional corporation is different in each state. Usually, though, mandatory professional incorporation requirements apply to these professionals:
You'll need to check with your state's corporate filing office (usually the Secretary of State or Corporation Commissioner) to see which professions are required to form professional corporations in your own state.
Professional corporations provide a limit on the owners' personal liability for business debts and claims. Incorporating can't protect a professional against liability for his or her negligence or malpractice, but it can protect against liability for the negligence or malpractice of an associate.
Dr. Anton and Dr. Bartolo are surgeons who practice as partners. Dr. Bartolo leaves an instrument inside a patient, who bleeds to death. The jury returns a $2 million verdict against Dr. Bartolo and the partnership. There is only $1 million in malpractice insurance to cover the judgment. Dr. Anton (along with Dr. Bartolo) would be personally liable for the $1 million not covered by insurance.
Drs. Anton and Bartolo create a professional corporation. Dr. Bartolo commits the malpractice described in Example 1. Dr. Anton, a corporate employee, would not be personally liable for the portion of the verdict not covered by insurance. Dr. Bartolo, however, would still be personally responsible for the $1 million excess, because he was the one guilty of malpractice. (In some states, Dr. Anton would be free from personal liability only if the professional corporation carried at least the minimum amount of insurance mandated by state law.)
Most professional corporations are classified as "personal service corporations" by the IRS and must file a professional corporation tax return. As of 2018, all professional corporations pay a flat tax rate of 21%. Unlike sole proprietorships, partnerships, and LLCs, professional corporations do not enjoy pass-through taxation, which means the professional corporation pays tax on its profits, and the owners pay tax a second time on the same income on their personal tax returns.
However, you can avoid double taxation by electing S Corporation tax status. Click here to learn more about the requirements and the application process.
As an alternative to incorporating, professionals wishing to limit their personal liability can also consider forming a limited liability company (LLC). States laws vary on what type of entity professionals can form though so be sure to check the rules for your state. For example, professionals are not allowed to form an LLC or professional limited liability company in California and instead must form either a professional corporation or a registered limited liability partnership.
In some states, you have the option to form a professional limited liability company (PLLC). The structure is similar to a professional corporation, but with the tax benefits of an LLC and a more flexible management structure. As with professional corporations, a PLLC can limit your liability for business debts, but you remain personally liable for claims relating to your own negligence or malpractice. To learn more about PLLCs, click here.
]]>A corporation is a distinct legal business entity, meaning the business owns property, pays taxes, and enters into contracts separate from its owners. The ownership and management structure of a corporation is different from other business entities. The owners of a corporation are shareholders (also known as stockholders) who obtain interest in the business by purchasing shares of stock. Shareholders elect a board of directors, who are responsible for managing the corporation.
One of the main advantages of incorporating is that the owners' personal assets are protected from creditors of the corporation. For instance, if a court judgment is entered against your corporation saying that it owes a creditor $100,000, you can't be forced to use personal assets, such as your house, to pay the debt. Because only corporate assets need be used to pay business debts, you stand to lose only the money that you've invested in the corporation.
There are some circumstances in which limited liability will not protect an owner's personal assets. An owner of a corporation can be held personally liable if he or she:
This last exception is the most important. In some circumstances, courts can rule that a corporation doesn't really exist and that its owners should not be shielded from personal liability for their acts. This might happen if you fail to follow routine corporate formalities such as:
Incorporating should never take the place of good business insurance. Even though forming a corporation protects your personal assets, you should use insurance to guard your corporate assets from lawsuits and claims.
A solid liability insurance policy can protect you against many of the risks of doing business. For instance, if you operate a clothing store, good business insurance should adequately cover the bill if someone slips and falls in your store.
Also, insurance can protect you where the limited liability feature will not. For example, if you personally injure someone while doing business for the corporation, say by causing a car accident, liability insurance will usually cover the accident so that you won't have to use either corporate or personal assets to pay the bill. However, insurance won't help if your corporation doesn't pay the bills: commercial insurance usually does not protect personal or corporate assets from unpaid business debts, whether or not they're personally guaranteed.
If an owner of a corporation works for the corporation, that owner is paid a salary, and possibly bonuses, like any other employee. The owner pays taxes on this income just like regular employees, reporting and paying the tax on his or her personal tax return.
The corporation pays taxes on whatever profits are left in the businesses after paying out all salaries, bonuses, overhead, and other expenses. To do this, the corporation files its own tax return, Form 1120, with the IRS and pays taxes at a special corporate tax rate. The Tax Cuts and Job Act established a new single flat tax rate of 21% for corporations. This replaces the corporate tax rates ranging from 15% to 35% that corporations paid under prior law.
Alternatively, corporate shareholders can elect what's called "S corporation" status by filing Form 2553 with the IRS. This means that the corporation will be treated like a partnership (or LLC) for tax purposes, with business profits and losses "passing through" the corporation to be reported on the owners' individual tax returns. To learn more about S corporations, see Nolo's article S Corporation Facts.
For more details on regular corporate taxation, see Nolo's article How Corporations Are Taxed.
To form a corporation, you must file "articles of incorporation" with the corporations division (usually part of the secretary of state's office) of your state government. Filing fees are typically $100 or so.
For most small corporations, articles of incorporation are relatively short and easy to prepare. Most states provide a simple form for you to fill out, which usually asks for little more than the name of your corporation, its address, and the contact information for one person involved with the corporation (often called a "registered agent"). Some states also require you to list the names of the directors of your corporation.
In addition to filing articles of incorporation, you must create "corporate bylaws." While bylaws do not have to be filed with the state, they are important because they set out the basic rules that govern the ongoing formalities and decisions of corporate life, such as how and when to hold regular and special meetings of directors and shareholders and the number of votes that are necessary to approve corporate decisions.
Finally, you must issue stock certificates to the initial owners (shareholders) of the corporation and record who owns the ownership interests (shares or stock) in the business.
To learn more about how to form your corporation, see Nolo's article How to Form a Corporation.
Corporations and their owners must observe certain formalities to retain the corporation's status as a separate entity. Specifically, corporations must:
For more information on making corporate decisions and keeping corporate minutes, see Nolo's article Documenting Corporate Decisions.
And for detailed information about corporate laws and regulations in your state, see Incorporate Your Business: A Legal Guide to Forming a Corporation in Your State, by Anthony Mancuso (Nolo).
]]>The law distinguishes between domestic and foreign corporations. When a corporation does business in the same state as where the owners incorporated the business, it is a domestic corporation. When the owners incorporate the business in a state other than where they do business, it is a foreign corporation in the state where it operates. This article explains the consequences of operating a foreign corporation:
Every corporation must appoint a registered agent, which is a company or an individual who receives government correspondences and notifications of lawsuits on behalf of the corporation. While you can incorporate and run your business in a different states than where you and the other owners live, your corporation’s registered agent must live in the state where you incorporate. If you and the other owners do not live in the state where you incorporate, you must find a local registered agent. A number of companies offer registered agent services for an annual fee, which is a cost to consider before registering out of state.
Before choosing a state in which to incorporate, take time to review the state tax rates that might apply to your business, as you could save money by operating in a low-tax state. As explained above, your business tax rates will depend on where you provide your goods or services, not where you incorporate. Some of the taxes that might apply to your business include:
To keep your corporation in good standing in its state of incorporation, you must file paperwork with the state, submit annual reports, and pay filing fees. Fees vary widely by state, ranging from less than $100 to almost $500. A few states do not require corporations to file annual reports, while others charge corporations several hundred every year to file the annual report. Keep in mind if you operate in states other than the one in which you incorporated, you will likely be responsible for formation paperwork, annual reports, and filing fees in those additional states.
No matter where you file, your corporation will give you limited liability protection, so you will not be personally responsible for the debts and obligations of the business. That’s a hefty dose of protection, and there might be more. Some states have business laws that are more favorable to corporations than other states’ laws. For example, a particular state might offer flexibility, privacy, or a favorable system to handle business disputes that you won’t find in other states.
]]>To create a corporation, you must file formation documents (articles of incorporation, also known as articles of organization or a certificate of formation) with your Secretary of State and pay the filing fee. Depending on the location and the needs of your business, you could be responsible for additional filings (and filing fees) to form your business, which might include:
Name reservation: If you are not ready to file your incorporating documents but want to save your business name (so no one else can register the name), you might be able to file a name reservation request, available in some states.
Foreign corporation registration: If you will do business in a state other than where you incorporated, the state where you provide your services might require you to register your business as a foreign corporation.
Fictitious business name: You must file for a fictitious business name if you will provide services under a name other than the one you listed on your articles of incorporation. Your state might refer to this as a tradename or a Doing Business As (DBA).
Trademark registration: You can register a trademark to protect your name, logo, slogan, or anything else that identifies your brand. You can file for state trademark registration or federal registration with the United States Trademark and Patent Office (USTPO). Click here to learn more about trademark registration.
Bylaws are the internal rules for your corporation that outline the board of director’s procedures, policies, and the rights and responsibilities of shareholders and directors. Bylaws are an internal document that you do not file with the state but keep with your corporate records. You will not face state filing fees to create bylaws, but you might pay an attorney to draft the document or use a document creation service.
Your corporation must appoint a registered agent, which is the person or organization responsible for receiving legal notices on behalf of the company. You or another owner can serve as the registered agent, or you can pay for a registered agent service. Because the registered agent must be a resident of the incorporating state, a service is a good option if you are filing in a state other than where you and the other owners live. When you live in the state where you incorporate, you have the option to use a registered agent service to maintain your privacy (the registered agent’s contact information is public record).
Depending on your location and services, you might need one or more licenses or permits. Some cities and counties require all businesses to obtain permits, and certain business types (such as restaurants and marijuana dispensaries) need a number of additional licenses (such as health and/or sign permits). You will likely face fees to apply for each license, and annual fees as long as your business is open.
All corporations that generate income pay tax. The amount your business will pay depends on your revenue and the laws of the state where your corporation operates. The types of taxes your corporation might be responsible for include:
In most states, to keep your corporation in good standing, you must file reports with your state. Most states require you to file the report annually, while other states require every other year, and a few states do not require annual reports. A few states do not charge a fee for the annual report, and in other states, the fee is over $300.
Corporations that issue stock to shareholders must register with the Securities and Exchange Commission (SEC) and state securities agencies, unless the company is exempt from the process. Most small corporations are exempt. However, your state might require you to file an exemption request and pay a fee.
When starting a corporation, you should budget for your start-up and operating costs, which are highly variable and depend on the type of business. Some of the costs you should consider include:
The following is a breakdown of the formation and annual report fees by state (as of September 2020). The numbers represent the minimum charges for incorporation, and you might pay more depending on the number of shares your corporation authorizes. Some states charge additional fees for online filing, in-person filing, rush service, or other administrative fees. Check with your Secretary of State to confirm.
State | Corporation Filing Fees | Ongoing Fees |
Alabama | 100 | No annual report; franchise tax based on revenue |
Alaska | 250 | $100 biennial |
Arizona | 60 | $45 annual |
Arkansas | 50 | minimum $150 annual franchise tax |
California | 100 | $25 annual + minimum $800 franchise tax |
Colorado | 50 | $10 annual |
Connecticut | 250 | $150 annual |
Delaware | 89 | minimum $50 annual + franchise tax |
District of Columbia | 220 | $300 biennial |
Florida | 35 | $150 annual |
Georgia | 100 | $50 annual + franchise tax |
Hawaii | 50 | $15 annual |
Idaho | 100 | No annual fee |
Illinois | 150 | $75 + franchise tax |
Indiana | 90 | $20 biennial |
Iowa | 50 | $60 biennial |
Kansas | 90 | $50 annual |
Kentucky | 40 | $15 annual |
Louisiana | 75 | $30 annual + franchise tax based on income |
Maine | 145 | $85 annual |
Maryland | 120 | Annual report fee based on revenue (minimum $300) |
Massachusetts | 275 | $100 annual |
Michigan | 60 | $25 annual |
Minnesota | 135 | No fee for annual report |
Mississippi | 50 | $25 annual + franchise tax based on capital used and property value (minimum $25) |
Missouri | 50 | $20 annual + franchise tax based on assets |
Montana | 70 | $20 annual |
Nebraska | $60 + $5/page | Biennial report - based on property value (minimum $52) |
Nevada | 75 | $150 annual |
New Hampshire | 100 | $100 annual |
New Jersey | 125 | $75 annual |
New Mexico | 100 | $25 annual |
New York | 125 | $9 biennial + franchise tax based in income and capital |
North Carolina | 125 | $25 annual + franchise tax based on income (minimum $200) |
North Dakota | 100 | $25 annual |
Ohio | 99 | $25 biennial |
Oklahoma | 50 | No annual report, Franchise tax based on revenue |
Oregon | 100 | $100 annual |
Pennsylvania | 125 | $70 every ten years |
Rhode Island | 230 | $50 annual |
South Carolina | 110 | minimum $25 annual |
South Dakota | 150 | $50 annual |
Tennessee | 100 | $20 annual + franchise tax based on earnings |
Texas | 300 | No annual report fee; franchise tax based on revenue |
Utah | 70 | $20 annual |
Vermont | 125 | $45 annual |
Virginia | 75 | Annual minimum $25 nonstock / $100 stock corporations |
Washington | 180 | $60 annual |
West Virginia | 100 | $25 annual |
Wisconsin | 100 | $25 annual |
Wyoming | 100 | $50 annual |
In some states, when a corporation is formed, the articles of incorporation must set a “par value” for its stock. Everyone who buys shares in the corporation, including the corporation’s founders, must pay at least this amount. If they pay less, they’ll owe the corporation the difference.
For example, if you set the par value for your corporation’s shares at $1, all purchasers of the stock must pay at least this amount for every share they purchase. If you purchase 10,000 shares, you’ll have to pay at least $10,000 for them. If you pay only $5,000, you’ll owe your corporation another $5,000. If your corporation later goes out of business, its creditors can sue to force you to pay that remaining $5,000 to your now defunct corporation to help pay off its debts.
The term par value can be misleading because it has nothing to do with how much a corporation’s shares are actually worth. It is only a minimum legal value. A corporation’s board of directors may require investors to pay far more than par value for the corporations’ shares. For example, you can establish a par value of $.01 per share, but require investors to pay $10 per share. In other words, you can sell your stock for whatever the market will bear. If your incorporated business proves successful, your shares should become worth far more than their par value.
It is up to the incorporators to decide what the par value of the corporate stock will be. Typically, large companies establish a par value of one cent or a fraction of one cent per share. This way they can issue many shares without the founders or other initial purchasers being legally required to pay huge amounts of money for them. For example, the par value for shares of Apple, Inc. is $0.00001 and the par value for Amazon stock is $0.01. Small corporations that intend to have only one or a few shareholders sometimes issue stock at $1 par value. If you have printed stock certificates, their par value should be printed on the certificate.
When shares have a par value, the amount shareholders pay for them in excess of par is accounted for as paid-in capital on the corporation’s balance sheet. For example, if a shareholder pays $5 for 1000 shares with a par value of $1, $4,000 would be credited to the corporation’s paid-in capital account and $1,000 to the common stock account.
Some states allow corporate stock to be issued with no par value. In this event, “no par value” should be printed on the stock certificates. Purchasers of no par value shares don’t have to worry about being liable to corporate creditors if they pay too little for the shares. For accounting purposes, the entire purchase price for no par shares is credited to the common stock account, unless the company decides to allocate a portion to surplus. In some states, this allocation to surplus must be done within a certain specified time after the stock is issued or it remains as capital which could affect the company's ability to make distributions or pay dividends.
]]>Because a corporation is a separate legal entity from its owners, the company itself is taxed on all profits that it cannot deduct as business expenses. Generally, taxable profits consist of money kept in the company to cover expenses or expansion (called "retained earnings") and profits that are distributed to the owners (shareholders) as dividends.
To reduce taxable profits, a corporation can deduct many of its business expenses -- money the corporation spends in the legitimate pursuit of profit. In addition to start-up costs, operating expenses, and product and advertising outlays, a corporation can deduct the salaries and bonuses it pays and all of the costs associated with medical and retirement plans for employees. To be sure you don't miss out on important tax deductions, see the Business Tax & Deductions area of Nolo's website.
The corporation must file a corporate tax return, IRS Form 1120, and pay taxes at a corporate income tax rate on any profits. If a corporation will owe taxes, it must estimate the amount of tax due for the year and make quarterly payments to the IRS by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If a corporation uses the calendar year as its tax year, the payments are due April 15, June 15, September 15, and December 15.
If the corporation's owners work for the corporation, they pay individual income taxes on their salaries and bonuses like regular employees of any company. Salaries and bonuses are deductible business expenses, so the corporation does not pay taxes on them.
If a corporation distributes dividends to the owners, they must report and pay personal income tax on these amounts. And because dividends, unlike salaries and bonuses, are not tax-deductible, the corporation must also pay taxes on them. This means that dividends are taxed twice -- once to the corporation and again to the shareholders. Smaller corporations rarely face this problem: Because their owners typically work for the corporation as employees, the corporation can pay them in the form of tax-deductible salaries and bonuses, rather than taxable dividends.
The scheme of taxation described in this article applies only to regular corporations, called C corporations. By contrast, a corporation that has elected S corporation status pays taxes like a partnership or limited liability company (LLC): All corporate profits or losses "pass through" the business and are reported on the owners' personal income tax returns. To learn more about S corporations, see S Corporations.
The Tax Cuts and Jobs Act established a new income tax deduction for pass-through entities. During 2018 through 2025, owners of sole proprietorships, partnerships, limited liability companies, and S corporations may deduct for income tax purposes up to 20% of the net income from the entity. Regular C corporations are not pass-through entities; thus, their shareholders do not qualify for this deduction.
Benefits of the Separate Corporate Income Tax
Although reporting and paying taxes on a separate corporate tax return can be time consuming, there are some benefits to having a separate level of taxation. Here we explain a few of them, but you should see a tax expert for a complete explanation of the pros and cons of corporate taxation as it applies to your situation. This is a very complicated area, and for some companies -- especially those that may experience losses, are involved in investing, or may soon be sold -- corporate taxation can be a real disadvantage.
Starting in 2018, corporations pay a flat tax of 21% on all their profits. The 21% rate is lower than the top five individual income tax rates, which range from 22% to 37%. The benefit of the lower rates is largely lost due to double taxation if corporate profits are distributed to the shareholders, who must pay individual income tax on such dividends. However, many corporations want or need to retain some profits in the business at the end of the year -- for instance, to fund expansion and future growth. If it does, that money will be taxed only once, at the 21% corporate income tax rate. Thus, a corporation's owners can save money by keeping some profits in the company.
In contrast, owners of sole proprietorships, partnerships, and LLCs must pay taxes on all business profits at their individual income tax rates, whether they take the profits out of the business or not.
The IRS will allow you to leave profits in your corporation, up to a limit: Most corporations can safely keep a total of $250,000 (at any one time) in the corporation without facing tax penalties (some professional corporations may not retain more than $150,000).
Another tax benefit of forming a corporation is that the company can deduct the full cost of fringe benefits provided to employees -- almost always including the business's owners -- and the owner-employees are not taxed on these benefits. Other types of business entities can also deduct the cost of many fringe benefits as a business expense, but owners who receive these benefits will ordinarily be taxed on their value.
To learn more about business taxes, read Tax Savvy for Small Business, by Frederick W. Daily (Nolo).
]]>Most (if not all) states require that a corporation’s articles of incorporation (called a certificate of incorporation in some states) be filed by one or more incorporators who meet state law requirements. An incorporator could be an attorney, registered agent, service company, or some other person or entity who might, or might not, have a personal stake in the corporation going forward.
In any case, it is quite common for the first entry in the minute books of a corporation (following the filing of the charter) to be a simple, one-page written consent signed by the incorporator entitled a “Statement of Organizational Action of the Sole Incorporator of [Name of Corporation] to Taking of Action in Lieu of Organizational Meeting,” whereby the incorporator names the members of the board of directors. Then, the incorporator concludes the written consent by resigning as the incorporator, effective immediately. Note that in most states, there is no prohibition against the incorporator naming itself as a director in the same consent. Furthermore, this approach assumes that there is only one incorporator and that the filed articles of incorporation don’t name the initial directors. If your corporation has more than one incorporator, then revise your written consent accordingly and have it signed by all of the incorporators.
Depending on the business laws of your state of incorporation, the incorporator will likely have the option of taking certain additional actions as well. For example, under Florida law, if the articles of incorporation do not name the members of the board, then the incorporator has the authority to not only appoint the board, but also to carry out the remaining organizational actions of the corporation, including issuing stock and approving the bylaws. (Fla. Stat. Ann. § 607.0205(1)(b).)
Once the incorporator has executed its organizational consent, the newly-appointed board can then execute its own, separate written consent — entitled “Written Consent in Lieu of an Organizational Meeting of the Board of Directors of [Name of Corporation]” — to complete the organizational process. A standard function of this initial board consent is to appoint the original officers of the corporation. Under the business laws of most states, the board of directors elects the corporate officers and the directors are permitted to serve dual roles as officers. In other words, these written consents could name you, as the owner of the company, as both the Chief Executive Officer and a member (or the chairman) of the Board of Directors.
The initial board consent should include a separate paragraph to address the issuance of stock to the initial shareholders of the company. This section should clearly state the name of each individual or entity to whom the company is granting shares, the number of shares, and the price per share. Note that your state’s business laws might permit the company to issue shares to the stockholders without the preparation or delivery of physical stock certificates.
Unless the incorporator has previously elected (for whatever reason) to approve the company’s bylaws itself, the board of directors typically bears the responsibility of reviewing and approving the company’s bylaws. The common thinking is that the board should be the responsible body for approving the bylaws because the bylaws address fundamental corporate governance topics such as board and shareholder meetings, officer appointments and responsibilities, the issuance of shares, company accounting practices, and the like.
The company’s secretary must make sure that its minute books include the incorporator’s written consent, the initial board consent (which evidences the initial issuance of stock), a capitalization table (listing all of the company’s initial shareholders and their stock ownership), and copies of all stock certificates issued, if any. Note that forms for the written consents described above can be found at Incorporate Your Business, by Anthony Mancuso (Nolo).
]]>Bylaws should provide rules for how stockholders (called shareholders in some states) hold meetings and make decisions. Stockholder meetings can be held on a regular basis — for example, monthly, quarterly, or annually (regular meetings). Certain designated persons can also petition for additional meetings (special meetings), so long as those persons are permitted to do so under the bylaws and the business laws of your state of incorporation (the State Business Laws). Note that because special meetings can be called at any time and disrupt the ordinary course of business, you should be conscientious about the persons authorized in the bylaws to request these meetings. The bylaws should also provide rules for holding stockholder meetings, including designating acceptable places and times and specifying how meeting notices must be delivered to the stockholders. Your State Business Laws probably require that notices be given to the stockholders at least a certain number of days before the date of the meeting and that such notices must include a record date for determining the stockholders permitted to vote at the meeting.
Most bylaws include a quorum requirement for holding a shareholder meeting. A quorum is the minimum number of voting shares that must be represented at a meeting (whether in person or by proxy) in order for the meeting to continue. Without a quorum, the meeting must be postponed and the shareholders can’t take action.
In addition to regular and special meetings, your bylaws can also authorize the stockholders to take action by written consent, in accordance with your State Business Laws. This can save time and expense because it avoids the necessity of holding a formal meeting. Note that state laws can differ regarding the minimum vote required for stockholders to take action by written consent.
Your bylaws should state the number of permitted directors, as well as their term lengths. Your bylaws can provide for a regular board or a staggered board. The bylaws should also describe how stockholders elect new board members and how unexpected vacancies should be filled. In most cases, bylaws also allow for the optional creation of board committees and subcommittees that focus on particular aspects of the company’s business.
As with the stockholders, your bylaws will also include provisions for regular and special board meetings, as well as terms for required quorums, places and times for meetings, and proper notice. You or your legal counsel must consult your State Business Laws to determine whether directors are permitted to take action by written consent and whether such consents must be signed unanimously.
In a corporation, the board of directors selects the officers. The bylaws should describe the appointment process and determine whether or not existing officers can hire additional officers without board approval. For example, the bylaws could permit you, as the company’s Chief Executive Officer, to hire and appoint additional officers. Your bylaws can also detail a slate of officer positions, describe their duties, and designate each officer’s place in the reporting hierarchy. It is also common for bylaws to allow individuals to hold more than one office simultaneously (for example, you can be named as both the President and Chief Executive Officer).
Bylaws should address whether or not the company will be required to issue physical stock certificates to its shareholders. You or your legal counsel will have to review your State Business Laws to determine whether uncertificated share ownership is permissible. Whether or not your company elects to have uncertificated shares, the bylaws can state that the secretary must properly record each stockholder’s equity ownership in the form of a stock ledger and capitalization table and maintain this information in the minute books of the corporation. If your company chooses to issue physical certificates, then the bylaws can describe any required legends that must be printed on the certificates relating to securities laws, prohibitions on share transfers, or existing contracts governing such shares (shareholders’ agreements, for example). The bylaws should also give instructions for how the company should deal with lost or damaged stock certificates.
Your bylaws serve as the foundation of your business’ corporate governance. As such, you should be thoughtful about the provisions you include in the document regarding bylaw amendments. Based on your company’s stockholder and board compositions, you should think carefully about what consent should be required in order to amend the document. For example, assuming that you’re the majority stockholder, you will want to ensure that your own written consent is required for any amendments. In order to reduce administrative burden, the bylaws can also provide that the secretary can make non-substantive amendments to the bylaws (to correct scrivener’s errors, for example) without any further approval, so long as no one is adversely affected by the changes.
While the business laws of most states typically allow a great deal of leeway with respect to the topics bylaws can cover, there are still certain matters that are traditionally excluded. For example, agreements among shareholders are customarily set forth in a separate document, whether it be a shareholders’ agreement, investors’ rights agreement, buy-out agreement, or the like (see Why Would I Need a Stockholders’ Agreement? and Shareholder Buyout Agreements--Why You Need One). These documents can cover a number of issues, including board control, share transfers, preemptive rights, drag-along rights, tag-along rights, buy-sell provisions, and so forth. It’s irregular for a company’s bylaws to cover these topics.
Note that your State Business Laws likely contain default provisions for some or all of the topics discussed above, and your bylaws can either adopt them or modify them, subject to the statutory parameters. For additional information or samples of bylaws documents, see Corporate Bylaws, Drafting Corporate Bylaws, and Incorporate Your Business: A Step-By-Step Guide to Forming a Corporation in Any State.
]]>Here’s a quick look at the basic steps for a shareholder to report and pay taxes on S corporation income.
As an S corporation shareholder, you can receive profits from the business in one of two forms:
If you are a passive investor in the S corporation, not serving as a corporation officer, and not otherwise providing the corporation with any services, then most likely you’ll receive your share of the profits as some kind of distribution. A distribution can fall under one of several categories, such as ordinary business income, real estate rental income, ordinary dividends, or royalties. However, regardless of the category, the distribution is subject to income tax but not employment tax.
If, on the other hand, you are not just a passive investor but are active in running the business, then the IRS will consider you an employee of the corporation. In that case, under IRS rules, you must receive at least some of your share of the corporation’s profits in the form of a salary. The same holds for any other shareholder-employees as well as for any corporation officers (regardless of whether they’re also shareholders). With small, closely-held businesses in particular, it’s common for the few shareholders to also run the business, so it’s important to be aware of the requirement to pay shareholder-employees a salary. Unlike distributions, shareholder-employee salaries are subject not only to the personal income tax but also to federal employment taxes.
At the end of each year, all S corporation profits are allocated to the corporation’s shareholders. Even if you and your fellow shareholders choose to leave some or all of the profits in the corporation, taking nothing as distributions or salaries, you will still be required to pay tax on those profits. In technical lingo, an S corporation is not permitted to have any retained earnings. This is different from a regular corporation, which can retain—and pay taxes on—its earnings.
However, S corporation shareholders may be able to deduct 20% of their business income with the pass-through deduction established under the Tax Cuts and Jobs Act. See The 20% Pass-Through Tax Deduction for Business Owners for more information.
After the end of your S corporation’s tax year, the corporation must send you and every other shareholder a Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc. The corporation also must provide each shareholder with an accompanying set of Shareholder’s Instructions for Schedule K-1. Each Schedule K-1 is specific to a particular shareholder and, among other items, provides information about that shareholder’s share of the income from the S corporation for the preceding tax year. The corporation also must include copies of the Schedule K-1s issued to its shareholders with its corporation tax return.
If you receive distributions from your S corporation, you’ll rely on the information provided on your Form K-1 to report and pay tax on that income. You’ll need to use the information from the K-1 to complete one or more required IRS schedules. In most cases, you’ll use the K-1 at least to complete Schedule E, Supplemental Income and Loss. Part II of Schedule E covers income or loss from partnerships and S corporations.
You may also need to attach other schedules to your individual federal tax return. For example, short-term capital gains or losses related to your S corporation are reported on Schedule D, Capital Gains and Losses. As with information for Schedule E, information for Schedule D also should be available from your Form K-1.
You attach your Schedule E, along with any other required schedules or forms, to your IRS Form 1040, U.S. Individual Income Tax Return. The total S corporation income (or loss) that you show on Schedule E is included on your personal Form 1040 on the line for income from rental real estate, royalties, partnerships, S corporations, trusts, etc.
As mentioned above, any shareholder in your S corporation who provides services to the corporation must be paid a salary. Shareholder-employee salaries are subject to employment taxes in the same way as the salaries of other employees. If you are being compensated for services to your S corporation, the corporation should report your wages to you on a Form W-2, Wage and Tax Statement. If you’ve ever worked as an employee, you’re probably familiar with this form. You typically receive one by the end of January from each employer you’ve worked for during the previous calendar year.
If you receive a W-2 from your S corporation, you’ll report the information it contains directly on your personal Form 1040. More specifically, the amount on that W-2 is added to any other income you may have received as an employee (shown on other W-2s you would have received) and entered on the line for wages, tips, and other compensation.
Example: Janet is one of four owners of Topp Summittz, Inc., an S corporation that manufacturers hiking gear. She owns 25% of the business. Janet also works part-time for the corporation. In addition, Janet is also employed as a manager at Azalea Boots Outdoor Store. Last year, Topp Summittz had total income of $250,000 and total expenses of $50,000. The S corporation’s entire net profit of $200,000 was distributed equally to each of its four shareholders. Each shareholder received half of that profit as a salary (wages) and the other half as ordinary business income. Consequently, Janet received a salary of $25,000 and ordinary business income of $25,000. Janet also earned $30,000 in salary from her job at the outdoor store.
After the end of the year, Janet received a Schedule K-1 from Topp Summittz that shows her $25,000 in ordinary business income. Using the K-1, she completes and attaches Schedule E to her personal Form 1040. She also enters the appropriate amount from Schedule E on the line on her personal Form 1040 for income from rental real estate, royalties, partnerships, S corporations, trusts, etc. Janet also receives one W-2 from Topp Summittz, which reports on her $25,000 salary from her S corporation, and another W-2 from Azalea Boots, which reports on her $30,000 salary from the outdoor store. She enters the total amount of wages from her W-2s on the line for wages, tips, and other compensation on her personal Form 1040. Ultimately, she uses her Form 1040 to report and pay taxes on her combined gross income of $80,000 ($30,000 as wages from Azalea Boots, $25,000 as wages from Topp Summittz, and $25,000 in ordinary business income from Topp Summittz.)
This article covers how a shareholder pays taxes on S corporation profits but does not deal with S corporation losses. Like profits, S corporation losses pass through the corporation to the individual shareholders, who claim those losses on their respective personal tax returns. In fact, many owners of small incorporated businesses choose S corporation status during periods when they expect to operate at a loss in order to reduce their personal tax bills. You can find out more about dealing with S corporation losses and other S corporation tax matters in Tax Savvy for Small Business, by Frederick W. Daily, J.D.
You can also find more quick information about S corporations here on the Nolo website. Check the S Corporations section for additional articles.
]]>Here is a brief overview of the tax forms a typical S corporation needs to file with the IRS.
An S corporation starts out life as a traditional C corporation formed under state law. Then, at some point after filing corporate formation papers with the Secretary of State (or equivalent state office), and possibly immediately after formation, the shareholders formally consent to the corporation electing S corporation tax status. The corporation also must meet a few basic requirements in order to be eligible to make the S corp election. Namely:
If you have unanimous shareholder consent, and your corporation meets the foregoing requirements, you gain S corporation status by completing and filing IRS Form 2553, Election by a Small Business Corporation. The form is straightforward—but you will need each shareholder to provide consent on the form. For more information about Form 2553, check out the two-part Nolo article on forming an S corporation.
Like a traditional corporation, an S corporation must file an annual federal tax return. However, because an S corporation is a pass-through entity, more of the information included on an S corporation’s federal tax return is for informational purposes than a traditional corporation’s tax return.
Where a traditional corporation files federal Form 1120, U.S. Corporation Income Tax Return, an S corporation files federal Form 1120S, U.S. Income Tax Return for an S Corporation. Much of the substantive information on the return reports on the S corporation’s income, deductions, and payments (such as estimated tax payments).
Form 1120S includes Schedule B, Other Information. The information required on Schedule B mainly includes:
Regarding the last item, if the corporation’s total assets at the end of the year are less than the designated amount, the corporation doesn’t need to file additional Schedules L, Balance Sheets per Books, or M-1, Reconciliation of Income (Loss) per Books With Income (Loss) per Return, with its 1120S.
S corporations also must file a summary of information regarding income, deductions, credits, and other items that pass through to the corporation’s shareholders. You provide this summary to the IRS through Schedule K,Shareholders’ Pro Rata Share Items. You include Schedule K when you file Form 1120S.
After the end of your S corporation’s tax year, the corporation must issue a Schedule K-1, Shareholder’s Share of Income, Deductions, Credits, etc., to each shareholder. The corporation also must provide each shareholder with an accompanying set of Shareholder’s Instructions for Schedule K-1. Each Schedule K-1 is specific to a particular shareholder and, among other items, provides information about that shareholder’s share of the income from the S corporation for the preceding tax year. Among other things, this can include ordinary business income, income from rental real estate, dividends, and royalties. You must include copies of the Schedule K-1s issued to your shareholders with your corporation tax return.
Each shareholder will take the information from his or her Schedule K-1 and use it to complete his or her individual federal tax return.
If your S corporation has employees, it must withhold employment taxes on their wages. Moreover, as a rule, any shareholder in your S corporation who provides services to the corporation must be paid a salary. (The same goes for corporation officers regardless of whether they are also shareholders.) Shareholder-employee salaries are subject to employment taxes in the same way as the salaries of other employees. Taken together, this means that your S corporation must periodically withhold, report on, and pay employment taxes for employee and shareholder-employee wages and salaries.
As part of the payroll tax process, your corporation must periodically pay money to the federal government using electronic funds transfer. In addition, your corporation needs to file quarterly employer tax returns (Form 941). Moreover, after the end of the year, the corporation must issue each employee a Form W-2, Wage and Tax Statement, which is specific to that employee. You must file copies of the W-2s, along with a Form W-3, Transmittal of Wage and Tax Statements, with the federal government each year by the last day of February.
While S corporation profits are not taxed by the federal government, they are taxed by some states. In other states, S corporations are assessed a flat fee. In states that require S corporations to pay taxes or fees, you will need to file separate state tax returns for your S corporation. Even states that don’t assess S corporation taxes or fees often require you to at least file an informational return.
Apart from federal employment taxes, most states also collect employment taxes. To pay those taxes, you’ll need to set up a state withholding tax account for your corporation, and report on and pay the taxes using the appropriate state forms.
Check your state’s Department of Revenue (or equivalent state office) for more details on both of these state taxes. You also can find out more about state business income and employment taxes in other Nolo articles.
S corporations themselves may owe no taxes on their profits, but that doesn’t mean that handling S corporation taxes, or completing a Form 1120S along with the required schedules, is a piece of cake. On the contrary, S corporation taxes, like traditional corporation taxes, are complicated. Just consider that the most recent version of the IRS taxpayer instructions for Form 1120S runs to 47 pages. Unless you are an accountant or tax expert, you should think twice before attempting to prepare your S corporation’s tax filings on your own. Instead, strongly consider working with a knowledgeable tax professional.
For more information about S corporations, including other tax issues, check out the other articles in the S corporation section of the Nolo website. For state-specific information about business income and employment taxes, check out the various 50-state guides on the Nolo site.
]]>The main purpose of the annual shareholder meeting is to elect the corporation’s board of directors for the next year. In the case of a small business operating as an S corporation with few shareholders, the directors may well be the shareholders, and the election may indeed be largely a formality. However, in cases where there are larger numbers of shareholders, or, perhaps, disputes regarding control of the business, it’s possible that there will need to be a discussion at the annual meeting regarding who will serve as the directors for the coming year.
You can also use annual shareholder meetings to address and take votes on matters other than who will serve as the S corporation's directors. For example, you might want the shareholders to consider and vote on big issues such as whether to try to sell the business in the coming year. More urgent issues, however, may more properly be handled by calling a special shareholders meeting.
The date of the annual meeting usually is fixed in the corporation’s bylaws. For this reason, you generally are not required to give shareholders formal notice of the meeting. However, in practice, most corporations do provide reminders to their shareholders. While many S corporations are small and have just a few shareholders who know and work with one another, it is still prudent to make sure all your shareholders have adequate notice. That way, if a shareholder doesn’t attend, you’ll be in a better position to deal with complaints (or worse, lawsuits) about any decisions that come out of the meeting.
Annual meetings often are scheduled for just after the end of a corporation’s fiscal year. This can be a particularly useful time for the shareholders to discuss the corporation’s financial performance. While shareholders in many small, closely-held businesses may be routinely discussing financial performance with each other throughout the year, some small businesses may have passive investors who are not in touch with the business’s finances on a regular basis. Particularly for those type of investors, the annual meeting can be an important event.
For the sake of efficiency, annual shareholder meetings are often scheduled on the same day as an annual meeting of the corporation’s directors. A meeting of the newly-elected directors usually will be held just after the shareholders meeting. Again, if you have a small business where the shareholders are also the directors, an annual directors meeting may be relatively brief and straightforward.
Votes taken at a shareholders meeting are valid only if a quorum (minimum number) of shareholders is present. The quorum requirement ensures that a minority of shareholders are not able to improperly exercise control over corporation decision-making. The number of shareholders that constitute a quorum is defined by state law. Most states require by default that more than 50% of the corporation’s shares be represented at the meeting in order for there to be a quorum. You do often have the option to impose a greater—or lesser—quorum requirement through your corporation’s bylaws. However, many states place an absolute minimum requirement that at least one-third of the corporation’s shares be represented, which cannot be superceded in your bylaws.
As an S corporation shareholder, you can appear at an annual meeting “by proxy.” This means you can authorize someone else to attend the meeting and vote on your behalf. Like quorum requirements, default rules for how proxy voting works are laid out in each state’s corporation laws. You can also create additional proxy voting rules in your bylaws. You typically will have to complete an authorization form in order to have someone vote your shares by proxy.
Part of required corporate formalities is not just holding annual shareholder meetings, but also making sure those meetings are recorded by the corporation’s secretary. More specifically, the secretary will create what are called meeting minutes. These are notes of what happened at the meeting, including when and where the meeting took place, who attended, and any significant actions or decisions. The minutes are kept in a corporate records book, which, in turn, should be kept in a safe location at your corporation’s place of business.
Probably the biggest risk for failing to hold annual shareholder meetings, as with failing to follow other corporate formalities, is that your corporation’s shareholders may lose limited liability protection. By default, shareholders in an S corporation cannot be held personally liable if, for example, the company fails to pay debts or injures someone. This type of protection traditionally is one of the main reasons small businesses choose to incorporate. However, courts can remove that protection and hold shareholders personally liable if corporate formalities, including the holding of annual shareholder meetings, are not observed.
Similarly, courts expect corporations to follow statutory requirements to keep meeting minutes, and otherwise record important decisions. Again, failure to adhere to this corporate formality could play a part in placing the limited liability of you and your fellow shareholders at risk.
For more information about other corporate formalities, including special shareholder meetings, as well as other information about S corporations, check the S corporation section of Nolo.com.
]]>Ordinarily, when you form a corporation to own and operate your business, you’ll work as its employee. If you form a regular “C” corporation, your corporation can provide you with health insurance as an employee fringe benefit and deduct the cost as a business expense. And you don’t have to pay any tax on the amount of the insurance premiums because they qualify as a tax-free employee fringe benefit.
However, when you elect S corporation tax status for your corporation, special tax rules come into play. Under these rules, anyone who works for an S corporation and owns 2% or more of its stock, must include in his or her wages the cost of certain employee fringe benefits provided by the corporation, including health insurance. This means income taxes must be paid on the amount of the premiums. Social Security and Medicare taxes have to be paid as well unless the procedure described below is followed.
Moreover, you can’t get around this rule by employing your spouse and providing him or her with company health insurance that covers you and rest of your family. Your spouse and other family members are considered S corporation shareholders for these purposes, even if they don’t actually have any stock in their names. They are treated as if they own all the stock that you own.
The fact that you’re not entitled to claim employee health insurance as a tax-free fringe benefit when you have an S corporation is not good. But things aren’t all bad for S corporation shareholders. You may still be able to take a personal income tax deduction for the health insurance premiums paid by your corporation.
Self-employed people are allowed to deduct health insurance premiums (including dental and long-term care coverage) for themselves, their spouses, and their dependents. When you’re an S corporation owner with more than 2% of the company stock, you’re treated the same as a self-employed person when it comes to deducting health insurance premiums.
This is not a business deduction. It is a special personal deduction you take on the first page of your Form 1040 as self-employed health insurance. If you have Medicare coverage, you may deduct your Medicare premiums as part of this deduction—this includes all Medicare parts (not just Part B). Your insurance can also cover your children up to age 27 (26 or younger as of the end of a tax year), whether or not they are your dependents.
Your deduction is limited to the amount of wages you are paid each year by your S corporation. You get the deduction whether you purchase your health insurance policy as an individual or have your S corporation obtain it. However, your S corporation must pay the premiums for you to get the deduction. Thus, if your purchase your policy yourself, you must have your S corporation reimburse you for the cost. If you choose the reimbursement option, be sure to submit your receipts to the corporation along with an expense report.
The amount of the premiums must be included in your employee wages on your annual Form W-2, and you must include the amount as wages on your Form 1040. Your S corporation deducts the amount as employee compensation on its own return.
You must pay income tax on the health insurance premium payments made by your S corporation. However, such payments are not subject to Social Security and Medicare taxes if (1) you’re the only employee of your S corporation, or (2) your corporation has other non-owner employees and provides them with health insurance. However, these taxes must be paid on the payments if your S corporation has non-owner employees, but does not provide them with health insurance.
]]>I'm planning on filing a lawsuit against an out-of-state corporation that owns retail locations in California. I was instructed to serve its agent for service, but the company does not have one. How can I properly serve the business -- and is it legal for it to continue doing business in California without having an agent?
No, it is not legal for the corporation to continue doing business in California without having an agent for service of process. In California, as in most all states, all foreign corporations -- which, less exotically, means all corporations formed in another state -- must have agents for service of process if they conduct any business in the state. An out-of-state corporation has to designate an agent before it begins doing business in California, file a statement every year identifying its agent, and file an amended designation if the name or address of the agent changes.
You don't have to serve the agent, however: You can also serve any officer of the corporation or its general manager. And if you cannot find the agent, an officer, or the general manager, you may serve the corporation by delivering the papers to California's Secretary of State -- all corporations must register with the Secretary of State before doing any business in California. To take this last route, though, you must first get a court order allowing it; you will be required to show that you tried without success to locate the agent for service of process.
I'm an officer of an S corporation, but I'd like to get out of this position and terminate my association with the corporation. If I do so, will I remain responsible for any corporate liabilities? Do I need a lawyer?
As breakups go, this shouldn't be too messy. You simply resign. Submit a written statement to the board of directors informing them of your resignation and its effective date.
Resigning won't cut off anyone's right to try and sue you for wrongful acts you committed while you were an officer. But in most states, the corporation will indemnify you -- in other words, provide backup such as legal defense and reimbursement for court-ordered money damages -- if you and the corporation get sued for your pre-resignation activities. (There are of course, limits on the wrongful acts that can be indemnified. Officers who are sued for sexual harassment, for example, are usually on their own.)
Check your corporation's articles of incorporation or bylaws to make sure this indemnification exists, and that it extends to you after you've resigned. Also, if your company took out directors and officers ("D & O") insurance, check the policy to make sure you'll be covered if you are later sued personally.
If you're also a shareholder, as a general rule you are not personally liable for the debts and liabilities of the corporation. If you and your corporate comrades have been observing basic corporate formalities, creditors shouldn't be able to come after you personally for the corporation's debts and liabilities. The rare exception would be where a creditor tries to "pierce the corporate veil" because you and your buddies have been, say, commingling corporate funds with personal funds, or committing similar no-nos. In such cases, your personal assets might be at risk.
Now, what are you proposing to do with your shares? If you intend to sell your shares to a third party, check with a lawyer to make sure the buyer won't cause the company to lose its S corporation status. There are legal restrictions on who can own shares of an S corporation. If you plan to sell your shares back to the company instead, be careful: Most states require a corporation to meet certain financial requirements before it can legally redeem or purchase a shareholder's shares. For instance, if the corporation can't pay its debts after it buys you out, the corporation (and its creditors) could come after you for that money.
You should be able to handle the basics of your departure yourself, without the assistance of a lawyer. But if you're ending your relationship with the corporation because of its shaky or questionable business practices, give your lawyer a jingle. You and your lawyer should look closely at the company's debts and liabilities to see whether they could leap out of the past and bite you.
Here are a few reasons why you should have a separate bank account for your business:
The documentation needed to set up the account will depend on how your business is organized: sole proprietorships require somewhat different documents from LLCs, and so on. Let’s briefly look at what’s needed for sole proprietorships, general partnerships, LLCs, and corporations.
For a sole proprietorship, you might not need anything more than a social security number—or, if you have obtained one, a federal taxpayer identification number (TIN). However, if your business requires a government-issued license, or you’ve filed a business name certificate because your business operates under a name different from your own name, you will also need the license or certificate showing both the business name and your own name.
For a general partnership, you’ll need the partnership’s TIN, a copy of your partnership agreement showing the name of your business and the names of the partners, and a business name certificate showing the business name and partners’ names.
For a limited liability company, you’ll need the company’s TIN and a copy of the articles of organization (or, depending on the state where the LLC is organized, the equivalent document, such as a certificate of formation). If the articles of organization do not provide sufficient information regarding who is authorized to sign on behalf of the LLC, you may also need an additional LLC document that does provide that information.
For a corporation, you’ll need the TIN and a copy of the articles of incorporation (or, depending on the state where the corporation is formed, the equivalent document, such as a certificate of incorporation). If the articles of incorporation do not provide sufficient information regarding who is authorized to sign on behalf of the corporation, you may also need an additional corporate document that does provide that information.
The common theme here is that you need the basic documents that substantiate the name and general nature of your business, the fact that your business is somehow registered with the IRS, and that you, personally, have the authority to set up the bank account.
With the appropriate documentation in hand, you’ll need to decide what kind of bank account you want to open. More specifically, you may have options ranging from basic checking accounts that, under certain conditions, incur no monthly fees, to more expansive accounts that include additional features such as special cash management services to assist you in moving money between multiple accounts, special customer service and support, or free companion savings accounts. Regardless of the type of account you choose, you probably will also want to get a debit card for your business account. This can make it easier to pay at least some business expenses.
In many cases, you can open your account online without having to appear personally at the bank. However, some types of businesses cannot open accounts online. These include businesses that provide money services, such as check cashing, issuing money orders, exchanging currency, and wiring funds, and also telemarketing businesses, dealers in precious metals, gambling businesses, and government entities.
If you are changing the legal form of an existing business, for example from a partnership to an LLC or corporation, it’s a good idea to open a new account for the business in its new legal form. You should have your new taxpayer ID number for the business in its new form, which you can present to the bank along with the articles of organization or articles of incorporation, and any other documents that may be required. (If you choose not to establish a new account for your business in its new legal form, you will need to investigate what the bank requires to convert your existing account, and also keep careful track of checks and other records relating to your business before and after it changes form.)
Going forward, it’s important to manage your business bank account responsibly. One potential benefit of consistently maintaining an adequate balance in your account, not writing bad checks, and sticking with the same bank over time is that you will increase your chances of obtaining a business loan from your bank should that become necessary.
Opening a separate bank account is just one of many steps for starting a new business. For more information, check Legal Guide for Starting & Running a Small Business, by Fred Steingold (Nolo) and The Small Business Start-Up Kit: A Legal Guide, by Peri H. Pakroo (Nolo).
]]>It's true that if you form a corporation in Nevada you won't have to pay any corporate or individual income taxes in Nevada. That's fine if you just do business in Nevada. But, if you do business outside Nevada, you'll find that your corporation will be subject to other states' taxes.
Here's why: Your Nevada corporation must qualify to do business in any state other than Nevada (it will be a "foreign corporation" in that state). "Doing business" means you have an office in that state, earn revenue there, or have employees there.
Qualifying to do business in a state is a lot like incorporating in that state. You'll have to register with the Secretary of State and pay the same (or more) filing fees as a "domestic corporation"--that is, a corporation formed in that state.
If you don't register, your corporation will be subject to monetary penalties and likely be barred from suing anyone in that state--this means you won't be able to enforce any contracts in that state and people who owe your corporation money won't have to pay. Failure to qualify may even constitute a crime under the state's law.
Moreover, you'll have to pay state corporate taxes in the states where you have qualified to do business. How much tax you'll have to pay in any particular state where you have qualified to do business depends on your level of business activity there. The rules vary from state to state. If the state imposes a "franchise tax" on corporations for the privilege of doing business, your Nevada corporation will have to pay that as well.
So even though you won't owe any tax in Nevada, you will owe tax in the state or states where your corporation does business. The result: No tax savings.
People who promote Nevada corporations claim that they have other benefits that make them worthwhile. One common claim is incorporating in Nevada is a good idea because Nevada's corporation law is particularly business-friendly. For example:
However, if the shareholders of the corporation don't live in Nevada and you do the bulk of your business in a state other than Nevada, there's a good chance you won't even be allowed to take advantage of Nevada's corporate law. This is the case, for example, if you incorporate in Nevada but a majority of your corporation's shares are owned by California residents and you do most of your business in California. Under California law, such a corporation is treated as a "pseudo foreign corporation" and the most important portions of California's less business-friendly corporation law are applied by California courts, not Nevada law. None of the Nevada legal benefits listed above would apply in California.
So, unless you'll be doing most of your business in Nevada, there is no reason to form a corporation there. When it comes to incorporating, stick close to home.
To learn how to incorporate your business, see Incorporate Your Business by attorney Anthony Mancuso.
April 2013
]]>An S corporation shareholder who performs more than minor services for the corporation will be its employee for tax purposes, as well as a shareholder. In effect, an active shareholder in a S corporation wears at least two hats: as a shareholder (owner) of the corporation, and as an employee of that corporation. This allows for savings on Social Security and Medicare taxes because such taxes need not be paid on distributions of earnings and profits from the corporation to its shareholders. Thus, to the extent they pay themselves shareholder distributions instead of employee salary, S corporation shareholder/employees can save big money on payroll taxes.
It’s up to the people who run an S corporation—its officers and directors—to decide how much salary to pay the corporation’s employees. When you are employed by an S corporation that you own (alone or with others), you’ll be the one making this decision. In fact, 70% of all S corporations are owned by just one person, so the owner has complete discretion to decide on his or her salary.
However, an S corporation must pay reasonable employee compensation (subject to employment taxes) to a shareholder-employee in return for the services the employee provides before a distribution (not subject to employment taxes) may be given to the shareholder-employee.
Unfortunately, many S corporation owners went overboard and had their corporations pay them no employee compensation at all, thus avoiding having to pay any payroll taxes. The IRS Inspector General found that in 2000 about 440,000 single shareholder S corporations paid no salary to their owners, costing the government billions in lost payroll taxes. As a result the IRS stepped up enforcement on this issue and audited thousands of S corps that paid their owners little or no salary.
If the IRS concludes that an S corporation owner has attempted to evade payroll taxes by disguising employee salary as corporate distributions, it can recharacterize the distributions as salary and require payment of employment taxes and penalties which can include payroll tax penalties of up to 100% plus negligence penalties. The IRS will do so if it concludes that the corporation paid the employee unreasonably low compensation for his or her services. For example, a CPA who incorporated his practice took a $24,000 annual salary from his S corporation and received $220,000 in dividends which were free of employment taxes. The IRS said that his salary was unreasonably low and that $175,000 of the dividends should be treated as wages subject to employment taxes. The court upheld the IRS’s power to recharacterize the dividends as wages subject to employment tax. (Watson v. United States, (DC IA 05/27/2010) 105 AFTR 2d.
The Tax Cuts and Jobs Act (“TCJA”) which went into effect in 2018, further complicates the S corporation employee wage equation. S corporations remain an effective means to avoid Social Security and Medicare tax under the new law. However, the TCJA instituted a new pass-through tax deduction that S corporation owners can take advantage of. Starting in 2018, owners of S corporations and other pass-through entities may deduct up to 20% of their net business income from their income taxes.
You qualify for the 20% deduction only if your total taxable income for the year is less than $157,500 (single) or $315,000 (married, filing jointly). If your taxable income is greater than $207,500 (single) or $415,000 (married), you don’t qualify for the pass-through deduction at all if you are involved in a personal service business, such as accounting, law, health, consulting, athletics, financial services, and brokerage services. If you’re not involved in such a service business, your deduction is limited to the greater of (1) 50% of the W2 wages you pay employees, or (2) 25% of wages plus 2.5% of the cost of your business property (but the deduction may never exceed 20% of your business income).
The employee wages S corporation owners pay themselves appear to count for purposes of the pass-through deduction. Thus, in cases where the pass-through deduction is based on W2 wages, it is in an S corporation owner’s interest to pay himself or herself more employee wages than under prior law when there was no pass-through deduction. Tax experts have calculated that 28.57% of business income should be paid as employee wages to maximize the pass-through deduction. Why not pay even more as wages? Paying more actually results in a smaller deduction because the total pass-through deduction may never exceed 20% of business income. Employee wages are a business deduction that reduces business income.
]]>In certain circumstances, fiduciary duties may also apply to controlling stockholders who possess a majority interest in or exercise control over corporate business activities, but not to other ordinary shareholders. A breach of a fiduciary duty may result in personal legal liability for the director, officer, or controlling shareholder. State statutory law, judicial decisions, and corporate articles of incorporation and bylaws may also impact a person's fiduciary obligations to a corporation.
Here are the key fiduciary duties owed to a corporation and its stockholders.
The fiduciary duty of obedience recognizes that officers and directors have different responsibilities in a corporation. To fulfill this duty, officers and directors must carry out their duties within the scope of their delegated authority under the law and the applicable corporate governing documents.
This duty may be of particular concern for nonprofit corporations where officers and directors are tasked with carrying out their duties in compliance with their organization’s charitable purposes. For example, an office or director may violate their duty of obedience by failing to comply with donor restrictions on pledges or permitting nonprofit resources to be used for non-charitable purposes.
Officers and directors owe a duty of loyalty to a corporation and its shareholders. They are expected to put the welfare and best interests of the corporation above their own personal or other business interests. Conflicts of interest, efforts to compete with the corporation, or making secret profits from corporate business dealings are typical examples of disloyalty. Under the corporate opportunity doctrine, officers and directors may not secretly divert or take advantage of business options for their own personal profit.
For example, officers and directors may confidentially learn about a lucrative development opportunity being offered to their real estate corporation. Officers and directors must not secretly profit from this situation or act upon it in a manner that harms corporate interests. In some states, officers or directors may take advantage of certain opportunities if the corporation has waived its interest to such dealings in its governing documents or appropriate prior disclosures have been made to the board of directors. Violations of this duty may result in officers or directors being sued and required to turn over their secret profits to the corporation.
In a corporate environment, both officers and directors are expected to use appropriate care and diligence when acting on behalf of their corporation. They should exercise reasonable prudence in carrying out their duties to achieve the best interests of the corporation. An officer or director may be held personally liable for failing to exercise reasonable or ordinary care under the circumstances. For example, a lack of due care may be shown when an officer or director fails to undertake a reasonable review of a corporate matter, to regularly attend board meetings, or to adequately supervise staff which ends up damaging the corporation.
Under the business judgment rule, an officer or director may not held liable for business decisions made in good faith and with reasonable care that turn out to harm corporate interests. The courts will defer to erroneous business judgments, provided that the officers or directors did not show gross negligence in their review and decision-making process. Without this rule in place, many individuals would be unwilling to serve as officers and directors and business people might be reluctant to take commercial risks that could benefit a corporation in the long run.
This fiduciary duty is closely aligned with the duties of care, loyalty, and obedience. Under this duty, officers and directors must act with honesty, good faith, and fairness when handling corporate obligations. This continuing duty runs through their daily tasks and operation of the corporation.
Candor in business discussion is important between officers, directors, and shareholders so that they may assess material risks and make informed decisions. Full and fair disclosure of material facts is essential before seeking board or stockholder approval of major corporate business transactions, such as a mergers with or acquisitions of other companies. As part of their duties of loyalty and care, officers and directors should also disclose any potential conflict of interest that may arise between their individual interests and those of the corporation.
]]>What sets a corporation apart from other types of businesses is that a corporation is an independent legal entity, separate from the people who own, control, and manage it. In other words, corporation and tax laws view the corporation as a legal "person" that can enter into contracts, incur debts, and pay taxes apart from its owners. Other important characteristics also result from the corporation's separate existence: A corporation doesn't dissolve when its owners (shareholders) change or die, and the owners of a corporation have limited liability—that is, they're not personally responsible for the corporation's debts.
Corporations are made up of shareholders, directors, and officers. Shareholders own stock (made up of individual shares) in the corporation. The directors, or board of directors, oversee the corporation and make the major decisions for the business. Finally, the officers manage the corporation's day-to-day activities and generally report to the board.
To learn more about how a corporation is run, read our article on understanding corporate structure.
Unlike corporations, partnerships and sole proprietorships don't provide limited personal liability for business debts. Limited liability means that creditors of those businesses can go after the owner's personal assets to collect what's due. However, organizing and operating a partnership or sole proprietorship is much easier than forming a corporation, because no formal paperwork is required.
A limited liability company (LLC), on the other hand, does offer limited personal liability, like a corporation. And while formal paperwork is required to form an LLC, running an LLC is less complicated than running a corporation. LLC owners do not have to hold regular ownership and management meetings or follow other corporate formalities, for example.
Corporations also differ from other business structures in the way they're taxed. The corporation itself must pay corporate income taxes on its "profits"—whatever's left over after paying salaries, bonuses, and other deductible expenses. In contrast, partnerships, sole proprietorships, and LLCs aren't taxed on business profits; instead, the profits "pass through" the business to the owners, who report business income or losses on their personal tax returns.
For guidance on deciding which ownership structure is most suitable for your business, read our article choosing the best ownership structure for your business.
If a business owner has "limited liability," it means that they aren't personally responsible for the corporation's debts and obligations. In other words, if the corporation is sued, only the assets of the business are at risk, not the owners' (shareholders') personal assets, such as their houses or cars. The corporation's owners must comply with certain corporate formalities, keep up with paperwork requirements, and adequately fund ("capitalize") their business to maintain this limited liability privilege.
Limited liability, traditionally associated with corporations, is the main reason most people consider incorporating. However, other business structures, such as LLCs, now offer this limited personal liability to business owners. Sole proprietorships and general partnerships don't.
Because of the expense and formalities involved in setting up a corporation and issuing stock (shares in the corporation), you should form a corporation only if you have good reason to do so. If you merely want to limit your personal liability for business debts, forming an LLC is probably smarter, because LLCs cost less to form and are easier to run. But here are some situations in which incorporating your business instead of forming an LLC might make sense:
There are several steps required to legally create a corporation. The first is filing a short document called "articles of incorporation" with the corporations division of your state government. (Some states refer to this organizational document as a "certificate of incorporation," a "certificate of formation," or a "charter.") You'll have to pay a filing fee that ranges from about $100 to $800, depending on the rules of the state where you file. This document contains basic information such as:
When forming your corporation, you must also create "corporate bylaws," a longer document that sets out the rules that govern your corporation, including decision-making procedures and voting rights.
Finally, before you start doing business, you must hold an initial meeting of your board of directors to take care of some formalities, and you need to issue shares of stock to the initial owners (shareholders).
If you're interested in reading more, check out our book, Incorporate Your Business, A Step-by-Step Guide to Forming a Corporation in Any State, by Anthony Mancuso. This book gives detailed guidance on how to incorporate and provides all the forms you need to establish your corporation.
Yes. Corporations require paperwork to start and run the business. As with an LLC but unlike with unassociated businesses, you must register your corporation with the state. After you register your business, many states require you to file annual reports to keep your corporation in good standing.
Additionally, corporations must comply with statutory rules that other businesses, such as LLCs, partnerships, and sole proprietorships don't. For instance, corporations must observe corporate formalities such as holding and taking minutes of annual shareholder and director meetings and documenting important decisions. Also, corporations must file and pay taxes on a separate corporate tax return and must set up a double-entry bookkeeping system to record business transactions, complete with daily journals and a general ledger.
To learn more about corporate paperwork, read our article on how and when to document corporate decisions.
Unlike sole proprietors and owners of partnerships and LLCs, a corporation's owners don't pay individual taxes on all business profits. The owners pay taxes only on profits paid out to them in the form of salaries, bonuses, and dividends. (Dividends are portions of profits that large corporations sometimes pay out to shareholders in return for their investment in the company.) The corporation pays taxes, at special corporate tax rates, on any profits that are left in the company from year to year (called "retained earnings").
Note that this taxation scheme doesn't apply to S corporations, which are corporations that have elected partnership-style taxation. (Regular corporations, discussed above, are called "C corporations.")
S corporations, like sole proprietorships, partnerships, and LLCs are pass-through tax entities. If your corporation elects to be taxed as an S corporation, all of the corporation's profits and losses will "pass through" to the owners, who'll report them on their individual income tax returns.
For more information on regular corporate taxation, see Nolo's article how corporations are taxed.
Many people have heard that corporate income is taxed twice: once to the corporation itself and then a second time when earnings are paid out to the corporation's owners (shareholders). This double taxation is true only for earnings paid out to shareholders in the form of dividends—that is, profits paid by the corporation to its shareholders in return for their investment in the company.
In practice, this sort of double taxation seldom occurs in a small corporation. The reason is simple: Shareholders rarely pay themselves dividends. Instead, they work for the corporation and pay themselves salaries and bonuses. Because the corporation can deduct salaries and bonuses as ordinary and necessary business expenses, it doesn't have to pay corporate tax on them.
Dividends, on the other hand, aren't tax-deductible corporate expense, so both the corporation and the shareholder must pay tax. As long as you work for your corporation, even in a part-time or consulting capacity, you can avoid double taxation by taking home profits in the form of a salary and bonuses rather than dividends.
Securities laws are meant to protect investors from unscrupulous business owners. These laws require corporations to jump through some hoops before accepting investments in exchange for shares of stock (the "securities"). Technically, a corporation is required to register the sale of shares with the federal Securities and Exchange Commission (SEC) and its state securities agency before granting stock to the initial corporate owners (shareholders). Registration takes time and typically involves extra legal and accounting fees.
Fortunately, many small corporations can skip the registration process because of exemptions provided by both federal and state laws. For example, SEC rules don't require a corporation to register a "private offering," which is a non-advertised sale of stock to either:
Most states have enacted their own versions of this popular federal exemption.
If you and a few associates are setting up a corporation that you'll actively manage, you'll no doubt qualify for an exemption, and you won't have to file any paperwork. For more information about federal exemptions, visit the SEC website. For more information on your state's exemption rules, go to your secretary of state's website.
The word "foreign" can be used to describe a corporation that's outside of the United States. Individual states, however, usually use the word "foreign" to refer to a company that was formed in another state.
For example, suppose you incorporate your business in Delaware but your corporation operates in Delaware and New York. To New York, your business would be considered a "foreign corporation" because you didn't incorporate in New York. On the other hand, in Delaware, your corporation would be considered a "domestic corporation" because you did form your company in Delaware.
If you incorporate your corporation in one state but want to do business in another state, then you'll need to qualify to do business in that other state. Each state has its own procedure for when and how foreign corporations need to register to do business.
A professional corporation is a special kind of corporation that only members of certain professions, such as lawyers, doctors, and healthcare workers, can create. By forming a professional corporation, professionals can limit their personal liability for the malpractice of their associates.
Before dividing up the remaining value of your business — or taking it home with you — be sure to:
First, you'll need to pay off all the bills you owe and all creditors' claims that you know of—or settle them for less than the full amount if possible.
Don't distribute assets to owners if debts aren't paid. State law prohibits a corporation, LLC, or partnership from distributing its assets to the owners if the company cannot pay all of its debts. Not only are there penalties for doing so, but unpaid creditors can sue for the return of the assets from the owners. And the directors, officers, members, or partners of the company who approved the illegal distributions of assets can be held personally liable for the amount of the distributions.
Next, you can pay off any loans to the business owners—and sign the appropriate paperwork to document it.
If there is a possibility that a creditor may bring a claim after the company is dissolved, you and the other owners should set aside a contingency fund to pay any liabilities (or taxes) that surface after the dissolution, rather than distributing the assets to yourselves. Creditors you aren't aware of when you close your business are called unknown creditors.
If there is still money left over after taking care of all of the above, the remaining cash and assets can usually be distributed to the owners based on their pro rata share of ownership. How the remaining cash and assets are distributed to the owners depends on the structure of the company.
Sole Proprietor. After paying debts and loans, the money and assets are yours.
Corporations. In a corporation, the remaining cash and assets are totaled and then divided by the number of shares owned by shareholders. The corporation pays the shareholders the amount of cash or assets that's proportionate to the number of shares each shareholder owns, and in exchange the shareholders return their outstanding shares.
Partnerships and LLCs. In a partnership or LLC, distributions are made to members and partners according to the balance in each member or partner's capital account. (All partners or members have capital accounts that start off with their initial investments in the business and are increased when profits are allocated to them and decreased when profits are distributed to them.) If there isn't sufficient cash to pay each owner the amount in the capital account, as is likely, whatever cash or assets that remain are split among the owners based on the relative size of each owner's capital account.
When all is said and done, be sure to close out your business bank account and cancel your business credit cards. However, you may want to wait a few weeks or months to close your checking account—no matter how organized you are, a bill or debt or two are certain to arise after you close.
If your business operated as a partnership, corporation, or LLC, be sure to dissolve the LLC or corporation or partnership. Some states require that the assets be distributed before the entity can be officially dissolved; other states requires you to file your final tax returns before you file the dissolution papers.
Stay available. Even though your business is ending on a not-so-successful note, make sure that people who might need to get in touch with you have your contact information. For instance, a former customer may need a referral, or a former employee may need a reference. Leave contact information with your business contacts, colleagues, employees, and customers. You never know when a contact can help you out in the future, so it pays to keep your network alive.
If you are worried about unknown creditors, speak to a local business lawyer before distributing the business's assets.
If you have been operating as a sole proprietor, you simply make the decision on your own, or with your spouse, and skip to the next step.
If you have been doing business as a corporation, limited liability company (LLC), or partnership, you and your business associates must agree to dissolve the entity by following either the procedures set out in your organizational documents or the rules set out in your state's business statutes. Usually, these rules require at least a majority of the owners to agree on dissolution, but they could require a two-third's or even unanimous vote. Dig up those documents to make sure you conduct the voting correctly, or check your state's corporation, limited liability company, or partnership statutes to find out what the rules are. You can get to most states' business statutes by visiting the Legal Research area of Nolo's website.
Make sure you record your decision with a resolution in the minutes of a meeting or with a written consent form.
If you have been doing business as a corporation or limited liability company, you need to officially dissolve your entity so that you are no longer liable for business taxes or filings in your state. Officially dissolving your business also puts creditors on notice that your entity can no longer incur business debts.
Your state corporations or LLC unit -- usually a division of the secretary of state -- should have the necessary forms. For instance, a California corporation must submit to the California Secretary of State a "certificate of dissolution" and a "certificate of election to wind up and dissolve." These forms set out the disposition of your business's debts and liabilities, the distribution of your business assets, and how you and your co-shareholders elected to dissolve your business. LLCs have to file similar documents (sometimes called "articles of dissolution").
In some states, before you will be allowed to formally dissolve your business, you may also be required to obtain a "tax clearance" or "consent to dissolution" from your state tax board, declaring that all of your business taxes have been paid.
The rules and forms for dissolving a business entity (including information or links to the state tax board requirements) are usually posted on your state's secretary of state's website; you may have to look under FAQs for information. To find a link to your secretary of state's website, visit here.
If you have been doing business as a partnership, you may need to file a dissolution form with the state, particularly if you filed paperwork with the state when you formed your partnership. (For instance, in California, if you filed a "statement of authority" with the Secretary of State when you formed your partnership, you must file a "certificate of dissolution" when you dissolve your partnership.) Required or not, it's a good idea to file dissolution paperwork if you can, to put creditors on notice that the partnership can no longer incur debts. This is especially important if you are involved in a general partnership, where any partner can usually bind the partnership to a deal and every partner is personally liable for all business debts.
No matter what kind of business you have, you should cancel any kind of permit or license you hold with the state or county -- you don't want anyone else to use your seller's permit or business name, for instance -- that could make you responsible for any taxes and penalties incurred after you no longer operate the business.
If you have a seller's permit or business license, contact the agency that issued the permit or license and cancel it. Likewise, if you've been using a fictitious or assumed business name, file an "abandonment" of the name and publish it in a local newspaper -- contact your county clerk's office for a form.
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