We’ve been Business Planning for over 11 years at the firm and here’s a breakdown of all the Frequently Asked Questions we get regarding Corporations.
What is a Corporation?
A corporation is a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members. People form corporations to protect their personal liability, to make it easy to raise money through the sale of stock, and to make it easy to transfer ownership of the corporation.
What is an “S-Corporation”?
S- Corportation means “Small Business Corporation”.
After a corporation has been formed (all corporations are, by default , a “C Corporation” , it may elect “S-Corporation” status by submitting form 2553 the IRS (some states require their own version). Once this filing is complete, the corporation is not double taxed like a regular corporation.
Most new small business corporations elect “S-Corporation” Status. “S-Corporations” can also revert back
How many people are required to form a Corporation?
Only 1 person, over the age of 18, is needed to form a Corporation in any of the 50 states and DC.
How is a Corporation Organized and Managed?
A Corporation has 3 levels: it is owned by Shareholders, who elect Directors (known as the “Board of Directors”), who appoint officers (CEO/President, Treasurer/CFO, Secretary, etc.) to run the day-to-day activities of the company. The Corporate Bylaws (that are adopted when the company is first organized and can be amended later) will specify how Directors can be elected or removed and how Officers are appointed or removed. Typically, this is done by a simple majority vote.
n many cases, especially in small businesses, one person is all of the above: sole Shareholder, sole Director and all of the Officers. However, the company still maintains the flexibility to add Shareholders, Directors or Officers at any point in the future.
What are the name requirements for a Corporation?
A corporation primarily identifies itself by its corporate name indicator. These include the following additions to the business name: Incorporated (or Inc.), Corporation (or Corp.) and Limited (or Ltd.) NOTE: Ltd. is not available in all states.
For example: “Acme, Inc.”, “Acme Corporation” and “The Acme Company Ltd.” all identify the business as a Corporation.
Also, the name of the corporation must be distinguishable compared to the other corporations (or other business entities) on file with the state. The rules vary dramatically by state on what constitutes “available”. Note that we’re experts at this so feel free to contact us if you have questions about corporation name availability.
How do I become an “S-Corporation”?
By default, all Corporations (regardless of which state they were formed in) are known as “C-Corporations“. So, if you have not specifically filed a form to elect to become an S-Corporation, then your company is still a C-Corporation.
By submitting a form 2553 the IRS and adopting the appropriate corporate resolution, you can become an S-Corporation. Note that this is due either 1) within the first 75 days of the companies formation (with a few exceptions) or 2) by March 15 of the next year (to make it effective that year).
If you utilize our S-Corporation Election service we can prepare the resolution and the form for you “ready for signature”, you’ll just need to fax it to the IRS and they’ll confirm via mail within a few weeks. Note that some states like California and New Jersey also require their own state version of the S-Corporation Election.
How do I add a Shareholder, Director or Officer?
Shareholders are added by purchasing stock in the corporation (providing money or services in exchange for shares in the corporation). The stock sale would be approved by the existing shareholders and may depend on your Corporate Bylaws.
Adding or removing Directors or Officers is an internal company decision best addressed by your company Bylaws as well. If you have not adopted Corporate Bylaws or held an organizational meeting, then the corporation doesn’t have a formal agreement on adding or removing Directors and Officers or approving the sale (or transfer) of stock.
Once you’ve held the Organizational Meeting and adopted Corporate Bylaws, then the Bylaws should spell out the necessary steps for adding and removing of Directors or Officers. At the least, you should document the change in writing and have all parties sign that document.
Most states do not record shareholders but many record the names and addresses of Directors and Officers. Once you’ve made the internal changes, then you will notify the State of the change by filing an updated Annual Report (we can do this for you).
NOTE: You might be able to file an “Early” Annual Report if you want the state database to be updated immediately or some states will require you to wait until your next Annual Report is due. If your state does not list Shareholders, Directors or Officers or have an Annual Report then you will simply need to keep internal records of the change per your Bylaws.
What if I decide to close my Corporation, what’s involved?
A corporation can be dissolved almost as easily as it is created. If you form your corporation and then decide to close it for whatever reason in the future, you simply will have to file “Articles of Dissolution” with the state and take the money (if any) out of the company and return it to the shareholders.
You will then notify the IRS (cancel your FEIN and indicate your final tax return) and any other appropriate government agencies and vendors that the company is no longer in business. We will file your dissolution paperwork with the state and also provide you a checklist of after-filing tasks to property shut down the company.