 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
| |
 |
Now that you're up
and running......
What type of business do
you have?
1. Sole Proprietorship
2. Incorporation
3. Limited Liability Company
and running......
What type of business do
you have?
1. Sole Proprietorship
2. Incorporation
3. Limited Liability Company
- Using Your Business
Plan
- Getting Financing for
Your Business
- Marketing Your Product
- Win Government
Contracts
TYPES OF BUSINESSES
Forming of the “C” Corporation
A "C Corporation" is taxed under Subchapter C of the Internal Revenue
Code. As a legal entity (an artificial person), the C corporation is separate
and distinct from the stockholders – the owners of the corporation. Under
most State's incorporation laws, there is no distinction between a C
corporation and an S corporation. However, the two types of corporate
entities are subject to differing federal and state tax treatment. Principal
aspects of C corporation taxation are summarized in this document.
As a tax-paying entity, the C corporation must pay taxes on its taxable
income prior to making dividend distributions to stockholders. It is allowed
to issue more than one type of stock and can have any number of
stockholders.
As a separate legal entity, the corporation's finances and records are
established and maintained completely separate and distinct from the
finances and records of the stockholders. Through a resolution adopted at
a stockholders meeting held in accordance with the bylaws of the
corporation, one or more officers or employees of the corporation are
authorized to conduct business on behalf of the corporation. The resolution
typically includes an authorization within specified limits to borrow and
repay funds as needed for business operations. The authorized person or
persons make credit arrangements in the name of the corporation with
loan document signatures after the lender has received a certified copy of
the authorizing resolution.
If the corporation is newly formed, small (has few assets), or has a limited
record of credit use, it's likely that a lender will require personal guarantees
by one or more officers or stockholders before approving a credit
application from the corporation. If personal guarantees are given, the
signer(s) usually have unlimited liability for the debts of the corporation.
The Corporate Charter includes information on the purpose(s) for which
the corporation is organized and the life of the corporation. (A corporation
often has perpetual life.) Bylaws of the Corporation are the "rules" for
conducting the organizational life of the corporation.
Moderate legal costs are incurred in setting up a C corporation, and annual
costs are incurred for stockholders meetings, tax return preparations, and
preparing other yearly reports and summaries as needed for management
and desired by stockholders. Public notice of the formation and continued
operation of a corporation is required and is accomplished through filings
with the Secretary of State's Office.
Advantages of the C Corporation:
Creation of the corporate shield that, in the absence of personal
guarantees, limits the liability of stockholders to their capital investment in
the corporation and the usefulness for estate planning purposes of the
corporate form of business organization are frequently cited advantages of
forming a C corporation. Other advantages include:
· The perpetual life of the corporation makes possible its continuation, and
the relatively undisturbed continued operation of your business, despite the
incapacity or death of one or more stockholders.
· Fractional ownership interests are easily accommodated in the initial
offering of stock.
· The purchase, sale, and gifting of stock make possible changes in
ownership without disturbing the corporation's ability to conduct business.
· The required separation of finances and records for the corporation
reduces the risk of unrecognized equity liquidations.
· To the extent the corporate shield is maintained and other investments
and savings of the stockholders are not at risk, the personal life of
stockholders is simplified.
· The annual meetings of stockholders and consultations with legal
counsel can provide stimulus for improved communication with the
stockholder group (usually a family group) and can provide more
comprehensive guidance for management.
· Life insurance up to $50,000 per person, health insurance, housing
costs, and other benefits for employees (including stockholder-employees)
can be a tax-deductible expense for the corporation.
Limitations of the C Corporation:
Double taxation of corporate net income distributed to stockholders in the
form of dividends is the most frequently cited disadvantage of the C
Corporation. As a corporate entity, C corporations must pay income tax on
their net income prior to any distribution of dividends to stockholders, and
the dividends are taxable to the stockholders resulting in double taxation of
corporation income distributed to the stockholders. However, the effects of
this limitation can be reduced when the stockholders are corporation
employees and derive most of their income from salaries and wages paid
by the corporation.
Other limitations of the C Corporation include:
· Lenders may require personal guarantees from corporate officers as a
condition of supplying credit, thus negating the limitation of liability.
· Conflicts or disagreements among the usually small group of
stockholders in a small-scale entrepreneurship corporation may
immobilize decision-making.
· Restrictions on the sale of stock and/or buy-back agreements included
in the bylaws may prevent minority stockholders from being able to recover
the value of their investment in the corporation.
· Through the processes of gifting and inheritance, stock ownership can
become divided among many persons who are not participants in
operations of the business, and that can result in their becoming a voting
block that does not support needs and decisions believed desirable by
managing stockholders.
· Over time, corporation paid benefits for stockholder-employees may
become costly and exceed the ability of the business to pay.
· If the corporation owns appreciated assets and the corporation is
dissolved, significant income taxes on the appreciation amount will be
generated.
Tax implications - general:
All real and personal property held by a C corporation is taxable to the
extent set by state law. C corporations pay income tax at rates that,
depending on their level of taxable income, can be more or less that the
income tax rates of single or married stockholders with comparable levels
of taxable income. If you are considering forming a C corporation, secure
current information on the relevant tax rates and compare estimated tax
costs with and without incorporation before deciding to incorporate your
business.
Pay of corporation employees is subject to payroll taxes in the same
manner as is the case for employees in any other type of economic activity.
Assets of the corporation generally are retrieved to individual ownership
only through transactions that generate taxable income. Sale of stock
establishes the market price as the purchaser's tax basis for the stock, but
does not increase the tax basis of assets of the corporation. Death of a
shareholder may result in a "step-up" of the tax basis of his or her
corporation stock, but does not increase the tax basis of assets held by the
corporation.
If the corporation is dissolved when it owns assets that have appreciated in
value (usually land, buildings, and/or equipment), federal income tax will
be due on the asset appreciation amount even when the assets are not
sold. For this reason, many management advisers and estate planners
recommend holding title to fixed assets in an entity separate from the
corporation – for example, in individual ownership or in ownership by a
limited liability company. When this is done, the corporation rents the fixed
assets from the individual or no corporate entity. Generally, this approach
is useful only when the value of fixed assets is relatively large or there is
good reason to believe they will experience significant appreciation in value.
| C CORPORATION |
What Type of Business
Should You Be?
Should You Be?
| THE BRANDON GROUP, INC. |
C Corporations S Corporations Limited Liability Company |