How Do I Form a Corporation?
Corporate Formation begins by filing Articles of Incorporation with the California Secretary of State. The Secretary of State provides a form that can be completed. Based on the type of Corporation you want to form and whether you plan to have investors, it may be a good idea to have an attorney assist with drafting these Articles rather than using the template provided by the Secretary of State.
Why Should I choose a Corporation?
Corporations are a great entity choice for people who want the liability protection of a corporate form. Corporations have been around a lot longer than LLCs and may be a better option if you want liability protection and the choice of adding different types of investors down the road.
What type of Corporation should I choose?
When deciding on Corporate Formation in California, there are a few different entity types to choose from. You can either choose to have a standard stock corporation, a social enterprise corporation or a nonprofit corporation.
Social Enterprise Corporations
For our clients that are more socially minded, we often find that a Benefit Corporation or Social Purpose Corporation may suit their needs. These types of corporations are popular among consumers and provide an excellent marketing platform for your new business.
For those who want a nonprofit, you can either have a nonprofit public benefit corporation, nonprofit mutual benefit corporation or nonprofit religious corporation. The biggest thing to keep in mind about nonprofit corporations is that no one owns the corporation. This is very important to remember because any assets that are transferred to the nonprofit will need to be distributed to another nonprofit upon dissolution. If you like the idea of a nonprofit but want to own the company, think about a Social Enterprise like a Social Purpose Corporation or Benefit Corporation.
Should I choose an S Corporation or a C Corporation?
Did you know that all for-profit corporations can choose to be either a C Corporation or an S Corporation. The designation of S Corporation or C Corporation does not refer to the entity type but rather how the corporation is taxed.
S corporations are Corporations have have elected to pass corporate income, losses and deductions through to their shareholders. This means that Shareholders of S Corporations report the income and losses of the S Corporation on their individual tax returns and are assessed tax at their individual tax rate. This allows Corporations to avoid double taxation that typically occurs on corporation income.
Your Corporation can elect to be taxed as an S Corporation by fling a Form 2553 with the Internal Revenue Service.
To qualify for S corporation status, the corporation must meet the following requirements:
- Be a domestic corporation
- Have only allowable shareholders
- May be individuals, certain trusts, and estates and
- May not be partnerships, corporations or non-resident alien shareholders
- Have no more than 100 shareholders
- Have only one class of stock
The IRS has provided some helpful information regarding S Corporations https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
All corporations that don’t elect to be taxed as an S Corporation or a C Corporation. C Corporations are really just the standard default Corporation. Often you hear that C Corporations face double taxation. What does this mean?
C Corporations are considered a separate tax payer that must file its own tax return and pay a corporate tax rate on its income. Any income that is paid to the shareholders through dividends will be taxed twice. First, on the corporate return at the corporate income tax rate and second on the Shareholder’s individual tax return. The only income that is really taxed twice is dividends. Its also important to note that income paid as a salary or deferred compensation is a deduction to the Corporation so that the amount of income paid is deducted from the amount of income subject to taxation.
Start Where you Mean to End Up
It is important to find an attorney that understands all of the aspects of business and corporate formation. Business formation is not just about filing Articles with the Secretary of State. This can be done by you or through a legal website. The business formation process involves planning and selecting the right entity type by looking at your business goals and making decisions that will help you achieve those goals. SLG takes the time to learn about you and your business to make sure that you choose the entity types that will set you up for success. Choosing a business entity type and deciding how that entity will be taxed should be a careful decision that is made with the help of an experienced attorney. At SLG, we are able to advise you of your options and set you up for success.