However, with respect to taxes, the C corporation itself is considered a taxable entity. That means that it files a tax return and pays income taxes on its net income. If the corporation then distributes income in the form of dividends to the shareholders, they are taxed again on the income.

This is often referred to as the double tax of corporations. Most small businesses can avoid or reduce this double tax by paying substantial compensation and providing benefits to the shareholders who work in the business.

Compensation and benefits are generally tax deductible to the corporation as a business expense. If a benefits plan is structured properly, the value of the benefits may not be considered taxable income to the employee.

Compensation must be reasonable or there is the possibility that the IRS could reclassify it as a dividend making it subject to the double tax problem. The other method of avoiding or reducing the double tax is to elect an S corporation status. Unlike a C corporation, an S corporation itself is not a taxable entity.

The S corporation files an informational tax return on form 1120S, but the corporation itself does not pay taxes on the net income of the business. An S corporation is a pass -through entity which means the profits or losses are reported by the owners (shareholders) on their individual tax returns.

An S corporation can also pay compensation to shareholders who work in the business. If the S corporation distributes income to the shareholders, there is no double tax because the S corporation as an entity does not pay any tax. Only the shareholders of the S corporation report and pay income taxes on their prorata share of the business net income.

The Corporate Filing Office (usually the secretary of state’s office) will usually have a lot of information about the organization and operation of a corporation.

For more legal resources visit:
• http://www.nass.org/
• http://www.keytlaw.com/Links/govrecords.htm

The next source of laws is found in various court decisions. The courts of each state often interpret and determine issues of law regarding corporations. Written decisions from these courts can usually be found in legal reports at a law library and sometimes at a local library.

There are also some good online services to help you find this information. Court decisions are frequently called legal precedents because they are often relied upon as authority by a judge trying to decide similar legal issues. In addition, many libraries have books or treatises prepared by legal experts, which provide helpful summaries of the law.

For example, if you incorporate in Nevada but your business office is in Oregon and you do most of your business in Oregon, you will have to file and pay fees in Oregon as a foreign corporation doing business in Oregon, in addition to incorporating and paying fees in Nevada.

This dual filing can be expensive and can result in substantially more record keeping which may outweigh any potential advantages. Some larger corporations are registered as foreign corporations in every state, but this is expensive and time consuming for most smaller businesses.

Occasionally, there is a valid reason for incorporating in a state different than where you conduct business. There may be some special tax or liability advantages in a particular state that are beneficial to your special type of business.

If you operate a business that provides its product or services everywhere, such as an internet-based business, then you have more choices. However, if you do substantial business in any particular state, you may still be required to register in that state as a foreign corporation.

For more information on corporate filing offices visit:
http://nass.org
http://www.keytlaw.com

Usually, the statutes provide that only a person holding the license required to practice the professional service can be a shareholder or at least a majority shareholder. In addition, only those holding the professional license can normally be a director or officer of the corporation except for the corporate secretary.

The reason for these restrictions is that the professionals are strictly regulated by license requirements of their profession and the law does not want unlicensed people making decisions that might compromise the professional’s judgment on matters within their expertise.

On the other hand, some states have adopted special statutes for a “close corporation” which describes a corporation with a small number of shareholders that is authorized to function without directors. This bypasses some of the normal corporate formalities involved with a board of directors and supposedly simplifies the process.

My experience is that in some cases this may make operation of a small corporation easier but on the other hand, it sometimes complicates it because the business world is accustomed to dealing with directors.

For this reason, owners or shareholders of a “close corporation” may find themselves trying to explain to a banker or other business person why they don’t have directors and why they don’t need director approval for various corporate actions. As a practical matter, the “close corporation“ structure may not provide that much benefit after all.

1. Liability Protection. With respect to liability protection, corporations (both C and S corporations) and LLC’s provide the same or similar limited liability protection. It is sometimes said that corporations may be more predictable because they have a longer history of legal case precedent to help decide issues of liability. Limited liability protection is also available in limited partnerships and limited liability partnerships but these forms are not frequently used for small businesses.
2. Tax Considerations. With respect to taxes, the best advice is to project your net income for the next year or two and then ask your accountant or tax advisor to calculate which entity will provide you with the best tax savings. The information provides some basic considerations:

Special note: I often hear people say they have been told that an LLC is easier to operate than a corporation because there are no corporate formalities to observe. In my experience, this is simply not a major factor since both small business corporations and LLC’s are relatively easy to operate. I do not believe this should be a deciding factor in most cases.

If saving money on the FICA or the 15.3% self employment taxes is important to you, an S corporation may be the best entity of choice. The tax law requires that you pay reasonable compensation to the shareholders who work in the business. Many accountants define “reasonable” to mean approximately half of the net income of the business (this may vary depending on the nature of the business and what employees in similar businesses earn).

The proper FICA taxes must be withheld and paid on the compensation. The rest of the income which is distributed to the shareholders is not subject to the FICA taxes (it is, however, still subject to income taxes). Most accountants suggest that this same savings on FICA taxes is not currently available when using an LLC.

Special Note: Some tax advisors are recommending the use of an LLC which elects S corporation tax status. This is a fairly new approach that might provide the benefit of reduced FICA taxes coupled with the informal operating requirements of an LLC.

If you plan to leave most of the earnings in the business for purposes of expansion, then a C corporation might be most beneficial. This is because the first $50,000 of net income in a C corporation is generally taxed at a lower rate than the individual tax rates of S corporation shareholders or members of an LLC.

Thus, you can leave the first $50,000 of net income in the business and pay a lower tax rate. (You can leave net income in the business in both an S corporation and LLC but the shareholders and members will be required to pay income tax on the money at the end of the year, regardless of whether they actually received it or not, at their individual tax rates.)

If you plan on losing money or borrowing substantial money in the start-up phase, you should consider an LLC which may allow you to write off greater losses than you could if operating as an S corporation or C corporation. That’s because you get a little better tax basis when using an LLC.

There are some limitations on S corporation election. The rules require all shareholders to agree to S election and all shareholders must be citizens or permanent residents of the United States. S corporations are limited to 75 shareholders and to only one class of stock such as common voting stock. Other entities such as corporations or LLC’s cannot be S corporation shareholders with the exception of a few types of special trusts.

If you are planning on the business expanding rapidly and possibly going public, S corporations and LLC’s do not work as well. Even though you leave the net earnings in the business to expand it, you will have to pay income tax at your personal rate on the net earnings.

If there is a need to distribute income and allocate losses on a basis different than ownership ratios, then an LLC may work best. An LLC operating agreement can provide for a different allocation of profits and losses.(S corporations must allocate profits and losses strictly on the basis of the ratio of share ownership.)

For example, if some owners of the business need income but others need losses to write off against other income, an LLC allows the members to adjust these allocations based on their needs rather than strictly on ownership ratios.

Some experts believe that a business involved in the transfer and sale of real estate in and out of the entity might work best in an LLC. (This does not include real estate agents or mortgage loan brokers who earn a fee for their service but are not transferring title to real estate in and out of their entity.)

They usually enjoyed the privileges of a monopoly. After more intensive industrial development began in the early 1800’s, the corporation proved to be an ideal structure or form for development due to its ability to raise large amounts of capital from numerous investors and yet provide centralized direction of a large industrial concern.

In the early 19th century, several states enacted general incorporation laws authorizing all general business corporations to incorporate without specific legislative approval. Then various states began to eliminate the restrictions in an effort to attract business to their state. They did so because the incorporation business provided tax revenue for the state, fees for lawyers and accountants, and revenue for local newspapers, printers, etc.

Other states followed suit in an effort to hold on to their corporate businesses. Delaware became the uncontested winner in the race to attract the incorporation business. Over one half of all corporations listed on the New York Stock Exchange are incorporated in Delaware. As a result, the Delaware Legislature and Supreme Court have become principle sources of modern corporation law.

In addition to Delaware, a second major influence on modern corporation law was the enactment of the Model Business Corporation Act (MBCA) by a committee of the American Bar Association. The main purpose of the MBCA was to attempt to standardize the various state incorporation laws. The MBCA was first published in 1950 and revised in 1984.

Many state corporation laws now closely parallel the revised MBCA although there are some differences in each state. Although most corporate regulation is found at the state level, the enactment of the Securities Act of 1933 and the Securities Exchange Act of 1934 have provided considerable regulation of the internal affairs of publicly held corporations on the federal level.