Corporate Structure - Some Initial Decisions To Make for Your Company
Choosing the structure of you company may depend on your intentions, desires and expectations for your company. Each structure, partnership, LLC or corporation, has different positives and negatives. If you intend to always be the sole owner of your company, an LLC might be fine. However, if you intend to sell stock to raise money or give shares for services, then you should consider a corporation. If you expect to always be the major shareholder or perhaps only a few more shareholders, electing to be a sub-chapter S corporation might be the correct way to go.
Also, your intentions for the company might determine where you should incorporate. If you intend to always be the owner of the company, your own state would be OK to form your business. However, if you believe that you might want to take the company public in the future, you might want to consider forming your corporation in a state that is preferred by many, such a Nevada, Delaware or Wyoming.
Below is a brief description of the various possible corporate structures and some details about Nevada and Delaware.
We suggest that you discuss your corporate structure and where to form your corporation with someone knowledgeable in this area, such as your corporate attorney.
Partnership - An arrangement where two or more parties agree to cooperate to advance their mutual interest, usually in some business transaction. Partnerships can present the individuals involved with unique challenges that must be navigated and put into a partnership agreement. These can include certain liabilities, goals, areas of responsibility, lines of authority, levels of give and take, succession, how success is evaluated, how profits are distributed and many other details and factors. Usually Articles of Partnership are drawn up, hopefully by a competent attorney. There can be many pitfalls and liabilities that can be involved in a partnership that should be addressed.
Limited Liability Company - A Limited Liability Company” (LLC) is a form of enterprise that is a blend of a partnership and corporate structure. It is a type of unincorporated association and is not a corporation, but does, as stated in the name, offer limited liability to the owners in most states. An LLC can be organized for profit or non-profit.
An LLC, like an S corporation or partnership, can pass-through to the members the income and loss for tax purposes.
An LLC has “Members”, and “Membership interest” and each member would “own” a part of the LLC.
There are pros and cons to a Limited Liability Company and good legal counsel should be consulted to determine if an LLC is best for your circumstances.
Corporation - A “corporation” is formed under the laws of a state and acts as an entity that is separate from their owners. The state in which a corporation is formed has U. S. jurisdiction over that corporation, and the corporation must abide by the corporation laws of that state. Corporations are formed by individuals submitting Articles of Incorporation to the Secretary of State in the particular state
Corporations have shareholders and the ownership of the shares determine the actual ownership of the corporation. Shares can be held by individuals or other corporations.
Shares of a corporation can be privately held “restricted” shares, or can be publically traded.
Corporations are taxed separately from their respective owners at a federal and state corporate tax rate.
The exception to the tax rules would be if the corporation elected to be an S corporation under the IRS rules. (see “S Corporation)
While many states have a very simple form for filing the Articles, sometimes only 1 page, many prefer to adopt more in-depth Articles covering a variety of subjects. These additional articles can be adopted by the shareholders and Board of Directors of a company.
Because corporations are totally separate entities, all debts and liabilities of a corporation belong to the corporation and are separate from the shareholders. This is sometimes referred as the “corporate shield”. This means that an individual shareholder, even if the shareholder owns 100% of the issued and outstanding stock, can usually not be held liable for debts for the corporation. An exception to this would be if the major shareholder, officers or directors of the corporation personally guaranteed a debt or committed fraud.
Corporations are recognized by the law, both federal and state, to have rights and responsibilities like natural persons. For example, corporations can be convicted of criminal offenses.
The primarily difference between a corporation and an LLC are mainly in the way in which they are taxed. While a corporation is a separate legal entity from its owners and is therefore taxed as a corporation under state and federal tax laws. an LLC has pass-through taxation which means that any profits or losses are passed through to its owners and taxes are only paid at the individual (owner) level. A corporation and LLC will differ in the way they are managed and operate. For example, a corporation must comply with certain formalities, usually set by the state, such as annual shareholder meetings. An LLC is managed as set forth in the Operating Agreement which is created by the members of the LLC and an LLC might be more flexible in terms of the management structure and an LLC can be less complicated to form and manage.
Both corporations and LLCs provide liability protection for the owners.
Good legal counsel should be consulted to determine which is best under the circumstances.
Subchapter S Corporation - A company can elect to become a Sub S corporation by filing the appropriate form with the IRS. An S-corporation is a regular C-corporation that has elected “S-corporation” tax status with the Internal Revenue Service (IRS). An S corporation offers the same limited liability protection to owners as C corporations. The major difference between an S corporation and a C corporation is that in an S corporation, all of the corporation’s profits and losses “pass through” to the owners, who report them on their individual income tax returns. This allows S corporations to avoid double taxation on the corporation income and passes the losses on the individuals. This can be especially good for a startup or early stage company that has losses while they are growing.
The shareholders of an S corporation report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. . An S corporation is excellent for a corporation which is owned by one shareholder or a limited number of shareholders.
There are other important limitations on S-corporations that you should consider before making an S-corporation election. Whether to become a S corporation should be discussed with the accountant for the corporation. The accountant usually files the election with the IRS.
To qualify for an S corporation status, the corporation must meet the following requirements.
Be a domestic corporation
Have only allowable shareholders
Have no more than 100 shareholders
including individuals, certain trust, and estates and
may not include partnerships, corporations or non-resident alien shareholder
Have one class of stock
Not be an ineligible corporation i.e. certain financial institutions, insurance companies, and domestic international sales corporations.
In order to become an S corporation, the corporation must submit Form 2553 - Election by a Small Business Corporation which must be signed by all shareholders.
VentureVest Capital Corporation can work with legal counsel in determining which form of business entity may be best and the formation of that entity and assist in preparing the correct documents.
WHERE TO INCORPORATE
Should You Incorporate in Your State, Nevada or Delaware?
Where you incorporate might depend on what you may want to do with your company in the future. Is there a possibility that you might want to take your company public in the future?
Many have a question of where should their corporation be domiciled? Should it be in the state where the main office is located or would it be better to be incorporated in another state, taking advantage of certain laws that might exist in that state and not in your state? Many corporations, including some of the largest corporations in America prefer to be incorporated in Nevada or Delaware for specific reasons. Both of those states offer certain advantages that no other states offer. The information below is to outline some of these advantages. This is a decision that should involve your corporate legal counsel.It will probably cost you more, both initially and in the future, to incorporate in a state other than your own state. The cost of filing might be higher, the state might charge other fees, for example, Nevada now charges a “business license fee”. You will definitely have to pay for a “Resident Agent” (see “RESIDENT AGENT”) in that state, usually about $100 per year, where if you incorporate in your own state you can act as your own resident agent for no cost.
Below is some descriptions of incorporating in Nevada and Delaware. You might compare these points with your own state. (Note: Some changes may have been made in each state.)
Why incorporate in Nevada?
Nevada offers many advantages as a corporate haven:
Nevada has no state corporate taxes.
Nevada has no franchise tax.
Nevada has no tax on corporate shares.
Nevada has no personal income tax.
Nevada provides total privacy of shareholders.
Nevada is the only state without a formal information-sharing agreement with the IRS.
Nevada is the only state that allows for the issuance of "bearer shares."
Nevada has minimal reporting and disclosure requirements.
Nevada has nominal annual fees.
Nevada allows for a one-man corporation.
Nevada has established case law that prevents easy piercing of the corporate veil.
Corporate officers and directors can be protected from any personal liability for their lawful acts on behalf of the corporation.
Stockholders, directors and officers need not live or hold meetings in Nevada, or even be U.S. citizens.
Only the names of the officers and directors are on public records. No other information, listings, or minutes of meetings are filed with the State.
There is no minimum initial capital requirement to incorporate.
Nevada corporations may issue stock for capital, services, personal property, or real estate. The directors alone may determine the value of any such transactions, and their decision is final.
Note: In 2009, the State of Nevada instituted a State Business License which is processed by the Secretary of State. This was done simply to raise additional capital for the state. Any company that files articles of incorporation in Nevada must also apply for the State Business License. The Business License cost $200 and must also be renewed annually along with the Annual List of Officers and Directors.
There is an exemption to the State Business Law. We suggest that you look at the web sites below to determine if your company might be exempt from the State Business License.
Many international companies choose Delaware because of its corporation law structure, its stability, and its reputations. Below are a few of the reasons why corporations, large and small, foreign and domestic, choose Delaware for their corporate headquarters even though few, if any, have any sales or manufacturing or office facilities located in the state.
You can be all the officers of a Delaware corporation yourself. The same person can be president, vice-president, secretary, treasurer and sole director. Many states require at least three officers and/or directors.
Delaware is the least costly state in which to form a corporation.
No minimum amount of money is required to be in the company bank account when forming a corporation while many states require $1,000.
You can incorporate anonymously in Delaware and the corporations may be operated anonymously, never revealing the owner's identity to the State of Delaware.
The annual franchise tax on corporations compares very favorably with other states (as little as $50/year in most cases).
There is no Delaware sales tax, no property tax or state corporate income tax for corporations that are formed in Delaware and do not transact business in the state.
There is no state inheritance tax on stock held by non-residents of Delaware. These shares are taxed only in the state of residence of the corporation's owners.
There is no state income tax for Delaware corporations who do not operate within the state.
There is an established body of laws which protect the corporations in Delaware. Delaware is the only state to have a continuous Court of Chancery a separate business court system. This is meaningful to entrepreneurs for two reasons. First, there is a long-established body of laws relevant to corporations that has been tested in the Delaware courts over many years. In the event of any legal action, therefore, there is a high degree of predictability. Second, Delaware has a long record of pro-management decisions.
Directors may fix any price on shares of stock that they wish to sell.
Shares of stock owned by a person outside the state are not subject to any Delaware taxes.
One can form a corporation without ever visiting the state. You can form a Delaware corporation easily by mail or by phone through firms established for that purpose.
Annual meetings need not be conducted in Delaware. Meetings can be held anywhere, at the option of the director(s).
The same corporation may conduct different kinds of businesses. If the corporate documents filed with Delaware have the broadest type "purpose clause", any legal business activity of any kind may be conducted. The same corporation can conduct more than one type of business without any changes in the documents filed with the state.
Delaware corporations have a special "Director Shield" that permits corporations to shelter their directors from personal liability in connection with their actions as board members. Delaware statutes also help limit hostile or abusive takeover tactics.
Stockholders, directors, or committee members may act by unanimous consent in lieu of formal meetings.
The by-laws of a Delaware corporation may be formulated or altered at any time by its directors.
A Delaware corporation is permitted to pay dividends out of profits as well as out of surplus.
Delaware corporation stock can be privately owned or publicly traded on any stock exchange anywhere in the world when properly registered.
The corporate headquarters and the records of a Delaware corporation may be located in any state in America or in any country in the world as long as the corporation maintains a registered agent to represent you in Delaware. Most of the owners of Delaware corporations have never set foot in Delaware. A Delaware corporation does do not need to maintain a Delaware business address except for its registered agent address which is required by law for service of process in case of legal action against your company.