IncFile.com - Business Incorporation Solutions

Forming a company can help entrepreneurs get their enterprises off of the ground, but can it also help the economy? The Small Business Administration reports that entrepreneurs lead the way in driving economic recovery, with small businesses creating 64 percent of net new jobs over the past 15 years.

A recent study from the Kauffman Foundation suggests that young companies create a disproportionate share of new jobs in the nation. This means that entrepreneurs who are just forming a company might be best suited to turn around the economy.

The Kauffman study shows that fast-growing, new companies comprise less than 1 percent of all businesses. Still, they make up nearly 10 percent of new jobs in any given year.

"While some new companies will undoubtedly fail, high-growth firms must be started somehow, and the more quickly they are launched and in larger numbers, the faster both output and employment will grow," said Robert E. Litan, vice president of research and policy for the Kauffman Foundation.

Filing an LLC might increase the chances that a new company will boost job generation and help lower the nation’s 9.7 percent unemployment rate. According to a report from Business Insider, LLCs bring more benefits to company owners when founders make new hires.

According to AllBusiness.com, one of the most beneficial aspects of business incorporation is perpetual existence. This refers to the ability of a corporation to exist even after shareholders die, retire, dissolve a business or merge with another business.

That sounds like a big benefit. But what does it really mean? The case of Carl Chuzy might shed a little light on how forming a company can give an entrepreneur a legacy – and help successors find success even if a founder is no longer with a company.

Chuzy was the founder of Carl Chuzy Co. – a colorful real-estate company that offered service in Wichita with an eccentric touch. Chuzy was known for his eager listening and his cream-colored Lincoln Towncar, which his staff kept outside of his office for some time after his death.

He had an established clientele, and his employees were in no hurry to change the company’s name and potentially alienate customers after his death. Keeping the name has enabled them to maintain a successful business even in Chuzy’s absence.

Moreover, it has made Chuzy a remembered and celebrated figure in his city. "Carl wanted to keep the name Carl Chuzy Co. in the public eye," his lawyer, Richard Foote, told BizJournals.com.

Business owners can build their own legacies by giving their enterprises perpetual existence through business incorporation. To learn more, entrepreneurs can visit online incorporation websites.

LLCs are one of the most commonly chosen business structures among entrepreneurs who are starting a company. With the help of online incorporation services, it’s simple to file an LLC, but it’s smart to know how to use this structure to its full advantage. Business Insider offers some insight on how to make the most of an LLC.

To start, the entity limits the responsibility of shareholders with respect to corporate practices. The structure protects entrepreneurs’ personal assets by separating the identity of the corporation and shareholders. This means personal savings, cars, homes and more are protected from creditors.

Tax advantages are another benefit of LLCs. Unlike many other business structures, limited liability companies don’t subject businesspeople to double taxation of profits on both the corporate and personal level.

While it may sound shallow, LLCs also look good. The suffix adds credibility to a company, making it more attractive to prospective clients. Perhaps even more importantly, the structure also looks good to investors, which could help bring in needed funds for starting or expanding companies.

Moreover, the source reports that LLCs might not only benefit an individual business, but they could also help the overall economy. In order to get the most benefits out of an LLC, entrepreneurs are encouraged to make new hires.

LLCs might not only benefit business owners, but they could help bring down the 9.7 percent national unemployment rate. With this in mind, entrepreneurs might consider filing an LLC to help the small business community live up to the expectation that it will generate new jobs and lead the way to economic recovery.

According to a report from Leagle.com, Frazao Building Corporation couldn’t get a job done – but the owners were never failed. In 2009, the company was sued for leaving incomplete construction work in the hands of a client. A disgruntled client sought damages, but the courts would have none of it.

In the ruling, the judge said there was no "wrongful or deceitful intent" on the company’s or owner’s part. The judge refused to to hold the business shareholders responsible and decided that the construction company didn’t do anything illegal – ruling "no fraud was committed that resulted in an injury to the plaintiff," reports the source.

The corporate veil is hard to pierce, and what might be very costly suits against proprietors often amount to nothing but legal fees. While this is not to say that the company in question was right to abandon the job, all businesspeople can make mistakes. This is an extreme example of the benefits business incorporation may present an entrepreneur.

Leagle.com says that courts will rarely rule against a corporation, usually only in "exceptional circumstances" that might indicate companies are just a shell allowing citizens to perpetuate fraud.

In light of this, it might be smart for business owners to consider forming a company. In addition to protection against angry plaintiffs, certain entities – like LLCs and S corporations – come with a number of tax benefits that can help a new company get a strong start.

For entrepreneurs interested in forming a company, it’s important to learn the basics about business – and business formation – in order to turn a great idea into a great corporation. Entrepreneur.com offers some insight entrepreneurs should consider when pursuing business incorporation.

To start, it’s important that prospective business owners start to think in numbers. It’s essential to know the size of a targeted market, current profit margins for similar businesses and the number of existing competitors before starting a business. Also, start thinking in terms of finance dollars. According to the source, it’s usually 30 to 35 percent more expensive to start a corporation than entrepreneurs expect.

Next, entrepreneurs should focus on sales skills. Even if making sales will eventually be hired out, business owners will be expected to be able to make sales and this is a useful skill for all startup leaders to posses.

Entrepreneur.com also says it’s critical for prospective business owners to learn about the process of business incorporation. Whether they hope to file an LLC or a C corporation, entrepreneurs should understand the legal aspects of creating a business and the benefits of incorporating different business types.

In addition to being a savvy move that paves the way for investors to support a startup, incorporation generally results in business owners making more money, reports the Medical Encyclopedia.

Entrepreneurs are likely finishing up their 2009 tax filings. As they prepare to leave last year’s finances behind them, it might be wise to look ahead to tax trends for 2010. One small business resource center offers some insight on what the coming tax year may hold for the small business community.

To start, they predict higher taxation rates. The source says experts predict that small businesses will pay higher taxes to cover the cost of healthcare reform. Additionally, state and local taxes may increase as communities work toward economic recovery.

The source also theorizes that tax enforcement will be strong in 2010. The House of Representatives has approved a $5.5 billion increase in the IRS budget for 2010 which might mean the agency will approve more tax audits.

This may sound like a lot to handle, but business owners might be happy to hear that another predicted change for 2010 is an increase in the advantages offered by business incorporation. With a changing tax climate, incorporation tax savings may mean it’s a better time now than ever to start a company.

Entrepreneurs who act fast can take advantage of the recently passed Small Business and Infrastructure Jobs Tax Act that promises to bring new tax benefits to startups.

As entrepreneurs celebrate the recently passed Small Business and Infrastructure Jobs Tax Act, which increases tax credits for startups, they also wait to see the impact of a new measure Congress has proposed. Congress plans to raise the taxes on high-income individuals, returning the top two marginal tax rates from 33 and 35 percent to 35 and 39.6 percent, respectively.

The proposed legislation has caused some debate partially because officials worry about the potential consequences of the tax increases on business formation rates. Yet many believe there will be no impact on overall incorporation – perhaps just a switch in the types of business entities formed.

Supporters believe that the tax will not impact the small business world as a report from the Urban Institute-Brookings Institution Tax Policy Center shows that less than 2 percent of small business owners have been subject to the top two marginal tax rates since 2007. Moreover, the proposed legislation does not directly change the top corporate tax rates.

If it has any impact, the TCP believes it will lead to a shift toward C corporations. C corporations and shareholders might not be the business entity least likely to be affected by the change.

Entrepreneurs starting a company may find there are a number of advantages of starting a C corporation in addition to the tax savings. According to a report from Inc.com, businesses that need substantial startup funds or expansion capital will likely find venture capitalists are more likely to invest in a C corporation.

For entrepreneurs ready to start a corporation, navigating different benefits of different business types can be tricky. Luckily, the Wall Street Journal recently discussed why some businesspeople find S corporations are best.

S corporations provide liability protection while still allowing business profits to pass through the shareholders’ personal tax returns. This means businesspeople are protected from the doubles taxation that C corporation owners incur.

To make the most out of S corporations, the source advises business owners to pay themselves a reasonable salary which is subject to affiliated to payroll taxes. This renders the dividend the owner takes free of employment taxes and it isn’t subject to a corporate tax rate.

As with any formal entity, it’s important to keep careful records in the event of an IRS audit, but proper documentation can mean legal salary savings. The source says the only difference between setting up an S corporation and any other company is the necessary selection of S status on a special IRS form.

This insight might really help new business owners get off to a strong start. The Christian Post says forming an S corporation is a top tax tip for 2010 to bring successful IRS representation. The source says its often tax advantageous even for businesses that are already set up as LLCs or C corporations to consider converting to an S corporation.

Entrepreneurs who are starting a company know there are many things to worry about – from effectively marketing products to finding the right employees. But potential lawsuits and loss of personal property might not have to be a concern for business owners who incorporate their companies.

The corporate veil is hard for plaintiffs to pierce. According to a report from VirginiaBusiness.com, a court refused to impose liability on a shareholder of a business for an improper corporate sale of property. The judge said the company – not the selling agent – was responsible.

As this court case illustrates, limited liability is a major advantage of business incorporation. Forming an LLC – or a number of other entities – can protect founders’ assets, and it also limits shareholders’ liability to the funds they invest in the company.

At the same time, the company itself is guaranteed the same rights of an individual. Corporations are capable of filing lawsuits or owning property. In fact, corporations can have more advantageous tax benefits than individuals. For instance, incorporated businesses can have lower tax rates, more flexibility in deduction benefits and the option of tax deferral.

Protecting personal finances might be an especially important consideration in trying times as it could make business owners more daring in their endeavors. According to a report from the Kauffman Foundation, entrepreneurs’ fear of risk-taking is one of the greatest barriers to startup success.

Entrepreneurs are likely aware of the fact that business incorporation is a good way to protect personal assets. It’s important to understand the nuances of different entities to ensure that the best model for a company is chosen.

Inc.com offers some tips on which entity might be the best fit for a business. The source says many small businesses choose to start as an LLC. LLC companies don’t require formal meetings, and they generally have minimal paperwork.

S corporations are another popular choice for entrepreneurs. Like LLCs, S corporations are "pass-through" entities, meaning businesses are not taxed; instead, profits and losses are filed on individual shareholders’ tax returns. This saves business owners from "double taxation" which sometimes occurs with companies.

C corporations, on the other hand, do get hit with double taxation. They are less common with small businesses. Generally, C corporations are used by larger companies. Still, Inc.com reminds entrepreneurs that C corporations can offer some very handy, unique benefits to small business.

The entity gives a business the chance to use a medical reimbursement plan, as medical expenses can be deducted while shareholders enjoy the benefit tax-free. Additionally, businesses that need substantial start up funds or expansion capital will likely find venture capitalists are more likely to invest in a C corporation.

This may be especially useful for young businesses as funds could be harder to come by in the near future. Legislation recently proposed by Senator Dodd might render a number of angel investors no longer credible.

Even with President Barack Obama’s recent allocation of $30 billion to banks that make loans to small businesses, many entrepreneurs reportedly struggle to find sufficient funds. Additionally, recent legislation proposed by Senator Dodd might render a number of angel investors no longer credible.

A report from Fox Business offers some insight on how business owners might become more appealing to lenders in trying times. To start, it’s important to have a solid business plan for lenders to review. This will also help an entreprenuer stay on track with business goals.

Another important thing to remember is that a credit score says a lot about a businessperson’s financial responsibility. Checking a credit statement and knowing personal weak sports in advance can help an entrepreneur head off concerns a lender may have.

These factors are important, but the source reports that business incoporporation may be the best way to secure funds. When lenders understand an entrepreneur has taken legal measures to protect themselves and their business associates, they may feel more comfortable about making an investment with a new firm.

Moreover, adding Inc. or LLC to a business name adds instant credibility – not only to lenders, but also to potential business partners, employees and customers. The source suggests incorporation makes it clear that a company means business and is not just a hobby.

To learn more about inexpensive options for forming a company, entrepreneurs can visit online incorporation sites.

America may be on the path to national recovery, but the Bureau of Labor Statistics reports that the unemployment rate lingered at 9.7 percent last month. Economists look to small businesses to help generate new jobs, and now entrepreneurs might be getting some help in accomplishing this goal thanks to a new bill aimed to encourage new business formation.

Congressmen Frank Kratovil co-sponosred the Small Business and Infrastucture Jobs Tax Act of 2010 which recently passed by the House of Representatives. The bill increases the tax deduction for startup business expenses from $5,000 to $20,000, reports ABC.

"This legislation is another important step this Democratic Congress is taking to strengthen the American economy, assist small businesses and create jobs," said Ways and Means Committee chairman Sander M. Levin.

With these new tax benefits, it might be wise for entrepreneurs to invest in business incorporation. The funds used to incorporate can be negated by the new tax deductions and the investment could really pay off down the road.

Creating a formal business entity entitles business owners to a number of tax benefits and it can protect personal assets. Entrepreneurs can visit online incorporation sites to learn more.

Even as the nation moves toward recovery, the economic climate has caused a number of economic losses for business people. Still, it’s not too late to protect personal assets from any potential business losses.

A report from Resource Nation offers entrepreneurs some tips on how to be proactive about protecting personal assets in tough economic times. The first and foremost step in an asset protection plan is to make sure that a business is properly incorporated as either an LLC or a Corporation.

For business owners who have not yet incorporated their entities, it would be wise to seek the counsel of professionals at incorporation services. Online incorporation companies usually offer fast and inexpensive filing procedures.

The next step to asset protection is complying with all record-keeping requirements. This includes state filings, records of meetings, bank account statements and more.

Once these measures are in place, business owners can consider advanced asset protection strategies. There are certain states that allow Limited Liability Companies to apply for "charging order" protection to maximize the security of personal assets.

Following this plan for protection of personal property might help many business owners limit their liability in a tough climate. Entrepreneurs might also note that incorporation not only protects personal finances, but additionally offers tax benefits that might help them save corporate cash in the midst of recession.

A recently released survey from Georgetown indicates that S corporations owned by employees through employee stock ownership plans (ESOPs) might be the most resilient companies in recessions.

The study reviewed the performance of S corporations in 2008 and found that these entities provide considerable benefits to workers and business owners. The results demonstrate that S corporation ESOP structures outperformed other companies with respect to job creation, providing for workers’ retirement and revenue growth.

Entrepreneurs who intend to start a corporation might consider these findings and form an S corporation. The study’s authors say their report suggests, "[S corporation] ESOPs hired and grew their businesses when other firms were shrinking."

In addition to outstripping the competition, S corporations offer entrepreneurs a wide range of tax benefits. For instance, S corporation losses – like those often incurred in startup years – can be claimed on shareholders’ personal income tax returns as tax deductions.

To learn more about the benefits of S corporation and forming a company, future business owners can visit online incorporation sites.

Is forming an LLC or corporation in Nevada or Delaware the right choice for my business?
The states of Delaware and Nevada have become popular destinations for incorporation formations. There are several reasons for this. For one thing, the state of Delaware has very strong history of corporate case law that is very favorable to business. This is why most major US corporations are headquartered there. Another advantage is that each of these states does not levy corporate taxes to corporations and LLCs that conduct business outside of the state.
What many incorporation service providers whose core business is concentrated often leave out is a very important piece of information that can have significant ramifications to the uninformed consumer. A company that is formed in one state and conducting business in another is not officially recognized or authorized to conduct business in that state. A corporation, LLC, or other such entity is organized under the statutes pertaining to business entities within that state and the authority to conduct business does not necessarily extend to any other state.
In order to legally conduct business in a state other than that in which the corporation or LLC was formed, a company must file what is typically known as a foreign qualification in each state where a nexus exists. While this may make sense for a multi-million dollar corporation with locations in multiple states, it does not necessarily extend to small business owners. In order to obtain a foreign qualification in a state as a foreign corporation or LLC additional filing forms and fees must be filed within each target state. Furthermore, upon obtaining rights to conduct business in that state the foreign company is subject to the same taxes and laws to which domestic (in-state) entities are subject, therefore negating the benefits of filing outside of the home state in the first place.
Additionally, both Nevada and Delaware levy annual taxes in the form of annual reports, which cost $125 in Nevada and a franchise tax in Delaware which varies depending on whether the entity is a corporation or an LLC. Another annual fee that is also overlooked by incorporation service companies is the registered agent fee which can be anywhere from $99 to $300 per year, depending on the company providing the service within a given state. Maintaining an agent is mandatory, and if an agent is not maintained it will result in the administrative dissolution of your LLC or Corporation upon the resignation of the registered agent.
The state filing fees to register as a foreign corporation can be quite substantial as well, Texas for example charges $750 to file a foreign qualification while the fee to file as a domestic entity is only $325. The truth is that in the long run filing a company in a state outside of your home state can end up being much more expensive than filing it in the home state to begin with, while providing no financial incentive to do so. In essence, the person who chooses to file in Delaware or Nevada may be required to meet the compliance and ongoing requirements of the two states, instead of just one.
While many individuals choose to file in these states without registering within their home state without incident, they ultimately jeopardize the advantage of incorporating sought in the first place, which is the limitation of their personal liability. If a corporation or LLC is registered in the state of Delaware but conducts business in California and neglects to register they could find that any and all liability could accrue to them personally in the event that a legal judgment was made against the company. This is because the state will not recognize the unregistered foreign corporation legitimacy thus piercing the corporate veil of the company.
While we are merely a filing company and have no personal incentive in swaying our clients to file in one state over another we do feel it is important to disclose this information to our clients and site visitors in the hopes that they will can avoid committing to a decision that for the majority of business owners could be a short sighted solution with potentially negative long term consequences and higher long term liabilities. If you would like to discuss this matter in further detail with one of our incorporation specialists feel free to call us anytime as we would be more than happy to answer any additional questions you may have.

The need for compliance with government requirements only gets more important after forming a corporation or LLC. Very often the corporation or LLC was set up in the first place to help protect personal assets and provide tax-deductible benefits for owners and employees. Failure to satisfy these ongoing requirements, however, could result in the organization losing those very benefits.

Small business owners are especially at risk of stumbling into this particular pitfall. Since they are often overwhelmed with the multiple facets of their business’ day-to-day operating needs, they may not know how to avoid noncompliance and the resulting crippling or fatal business consequences. IncFile.com can help.

Corporations and LLCs have both internal and external ongoing requirements. The internal requirements must be met by the directors of the corporation or the members of the LLC, and then documented in company records. External requirements are those imposed by the state in which the LLC or corporation was formed; these often include, at a minimum, an annual (every year) or biennial (every two years) filing with the state, as well as some kind of fee.

Internal Requirements

Internal requirements are frequently overlooked, but are vitally necessary to effective decision-making and communication within the organization. A corporation has more internal requirements than an LLC; these include holding and properly documenting director and shareholder meetings, adopting and updating bylaws, issuing stock to shareholders, and recording stock transfers. While these actions are not specifically required for an LLC, it’s still a good idea to adopt an operating agreement (and keep it up to date with amendments as needed), issue membership shares, record interest transfers, and hold annual meetings.

Owners use a consolidated corporate records book to organize and maintain important corporate documents such as articles, bylaws, meeting minutes, resolutions, stock certificates, deeds, and so on. Many business owners use a Corporate Kit or LLC Kit for organizing and maintaining these vital records. Many businesses also use a metal or rubber corporate seal—the kind that leaves the company name in raised letters on a document—to signify that the document is an authorized, official transaction of the corporation. These can be obtained as part of a corporate kit or from a stationery store.

Bylaws lay out the corporation’s basic operating principles; they should be planned for and drawn up as part of the incorporation process. It is not required to file the bylaws with any government agency, but a corporation is required to have at least an initial and annual meetings, adopt bylaws, and keep minutes of the meetings, and keep these on file with the corporate records. Bylaws are important because they set down formal rules for such things as: when and how meetings can be held; notice, quorum, and voting rules for meetings; how decisions can be reached and recorded outside of meetings; basic titles and responsibilities of corporate officers; and the requirements for providing periodic (usually at least annual) information to shareholders.

In short, bylaws are the corporation’s major decision-making and operating procedures set down on paper. This can help owners refine and improve their common practices, and can also serve as a “referee” when uncertainty or disagreements arise on what the official solution is to a given situation or need. Bylaws also give your firm credibility in the eyes of shareholders, creditors, potential investors, other businesses, and even the IRS. Owners should take care, though, to make sure their bylaws do not conflict with their state’s Business Corporation Act or its equivalent.

If the board of directors is not already appointed in the articles of incorporation—a requirement in some states—the initial board’s names and addresses will need to be listed in a separate document. These directors will serve on the board until the first annual shareholders’ meeting, when a new board will be elected.

One of the new corporation’s most important tasks is to prepare minutes for the first board of directors meeting. This first meeting is where several key company actions should be approved, such as electing officers, adopting bylaws, selecting the main office or headquarters location, choosing a bank for corporate accounts, the accounting period or fiscal year, initial tax elections, and issuance of initial shares of corporate stock. Normally the groundwork and supporting research is done before the actual meeting, although the board can change or amend the minutes as prepared if they vote to do so. Any of the initial directors can prepare the minutes, but the entire board must sign them at the meeting, incorporating any amendments or changes as needed.

Thereafter, at a minimum, the corporation must hold a shareholders’ meeting and a board of directors meeting at least annually; accurate, complete minutes for both are essential, because these documents will be used as reference materials for future decisions. Remember: “If it’s not written down, it didn’t happen.”

A limited liability company, on the other hand, comes officially into being when its articles of organization are filed with the state’s LLC office. The articles contain basic organizational information about the LLC, such as its name; whether it’s managed by its members or by selected members called managers; the name and address of its members; and where its office is.

Next to its articles of organization, the most important document for an LLC is its operating agreement. This isn’t required by the state (except for New York)—but it’s a key internal document that officially records how the LLC will run. It is very much the same as a partnership agreement; except for an LLC it is called an operating agreement. It lists the members, how much each member has invested, how profits will be divided, and how much weight each member has when matters come to a vote. It may also specify requirements for meetings (notice, quorum, voting rules, etc.) and the like, but it doesn’t have to. Normally, however, the operating agreement does include state-mandated requirements.

 External Requirements

External requirements usually consist of a periodic report to the state and some kind of fee. Most states require corporations and LLCs to file an annual or biennial statement or report, along with an associated filing fee of some kind. LLCs may also be liable for payroll tax, property taxes, sales and use taxes or “seller’s permits,” or business license renewals. Other state or local filings, such as business licensing or state or municipal tax registrations, may also be required. Owners will also still file their individual state and federal income tax returns.

Some states also impose a franchise tax—basically a fee paid by the company for the state’s permission to operate there. Different states use different methods to calculate the franchise tax; it may be based on revenue, or on some measure such as a corporation’s total number of authorized shares and their value.

Each state has its own deadlines for annual statements and franchise taxes. Some states determine these based on the formation anniversary of the corporation or LLC. Other states set one deadline for annual statements for all corporations and another for all LLCs. Business owners need to know how and where to research these requirements so that they can plan for them before incorporating, and then keep up with changing requirements as their business continues to operate and progress.

Copyright Notice: Guests of IncFile.com’s website may not copy, republish, or redistribute information or material from its website in any form, printed or electronic, without the express written consent of IncFile.com. Requests for use of copyrighted material from the IncFile.com website should be directed to support@incfile.com.

There are several decisions to consider when forming a business entity; it is important to be familiar with the tax ramifications of a given business entity before it is filed with the designated state agency. Forming an S Corporation is one of several options when deciding which type of business entity to form; other options include the LLC and C Corporation. There are several practical and legal concerns to take under consideration as you determine how to structure your business. You must establish whether or not your company will go public, you also need to consider the number of partners or shareholders within the company, and, perhaps most importantly, explore all the tax ramifications of each business entity. With all these considerations in mind, there are some distinct advantages to choosing the S Corporation as your business entity.

One advantage of the S Corporation is that like the LLC it receives pass through taxation. Pass through taxation simply means that federal income tax is not assessed at the entity level; profits are distributed in the form of dividends and flow through to the individual tax returns of the shareholders, and the IRS taxes the shareholders at their individual income tax rate and not at the entity or corporation level. Therefore the S Corporation, unlike the C Corporation, is not subject to double taxation. Since net losses are “passed through” as well, the individual shareholder may be able to reduce his or her tax liability by offsetting other income with any S Corporation losses. One of the most enticing advantages of the S Corporation is its ability to minimize payroll / self employment taxes which can be a significant amount of money, currently the rate is set at 15.3%. For example let’s take an S Corporation with a single shareholder, if the company was to have a net profit of $90,000.00 and the shareholder / employee assigned himself a salary of $25,000.00 he would be able to reduce payroll / self employment taxes by $9,945.00. This is because only the $25,000.00 salary portion would be classified as earned income and subject to payroll / self employment taxes, the remaining $65,000.00 would pass through as a non-qualified dividend. While taxed at the personal income tax rate of the shareholder, the $65,000.00 is exempt from the self-employment / payroll taxes.

Companies doing business as an LLC have the same advantage of pass through taxation; however a single member LLC is treated as a disregarded entity by the IRS. The business entity is disregarded as a separate entity from its owner for Federal tax purposes; essentially what this means is that the IRS classifies the single member LLC as a sole proprietorship and since all income from a sole proprietorship is treated as earned income the full $90,000.00 would be subject to the 15.3% payroll / self employment tax. For this reason, an S Corporation could be viewed as a superior entity choice for the individual owner who is looking to minimize his or her payroll and self-employment tax exposure.

A multimember LLC is treated by the IRS as a Partnership as the default status for federal tax purposes. This requires that the LLC file the Form 1065 Partnership return (informational only – the LLC does not pay federal taxes), and the net income (or loss) passes through and is accounted for on the tax returns of each individual member.

Companies doing business as S Corporation must first form a standard corporation with the state (and the default federal tax status at that point is that of a C Corporation). After the corporation is formed with the state the company must file an IRS Small Business Tax Election form 2553 stating their intention to be taxed as an S Corporation. IncFile prepares the Form 2553 and returns it to you for your signature along with your filed corporation, and after the initial shareholders have signed it can simply be faxed or mailed in to the IRS. The IRS Form 2553 must be signed and submitted to the IRS within 75 days of the date of formation of the Corporation.

A Limited Liability Company is a business structure formed loosely on a German style of business called GmbH (legal abbreviation) and literally means limited liability. The concept spread throughout Central Europe and in 1997 the first LLC was shaped in Wyoming. The Internal Revenue Service ruled one way and then another, making regulations unclear until 1988 when they ruled to treat multi member LLCs as partnerships and single member LLCs as sole proprietorship’s for tax purposes. Nearly ten years later, all states had LLC statutes and the Uniform Limited Liability Company act was adopted. LLCs are currently the most popular form of business entity. Note that laws vary from state, and you need to be familiar with those in your state.

There are advantages to starting an LLC. For one thing members may be individuals, other partnerships; they may be non-resident aliens or a trust. This allows for more flexibility for the company formation. Distributions need not be equal. If one member invests more or contributes more to the business, that member may reap more of the profits. The agreements of disbursement are stipulated in the LLC operating agreement. Additionally, there need be no organized meetings and minutes, often an unnecessary formality for a small business. Taxes “pass-through” the company, and the individual members are taxed at an individual levels and not the company level according to their profits or losses. While LLCs file tax returns, the company does not pay federal income tax. Consequently, administrative paperwork and accounting are simpler for an LLC. Perhaps the most important advantage to LLCs is that it provides liability protection to the business owners, since owners are considered separate entities from the LLC. Personal assets are not connected to the company if the LLC is in litigation.

You might wonder, “Can anything be simple”? Well, yes, with the proper help some things, like forming an LLC, can be made quite simple. Knowing where to look may be the hardest task. You can hire a lawyer to guide you through the process of an LLC formation, but expect this to be costly. Using an online incorporation company is another option. Online incorporation companies will guide you through the process. Look, to incfile.com for help when filing for a LLC. With their help, the process can be made quite simple. An online incorporation company such as incfile.com will process the paperwork with the state of formation as well as file any necessary IRS forms.

Forming a Nonprofit Corporation will not only make you more accessible to potential donors. It will can your organization credibility and help you protect your personal assets, too.

Unlike a for-profit Corporation, a Nonprofit Corporation is not designed to make a profit for shareholders. Instead, it is established for a specific noncommercial purpose, such as educational, literary, charitable, religious, or scientific, for example. None of the income of the organization gets distributed to its officers or directors. Some common examples are schools, colleges, universities, hospitals, houses of worship, museums, fraternal organizations, homeless shelters, food banks, and other volunteer organizations.

Nonprofit Corporations may be eligible to benefit from not having to pay corporate taxes on income they receive that is related to their stated purpose. This tax-exempt status, if obtained, means that donors may be able to deduct their donations to your Nonprofit Corporation on their federal and state income tax returns. This can be a requirement to qualify for a variety of private and public grants. And, just like a for-profit corporation, members and directors of nonprofits are generally protected from personal liability for the operation of their Nonprofit Corporation, which is not true for an unincorporated association or club, no matter how noble the cause.

Unlike regular corporations, however, a nonprofit corporation cannot distribute any profits to its members, contribute money to political campaigns, or engage in lobbying activity, except in very limited circumstances.

The most commonly-used federal tax exemption used for nonprofit corporations is in Section 501(c)(3) of the Internal Revenue Code. This is why Nonprofit Corporations are often referred to as “501(c)(3) organizations” or even just “501(c)(3)s.”

To achieve that critical tax-exempt status, though, nonprofits must apply for federal and state tax-exempt status; it is not just automatically granted by forming the Nonprofit Corporation. To apply for federal tax-exempt status, IRS Form 1023 must be filed with the IRS, and the appropriate tax-exempt application made at the state level as needed.

Like standard for-profit Corporations, Nonprofit Corporations provide limited liability protection for their officers, directors, and members, so that their bank accounts, homes, and other personal assets typically can’t be used to satisfy the debts and liabilities of the Nonprofit Corporation.

Even though Nonprofit Corporations are established and regulated under different state laws than standard for-profit Corporations, the process of forming a nonprofit is fairly similar.

Choose a Business Name
Generally speaking, your Nonprofit Corporation’s name can’t be the same or confusingly close to another, already-registered Corporation, and can’t contain certain potentially misleading words or terms (like Federal, National, Bank, United States, and the like). Some states also require a corporate designator at the end of the name, such as “Corporation” (Corp.), “Incorporated” (Inc.), or “Limited” (Ltd.). There are many states that require a corporate designator with for-profit Corporations that do not require designators for Nonprofit Corporations.

Once you have decided upon a name and entered your information online, IncFile.com automatically performs a name search against the corporate database of the state of incorporation to check the availability.

Nonprofit Articles of Incorporation
In order to actually form your Nonprofit Corporation, you will have to file Nonprofit Articles of Incorporation with the appropriate state agency and pay the necessary state filing fees (usually fairly small). In some states, this may be called a Certificate of Incorporation, a charter, or a Certificate of Formation.

Regardless of what they are called, the formation documents need to include specific information and language to make sure you’ll qualify for tax-exempt status. IncFile.com automatically includes the necessary verbiage required by the IRS for 501(c)(3) status.

Apply for Tax Exemptions
After your state’s corporate filing office returns a copy of your filed articles, you can submit your federal 501(c)(3) tax exemption application to the IRS. This has to be done in this order because the IRS requires you to submit a copy of your filed articles with your application. This is a crucial step in forming your nonprofit, since most of the real benefits of being a Nonprofit Corporation are dependent on gaining 501(c)(3) tax-exempt status. The application fee ranges from $300 to $750.

After the IRS reviews your application, it will send you a letter approving your nonprofit tax-exempt status, asking you for more information about your organization, or denying your application outright if it doesn’t meet required standards. If that’s the case, the IRS will tell you where the shortfall was; this is often correctable by including more specific or precise language in your application.

In some states, you will need to apply separately to get a state tax exemption. In other states, as long as you file nonprofit articles of incorporation with the state and get your federal 501(c)(3) tax-exempt status, your state tax exemption will be automatically granted, or will be granted once you furnish a copy of the IRS approval.

Bylaws
After filing your Articles of Incorporation and tax-exempt applications, it’s time to create your corporate bylaws, which lay out your nonprofits’ purpose and internal operating rules. These should include:

• How directors are elected and what authority they have.
• How, when, and where directors’ meetings are held.
• How decisions can be reached with or without a meeting.
• The duties and responsibilities of officers and how long they serve.
• Officers, constituency rights and responsibilities, and standing committees.
• The organizational structure of the nonprofit.

To create your Nonprofit Corporation bylaws, you can hire a corporate attorney—or you use IncFile.com’s nonprofit incorporation kit. Bylaws are typically adopted by the corporation’s directors at their first board meeting.

Appoint Directors
The next step is to appoint an initial group of directors. The directors of the Nonprofit Corporation have the overall authority and responsibility to manage and run the organization. Collectively, they meet periodically and make decisions about major business operations. Many states allow nonprofits to have just one director, but other states require at least three. The board is ultimately responsible for setting the vision and direction of the organization and providing oversight.

In most states you must designate your initial directors when filing your Articles of Incorporation. These directors will serve on the board until the first board of directors meeting, when the first elected board will be seated.

Hold a Meeting of the Board of Directors
The initial makeup of your Nonprofit Corporation board of directors may or may not change at the first board meeting. What’s important to notice is that the first slate of directors is appointed, and then from there on they are elected.

Normally a corporation’s officers include, at a minimum, a president, treasurer, and secretary, or their functional equivalents. It may be “Chief Executive Officer” instead of “president,” for instance, or “Chief Financial Officer” instead of “treasurer.”

The purpose of this first, organizational meeting of the board of directors is where several significant company actions should be approved, such as electing officers, adopting bylaws, selecting the main office or headquarters location, choosing a bank for corporate accounts, designating the accounting period or fiscal year, initial tax elections, and documenting the receipt of federal and state tax exemptions.

Officers (who may also serve on the board) carry out the day-to-day business of the corporation and sometimes do receive salaries.

Depending on its structure, a nonprofit may or may not have formal members with voting rights. If your nonprofit doesn’t create a formal membership structure, the only people who participate in the management of the nonprofit operations are the directors and officers.

After the meeting is completed, minutes of the meeting should be created and filed in your corporate records book.

Acquire Licenses or Permits
Many businesses, whether operating as for-profit or Nonprofit Corporations, are required to obtain state or local licenses and permits before starting to conduct business operations. So, while your organization may not be subject to the kind of red tape that can entangle for-profits, you should check with your state department of consumer affairs (or similar state licensing agency) for information about any licensing or permit requirements for your type of organization. For instance, a local business license (sometimes called a tax registration certificate) may be required for your activities, and if you sell anything to consumers, you may need a state sales tax permit or license.

Even though it is not legally required by most states (New York is an exception), having an operating agreement for your LLC is a smart move – and not having one can be dangerous for both you and your business.

An operating agreement is a contract among the LLCs members stipulating its membership, management, operation, and the distribution of the company’s income. It documents the roles, responsibilities, rights, and relationships of the members, as well as their respective ownership percentages, shares of profits and losses, and what will happen to the LLC if someone leaves or if a new member wants to come on board. Not only does this increase your organization’s efficiency and effectiveness, it also helps prevent disagreements and misunderstandings about decision-making and financial dealings.

The Incfile.com LLC Kit has a customizable operating agreement that can be customized to meet the particular needs of your LLC.

Having an operating agreement also gives your LLC credibility as a separate entity, especially when it comes to the legal system. It helps safeguard your limited liability status, so it is a smart idea even if you are the sole owner of your company. If you are a single member LLC but do not have a formal operating agreement, the court may not respect your limited personal liability and may view your operation as a sole proprietorship instead, opening you up to significantly increased financial and operational risk.

Documenting your LLC’s procedures in an operating agreement also allows the members to set the rules, instead of being forced to follow your state’s default rules – which might or might not be a good fit for your particular business. Each state has its own laws governing basic operating procedures for LLCs. In some areas, these state default rules will be the controlling factor in how your business runs unless your operating agreement specifies different rules.

Some states, for instance, have a default rule that requires LLC members to divide profits and losses equally, regardless of the level of each member’s investment in the business. If all members did not invest equal amounts in the LLC, it’s unlikely that all members will want to allocate the profits equally. To avoid this, your operating agreement should spell out how you and your fellow members (sometimes called co-owners) want to split profits and losses.

Another area that your operating agreement needs to cover in detail is how ownership shares are distributed. The members/owners of an LLC usually contribute cash, property, or services to the business to help get it started. In consideration of this, each LLC member gets a percentage of ownership in the LLC—usually in proportion to their contributions, but LLC members are free to divide up ownership any way they want to.

As well as getting a percentage-based ownership interest in exchange for their contribution of capital, LLC co-owners each also receive shares of the LLC’s profits and losses, called distributive shares. Each owner’s distributive share usually corresponds to his or her percentage of ownership in the LLC.

The operating agreement should also specify how much of the LLC’s allocated profits will be actually distributed to the members each year. It’s important to remember that an LLC member has to pay income taxes on the full amount of the profits that are allocated to him by the distributive shares specified in the operating agreement, whether or not those profits were actually paid to the member.

Since LLCs usually have relatively few members, most management decisions are made informally. Sometimes, however, a decision is so significant or contentious that a formal vote is necessary. While some LLCs allot one vote per member regardless of shares – called per capita voting – it’s more common for each member to control votes proportionate to his or her shares in the business. The operating agreement should also specify whether a simple majority will decide voted questions, or whether unanimous consent is required.

The paradox is that the more well-thought-out your operating agreement is—the more contingencies and possibilities it covers – the more complex it is, not to mention longer. This article has mentioned only the highlights of what an LLC needs to cover; specific requirements will depend on the laws of your state and exactly how you want your business to operate. Again, the LLC Kit will answer your more detailed questions.