INCORPORATION FAQs

A. Incorporation provides many benefits. By incorporating you can limit your personal liability as a business owner. Creditors of your corporation must satisfy their claims by seizing the assets of the corporation rather than your personal assets. In contrast, as a sole proprietor or partner in a general partnership, you are financially responsible for all liabilities of the business, and your personal assets are subject to seizure or lien by creditors. Other benefits of incorporation can include greater tax deductions for health insurance and medical expenses, lower payments for social security tax and medical tax, and greater opportunity to raise capital for the business through the issuance of stock.

A. Generally, you should incorporate in the state where your office is physically located. If you incorporate in another state such as Delaware, you may need to submit an application to qualify as a foreign corporation in the state where your office is physically located. We can assist you with the foreign qualification application. Most states have revised their corporate laws based on the laws of Delaware. For companies that are privately owned (not publicly traded), generally there are no substantive differences any more between the corporate laws of Delaware and those of other states. If you incorporate for the purpose of owning and operating a business, the general rule is that you should incorporate in the state where your main business office is located. We look forward to receiving your incorporation order.

A. State laws require that a person located in the state of incorporation be available during regular business hours to receive legal notices and other official documents. That person is called the registered agent. As part of our registered agent service, you can call us with legal questions about your company. The initial registered agent fee is due when the incorporation order is made. The Law Office of Peter C. Bronstein will provide or arrange registered agent services unless you indicate otherwise.

A. In general, corporations file an annual tax return (IRS Form 1120 or 1120S) and a simple, one-page annual state report that updates information such as the address of the corporation and the names of its current officers and directors (the names of the shareholders are generally not listed in the annual state report). Note that annual tax returns are filed by sole proprietorships (Schedule C to IRS Form 1040), limited liability companies (IRS Form 1065), and general partnerships (IRS Form 1065).

A. In California, one person is enough to form a corporation. The same person may hold the offices of president, secretary, and treasurer, and may be the only person on the board of directors. The officers manage the daily business of the corporation based on the instructions of the board of directors. If you have more than one shareholder, then you need to have different parties holding different positions (unless there are more than three shareholders, in which case only three people need to hold a position).

A. The corporation is owned by the shareholders. A corporation may have one or more shareholders. In general, since the shareholders elect the persons who serve on the Board of Directors, the corporation is controlled by the shareholders. The shareholders that own more than 50% of the corporation’s common stock get to make the ultimate decisions about running the corporation.

A. Generally, there are no restrictions on foreign ownership of a company formed in the United States. The procedure for a foreign citizen to form a company in the United States is the same as the one for a U.S. resident. It is not necessary to be a U.S. citizen or to have a green card to own a corporation or limited liability company formed in the United States. To receive pass-through profit distributions, a foreign citizen may form a limited liability company. In contrast, all profit distributions (called dividends) made by a C corporation are subject to double taxation. (Under U.S. tax law, a foreign citizen may own shares in a C corporation, but may not own any shares in an S corporation.) For this reason, many foreign citizens form a limited liability instead of a C corporation. A foreign citizen may be a corporate officer and/or director, but may not work in the United States or receive a salary or compensation for services provided in the United States unless the foreign citizen has a work permit (either a green card or a special visa) issued by the United States. Some work permits allow a foreign citizen to work only for a sponsoring employer. Such work permits generally do not enable a foreign citizen to also work for a new, unrelated company formed by a foreign citizen. The foreign citizen would need to obtain a separate work permit to work for the new company. We do not provide immigration advice.

A. The processes to form for-profit and nonprofit corporations are similar, but the text of the articles of incorporation is different. There are no owners in a nonprofit corporation. Instead, a board of directors controls a nonprofit corporation. The profits of a nonprofit corporation may not be paid to the “founders” of the nonprofit, except that the founders may receive compensation for the fair market value of actual services provided to the nonprofit. In general, a nonprofit corporation will seek charitable contributions from the public; the nonprofit must apply for 501(c)(3) status, which is a separate application that should be filed within 15 months after incorporation of the nonprofit.

A. The term C corporation refers to the way in which the corporation is taxed. There is a corporate level income tax on the profits of a C corporation. In addition, if a dividend is paid to shareholders from retained earnings, the dividend is included on the personal tax return of each shareholder. Thus, the profits of a C corporation are subject to potential double taxation. Your corporation will be taxed as a C corporation this year unless you timely file IRS Form 2553 to elect tax treatment as an S corporation.

A. The term S corporation refers to the way in which the corporation is taxed. An S corporation is a pass through entity. There is no corporate level income tax. Instead, a pro rata portion of the annual profit or loss of the S corporation is included on the personal tax return of each shareholder. If IRS Form 2553 is filed within 75 days after incorporation, the corporation will be treated as an S corporation for tax purposes. Many start-up businesses benefit by making the election to be taxed as an S corporation.