S Coporation

An S Corporation is a special form of corporation (Note: The “S” in S Corporation refers to sub chapter S of the tax code). S Corporations are based on C Corporations but they are not treated as a separate tax entity as C Corporations are. Instead, the income of an S Corporation is “passed through” to the personal income of its owners (shareholders) in proportion to their ownership interest. An S Corporation is created by forming a traditional C Corporation and then filing the IRS Form 2553 (The Subchapter S Election) for federal recognition of S Corporation tax status. While the S Corporation has many of the same features as a C Corporation, there are some important differences.

Note: While the S Corporation features similar pass through taxation to an LLC, in the area of self-employment taxes an S Corporation can have an advantage over an LLC. The compensation (salary and bonuses) of S Corporation shareholders is subject to self-employment tax, but not on the profits automatically allocated to them as a shareholder. This can be an advanced and aggressive tax strategy, so be sure to consult with the appropriate tax and legal specialists before pursuing it.

Unless you plan on having a large, multi-state operation, it is generally best to form your company in the state in which it is located. Generally speaking, most states will expect you to be registered with them if there is substantial ongoing business and/or a physical presence in that state. If you do form your company in a state other than the one in which your company is located, you may ultimately need to register your company as a foreign (out of state) company with your home state, which will subject you to all of the fees, taxes, and regulations of that state.

There are no citizenship or residence requirements for ownership of a C Corporation or an LLC. The S Corporation however does not allow nonresident aliens to be shareholders (owner), but any US citizen or resident alien may be a shareholder (owner). You would, of course, require an in state street address for the state to forward official legal and tax correspondence including service of process, known as the registered agent address, but neither residency nor citizenship is required for ownership of a C Corporation or an LLC.

There are no citizenship or residence requirements for ownership of a C Corporation or an LLC. The S Corporation however does not allow nonresident aliens to be shareholders (owner), but any US citizen or resident alien may be a shareholder (owner). You would, of course, require an in state street address for the state to forward official legal and tax correspondence including service of process, known as the registered agent address, but neither residency nor citizenship is required for ownership of a C Corporation or an LLC.

Typically entrepreneurs will select the S-Corporation as the entity of choice for the following reasons:

• The S-Corporation combines the advantages of the sole proprietorship, the partnership, the LLC and the corporation into one entity.
• Unlike sole proprietors and the partners in a partnership the shareholders of the S-Corporation are granted the same level of limited liability and personal asset protection as are the shareholders of a corporation.
• The S-Corporation allows shareholders to avoid the “double taxation” levied on shareholders of C-Corporations that is because all of the income or losses in a S-Corporation are reported only once on the personal income tax returns of the S-Corporation’s shareholders.

For purposes of federal taxation, an S Corporation is taxed differently than a C Corporation. Typically, the S Corporation files its annual return using the Form 1120S, as opposed to the 1120 for a C Corporation. The 1120S is an informational return; it simply informs the federal tax authorities the amount of net profit/loss made by the S Corporation, the shareholders amongst which the profit/loss will be distributed, and the proportion in which the profit/loss is distributed to the shareholders. There is no tax payment/refund associated with the 1120S tax return, as the S Corporation does not have the independent tax status that a C Corporation has. Instead, the profits/losses of the S Corporation are considered distributed to the shareholders in proportion to the ownership interest of the shareholder.

A corporation consists of all three: officers, directors and shareholders. Shareholders are the owners of the corporation and elect the directors. Directors guide and are involved in the fundamental decisions of the corporation on behalf of the shareholders. Officers are selected by the directors and run the day-to-day operations of the corporation. These do not need to be separate people. Any person can fill all three positions. In small businesses, one person can be the only shareholder, the only director, and the only officer.

The 2553 Form, known as the sub chapter S election, is required to be filed with the IRS to get S-Corporation status for purposes of federal taxation. Filing this Form with the IRS is used to convert a C-Corporation into an S-Corporation.

Par value is a nominal dollar amount given to corporate shares. It doesn't necessarily reflect their real value, and is typically set at a low value (i.e. one dollar or one cent). The par value of a share is the minimum price at which it may be sold to shareholders, and the par value must be the same for all shares of the same class. The shares can be sold to the initial shareholders, at par value or more, but the price must be the same for each share. Not all states require a par value. Unless you specify otherwise, QuickCorps will authorize 1500 shares (this is due to the fact that 1500 is easily divisible by 2, 3, 4, 5, 6) with a par value of one cent, or at no par value if not required by your state.

The bylaws of a corporation are an internal document that contains rules for holding corporate meetings and carrying out other formalities according to state corporate laws. Bylaws are not filed with the state.

The number of initial shares your corporation is authorized to distribute is specified in the Articles of Incorporation. The actual number is more or less arbitrary, at your discretion. QuickCorps uses a default number of 1500 shares (this is due to the fact that 1500 is easily divisible by 2, 3, 4, 5, 6), with a par value of one cent (if your state requires par value, otherwise no par value will be assigned). Some states charge more to form a corporation with a high number of shares and/or high par value.

Once you receive the filed Articles of Incorporation, which signifies the formation of the corporation by your state, your corporation will need to hold an organizational meeting of the initial shareholders and directors. At this meeting the directors will typically adopt corporate bylaws, distribute corporation stock to initial shareholders, and appoint corporate officers. Also, in most states, directors must meet at least once a year, as directors typically must be elected (or reelected) each year. At the annual meeting the board members accept their election to the board, and transact any other necessary business. The date, time, and location of the annual meeting is typically specified in the bylaws. Written notification of the annual meetings is not usually required, but it is probably a good idea. Other regular meetings may be held as spelled out in the bylaws. Special meetings may be called, and it is typically required that directors receive written notice of the date, place, and purpose all special meetings of directors.

NOTE: It is important to observe these formalities and take corporate minutes of the required meetings. Failure to follow these formalities and properly document your meetings (i.e. keeping minutes) can place your corporate status in jeopardy. The necessary record keeping material, sample bylaws, and stock certificates are included in the Customized Corporate Kit provided by QuickCorps.

A Corporation is managed and run by its directors and officers. The directors are appointed by the shareholders and are responsible for the overall management and corporate governance of the corporation. The directors appoint the officers who are responsible for the day to management and operations of the corporation. The typical officer positions are president, vice-president, treasurer, and secretary, although there can be more and sometimes different titles are used. In most states only one director and one officer is required, and they can usually be the same person.