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Check out the following types of companies:
C-Corp - Close Corp - S- Corp - LLC - Close LLC
The corporation is the stalwart business entity most commonly formed for raising capital and limiting individual liability throughout the world. The corporation is a legal separate "person" which may live forever or be empowered to protect the shareholder from economic harm. It my own assets, sue or be sued, transfer its ownership easily, borrow money, mortgage its assets, and file bankruptcy. A board of directors and corporate officers remove day to day management from the hands of the owners (shareholders). Shareholders elect the board at shareholder meetings.
GENERAL CHARACTERISTICS
- Separate entity--a corporation is a separate legal entity formed to be a "fictitious legal" person. Easy transfer of ownership and assignment of equity.
- Limited liability--owners (shareholders) are insulated from debts and liabilities of the corporation by state law. Certain provisions must be met.
- Corporate articles--must be filed with the Secretary of State to form the entity.
- Capital generation--may borrow money, issue bonds, sell common and preferred stock, enter into investment contracts.
- Continuity of life--the entity may live forever without interruption by death of shareholders, directors or officers.
ADVANTAGES
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Limited liability--no shareholder; officer or director may be held liable for debts of the corporation unless corporate law was breached.
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Capital generation--may sell common or preferred stock, issue bonds, borrow money, mortgage assets, or contract for many types of financing.
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Continuity of life--the entity exists forever so long as corporate regulations are met. No need to wind up operations if an owner or manager dies.
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Ease of ownership transfer--the assets may be sold, transferred, pledged, or mortgaged simply by using stock.
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Centralized management--practical control of business is performed by officers at the direction of the board of directors.
DISADVANTAGES
TAX IMPLICATIONS
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Read IRS Publication 542 on corporate taxation.
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Corporations file on IRS Form 1120 and report earnings and taxable profit.
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May be subject to estimated tax payments (quarterly). Read IRS Publication 542 and Form 1120-W.
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Must withhold and match employment taxes on any wages paid its employees.
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Must file for a "Federal Tax Identification Number" using Form SS4.
"A Wyoming Business Advantage"
The Close Corporation was created by an act of legislature especially for small corporations which have a small number of stock holders usually having ties to one another through family relationships or friends and business partners. Close corporations are special cases of regular business corporations electing to operate in a more informal manner likened to partnerships. Regular business corporations must conduct shareholder and director meetings, elect a board of directors, and provide shareholders with written proposals for any major corporate action to be voted on in the annual meetings. Family corporations usually do not hold annual meetings because the family regularly makes decisions around the breakfast table or wherever. A Board of Directors is also not required, if so listed in the Articles of Incorporation, and so there is much less paperwork required for ongoing operations. The Wyoming Close Corporation Law allows small corporations to forego many traditional corporate formalities.
General Characteristics
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Limited shareholders--corporations may not have more than 35 shareholders and still be a Close Corporation.
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Legal basis--Wyoming Statutory Close Corporation Supplement to the Wyoming Business Corporation Act, W.S. 17-17-101 et seq.
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Special action necessary--the Close Corporation law became effective on January 1, 1990. If you were incorporated before that date and you wish to transform your corporation to a close corporation, all shareholders must agree. You become a close corporation by so stating in your Articles of Incorporation or in an amendment to the Articles, that the corporation is a close corporation.
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Special action necessary--if you were incorporated after January 1, 1990 and you wish to transform your corporation to a close corporation, then only 2/3 of the shareholders must agree.
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Abbreviated governance--shareholders may agree in writing to treat the corporation as a partnership, operate without a board of directors, dispense with annual meetings, and make a shareholder agreement. (If you so choose this you need to let us know at the time of incorporation.)
Advantages
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Limited liability--the law says shareholders don’t have personal liability even though they relax corporate formalities in operations.
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Ease of operation--operates without pomp and circumstance required in regular corporations where hundreds of shareholders must receive information and vote.
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Cost of operation--relaxed corporate governance means lower legal, accounting and administrative fees for lower total costs of operation.
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Deadlock prevention--provides access to court when shareholders are deadlocked and harm could befall the corporation through lack of action.
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Buy-out provisions--shareholders may buy out a deceased shareholder’s interest according to shareholder agreements.
Disadvantages
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Generally we regard the "Close Corporation" as a highly advantageous and flexible vehicle for small and medium business. Possible disadvantages might be.
*Limited ownership transfer--share transfer is prohibited except in stated circumstances
*Fewer capital sources--only 35 shareholders may comprise a close corporation.
Tax Implications
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Close corporations are taxed the same as regular business corporations unless it opts for "S" tax treatment. See IRS Publication 542 and the instructions for Form 2553.
"Special tax treatment for corporations"
"S" status for a corporation is granted by the IRS to any regular business corporation or close corporation which meets specific criteria. Domestic corporations having 75 or fewer shareholders all of the same class who are citizens of the U.S. or resident aliens may elect to pass gains or losses, credits or deductions, on to shareholders in much the same manner that partnerships are taxes. "S" status avoids the corporate potential problem of "double taxation." Individual shareholders may benefit from a reduction in their taxable income if the corporation operates at a loss. Despite their unique tax treatment, "S" corporations maintain full corporate attributes like limited liability and continuity of life. Whether a corporation is a regular "C" corporation or a close corporation, it may become an "S" corporation for tax purposes.
General Characteristics
- Limited shareholders--no more than 75 shareholders.
- Domestic corporation--must be organized in the United States.
- One class—must have only one class of stock, but may have voting and non-voting.
- Citizen shareholders--must have shareholders who are citizens of the U.S. or resident aliens.
- Legal basis--IRS Code and Regulations Sections 1361, 1362, and 1378.
- Special action necessary--all shareholders must consent to "S" corporation status.
- Special action necessary--the corporation must file IRS Form 2553. See Form 2553 and Instructions.
- Tax advantage--small corporations may avoid double taxation by passing gains and losses on to shareholders.
Advantages
- Corporate attributes--offers shareholders limited personal liability and offers the corporation continuity of life.
- Tax advantage--corporate income tax payments are not required. Gains and losses are passed on to shareholders who pay taxes in a manner similar to partnerships.
- Early loss benefit--corporations may operate at a loss in their first years. Shareholders may benefit from a reduction in their personal taxable income by receiving their share of corporate losses.
Disadvantages
- Limited capital sources—may have 75 or fewer shareholders which may limit capital raising activities.
- Class limitation—may not have debt convertible to stock or preferential rights to assets or profits that would tend to create more than one class of stock.
- Shareholder restrictions—foreigners, corporations, and partnerships cannot be shareholders of an "S" corporation.
"A Company without double taxation"
A Limited Liability Company (LLC) may elect to pass gains or losses, credits or deductions, on to the members of the LLC in much the same manner that partnerships are taxes. An LLC status avoids the corporate potential problem of "double taxation." Individual members may benefit from a reduction in their taxable income if the corporation operates at a loss. Despite their unique tax treatment, LLC’s maintain full corporate attributes like limited liability. If you are not sure about what type of corporation to start with, this would be the one to choose. An LLC can later be converted to a C corporation, much easier than converting a C to an LLC.
General Characteristics
- Member instead of shareholders.
- Members do not have to be citizens of the United States.
- A Managing Member runs the LLC.
- Special action necessary--all members must consent to LLC status.
- Special action necessary--the corporation must file IRS Form to show the profits or losses passed to the members.
- Tax advantage--may avoid double taxation by passing gains and losses on to members.
Advantages
- Corporate attributes--offers members limited personal liability, the same ones that a C corporation offers.
- Tax advantage--corporate income tax payments are not required. Gains and losses are passed on to members who pay taxes in a manner similar to partnerships.
- Early loss benefit—LLC’s may operate at a loss in their first years. Members may benefit from a reduction in their personal taxable income by receiving their share of corporate losses.
- Shareholder restrictions—foreigners, corporations, and partnerships can be members of an LLC
Disadvantages
- Corporation continuity – life of company has a set ending date.
The first LLC statutes in the United States were instituted in Wyoming in 1977. Since Wyoming has had limited liability companies available longer than any other state and has strong laws protecting members and managers of an LLC, we feel it is the state of choice for establishing LLC's.
The main differences between a regular LLC and a Close LLC is that there is a restriction on the selling of a member's shares. A member must offer the shares, for sale, to the other member(s) of the LLC, before they can be sold to anyone else. All members also must approve of the sale of shares. This works well in a closely held family company, were the parents want to make sure that the children can not sell part of the company to outsiders.
A Close LLC is not required to hold annual meetings, unless requested by a member.
The
Close Limited Liability Company Supplement, articles of organization, and
operating agreement of a close limited liability company may also restrict
transfer of ownership interests, withdrawal or resignation from the company,
return of capital contributions and dissolution of the company.
The above are general characteristics of the most prominent types of business entities. The information contained herein is provided for discussion and education purposes only and should not be relied on as a substitute for legal advice provided by a qualified attorney or as accounting advice provided by a qualified accountant.
Corporations Today has many decades of experience. However, we are neither attorneys nor accountants and do not render professional advice. We consider it highly advisable that you consult with legal and accounting professionals in fine tuning our products and services to your individual needs. We would be happy to speak with your lawyer or accountant at your request to explain the full spectrum of our products and services.
Finally, if you wish to seek professional advice but do not currently have an attorney or accountant of your own, we would be pleased to make a referral to such professionals who have worked on similar matters for other Corporation Today clients over the years. Click here to be referred to a CPA who is qualified in Wyoming.
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