Guide to Incorporating your Business in Federal Way, WA
Guide to Incorporating your Business in Federal Way, WA
The great corporations of this country were not founded by ordinary people. They were founded by people with extraordinary intelligence, ambition, and aggressiveness.
- Daniel Patrick Moynihan
A corporation refers to a group of people authorized to operate as a single entity. It is managed by a board of directors who administer its general affairs.
Forming a Corporation
For a corporation to exist, "Articles of Incorporation" are filed with the Secretary of State. In some states, this document is known as "Certificate of Incorporation" or "Certificate of Formation."
Different Types of Corporations
The main difference relates to the two ways an IRS allows a corporation to be taxed: "C Corporation" and "S Corporation."
C Corporation
In a "C Corporation" corporate income (1st tax) is the source of its corporate tax. Then it will distribute the profits of the corporation to its shareholders who are liable to pay taxes out of those dividends (2nd tax). This is referred as double taxation because the C Corporation is taxed on two levels.
S Corporation
A corporation that elects to be treated as a pass-through entity is referred to as an "S corporation." All corporate income is "passed-through" to the shareholders directly, who in turn list the income on their individual tax returns. An "S Corporation" is not subject to double taxation and its accounting is easier than a "C Corporation."
Benefits of Forming a Corporation
A corporation can help reduce your taxes. It can also protect your assets. It can also shield you from liability for losses of a business. Without the corporate veil, you would have to pay the debts of the businesses you owned out of your personal assets. In a corporation, however, you are shielded from this liability, so more people are willing to invest in this type of business venture. Presently, corporations have become the standard for many business entities.
Tax Advantages of Corporations Income Shifting
A "C Corporation" even with its double taxation, can still offer tax flexibility because of income shifting. You can use income shifting to take advantage of lower income brackets. For example, raising or lowering the owner's salary can shift income from the "C Corporation" to the owner giving the owner flexibility to choose the ideal tax bracket for the corporate entity and for personal taxes.
Sole Proprietorship and Partnership
Corporations have a lot of advantages and only some disadvantages over partnerships and sole proprietorships.
Advantages:
• Corporate shareholders are not liable for corporate debts.
• Corporations offer self-employment tax savings
• Corporations have continuous life
• Corporations make raising money easier
• Transferring the ownership interests of a corporation is easier
Disadvantages:
• Sole proprietorship and partnership cost less to establish
• Minimal formalities required for sole proprietorship and partnership
• Sole proprietorship and partnership are not accountable for unemployment insurance
Corporation vs. a Limited Liability Company
Limited liability company (LLC) combines the simplicity of a partnership and personal liability protection of a corporation with the tax benefits.
Advantages of a corporation over LLC:
• Corporation profits are not subject to Social Security and Medicare taxes
• Corporations garner greater acceptance
• Corporations can offer a greater variety of fringe benefits with fewer taxes
• Corporations lower taxes through income shifting
Advantages of LLC over a corporation:
• LLCs have fewer corporate formalities
• LLCs have no ownership restrictions
• LLCs have the ability to deduct operating losses
• LLCs have tax flexibility
Choosing a State for Incorporation
Most people want to establish business in their home state. It would be practical to check if your home state has a high corporate tax or high state fee. You can do business elsewhere if that is the case in your chosen state. Business involves more than just selling products; it requires having active presence and or occupying an office.
Procedures for Forming a Corporation in a Particular State
Most states have the same basic process for incorporating. Variations will be on state filling fees, bylaws, continuing obligations, and formation requirements.
Foreign Corporations
A Foreign corporation refers to the registration of a corporation in each state where they do business outside of their state of incorporation. This process is called foreign Qualification.
Managing the Corporation
Approving major business decisions are done by the board of directors who manages the corporation. Directors are elected by the shareholders and hold office for a limited term. Here must be at least one director in a corporation.
Some of the procedures approved by the board of directors include:
• Declaration of dividends
• Setting the terms of employment of the elected officers
• Amending the articles of corporation and bylaws
• Corporate transactions involving mergers and reorganizations
Owners of a Corporation
The ultimate owners of the corporation are the shareholders or stockholders. They don't have the right to direct the daily activities of the corporation yet they have the right to share the profits of the corporation, elect directors, and vote on major corporate actions.
In order to elect directors, a corporation is required to hold annual shareholders' meeting. If not all shareholders are present, the meeting can still go on through a conference call or by letting shareholders signed the approved actions as discussed during the meeting.
Corporate Stock
Corporate stocks have two levels, the common stock and the preferred stock. Common stock is the most basic level of stock and it is the ownerships' share in a corporation accompanied by the rights to vote on corporate policy and management. It is the usually the only kind of stock with the voting rights.
Shareholders and Directors for a Corporation
To run the company, a corporation should have at least one director and one shareholder.
Appointing Corporate Officers
Corporations have at least three officers: a president, a treasurer or financial officer and a secretary. These officers are appointed by the board of directors to run the day-to-day operations of the corporation. They don't have to be shareholders or directors; in most cases the same person can hold all offices.
Required Officers for a Corporation
A corporation must have a president, secretary and treasurer in most states. In most cases, one person can hold all three offices.
How Corporations are Taxed
A corporation, being a separate legal entity, submits their tax return each year with the IRS. If the corporations' fiscal year ends in December 31, tax returns are due on Mach 15. Tax return must be filed even if it does not have a tax due or income. C corporations file their tax returns using the Form 1120 or 1120A. S corporation are not required to pay federal taxes at corporate level but they still must prepared a separate tax return using Form 1120S.