Bringing a corporation into existence

“A corporation is a formal business association with a publicly registered charter recognizing it as a separate legal entity having its own privileges, and liabilities distinct from those of its members." http://en.wikipedia.org/wiki/Corporation. They are managed by the board of directors and are owned by the shareholders.

What are the steps for bringing a corporation into existence?

Choose a State The Where the Business Will Be Incorporated: “The state that you choose should provide your business with favorable laws that will help your company once it is incorporated. Once you have chosen, visit the website of the Secretary of States Office. You should find guidelines about the incorporation procedures of the state." http://www.articlesnatch.com/Article/Steps-In-Creating-A-Corporation/909438

Choose a Name for the Business: the Corporation’s name has to be unique and it must be ensured that the name is not already taken by another company or companies. In addition, there are websites available which could help in identifying names that have already been chosen or used by other companies. Moreover, other than the company’s name a trade name should also be used which would have to be filed under a Fictitious Business Name to the appropriate county court.

Choose the type of corporation: There are three types of business structures and they are as follows:

C- Corporation This refers to the traditional type of corporations

S- Corporation A type of corporation often used by small businesses to avoid double tax

Limited Liability Company (LLC) More like a type of partnership that provides investors with limited liability

http://www.articlesnatch.com/Article/Steps-In-Creating-A-Corporation/909438

Write Articles of Incorporation: This is the most important which would include the Company’s name, nature of business, duration, capital structure, name and addresses of the incorporators.

The corporation’s name may be in Uppercase or Lowercase, may have numerals and also punctuation marks and it’s purposes must be comply with the state’s corporate laws. “In the Articles of Incorporation, one person must be appointed to handle the business’s future legal process. “Authorized stocks must also be indicated (this would specify the share limit a person would have as part of the corporation).

Afterwards the Article of Incorporation would have to be filed, where a fee would be charged. Filing of this may possibly take weeks before feedback is given about the company’s status.

WHO IS LIABLE FOR PRE-INCORPORATED CONTRACTS

“A pre-incorporation contract is a contract purported to be made by or on behalf of a company which has not been formed." A supporting law case is Newborne v Sensolid [1954]. http://www.coursework.info/University/Law/Contract_Law/A_pre-incorporation_contract_is_a_contra_L83281.html “As a general rule, a promoter is personally liable on pre-incorporation contracts (unless the promoter secures the contracting party’s agreement to hold only the corporation liable). Moreover, a promoter is responsible for:

1) Negotiate pre-incorporation contracts

2) Incorporate the business

3) Find investors

4) Take all other steps necessary to start the business (licenses, etc.)

HOW IS A CORPORATION TAXED

Corporations are taxed as separate entities under the tax laws, and must pay their own income taxes on profits. “Because a corporation is a separate legal entity from its owners, the company itself is taxed on all profits that it cannot deduct as business expenses. Generally, taxable profits consist of money kept in the company to cover expenses or expansion (called "retained earnings") and profits that are distributed to the owners (shareholders) as dividends." http://www.nolo.com/legal-encyclopedia/article-30157.html.

Moreover, the IRS form 1120 is used by corporations to file corporate tax returns. "If a corporation will owe taxes, it must estimate the amount of tax due for the year and make payments to the IRS on a quarterly basis — in April, June, September and January."

http://articles.bplans.com/growing-a-business/how-corporations-are-taxed/137#ixzz14LQhSjox

Shareholder Tax Payments

“The corporation’s owners, if they work for the corporation, pay individual income taxes on their salaries and bonuses, like regular employees of any company. Salaries and bonuses are deductible business expenses, so the corporation deducts those costs and does not pay taxes on them."

Tax On Dividends

“If a corporation distributes dividends to the owners (rare for small corporations where the owners work for the corporation), the owners must report and pay personal income tax on these amounts. And because dividends, unlike salaries and bonuses, are not tax-deductible, the corporation must also pay taxes on them. This means that dividends are taxed twice — once to the corporation and again to the shareholders."

Retained Earnings

“Often a corporation will want or need to retain some of profits in the business at the end of the year — for instance, to fund expansion and future growth. If it does, that money will be taxed to the corporation at corporate income tax rates. Because initial corporate income tax rates (15% – 25% on profits up to the first $75,000) are lower than most owners’ marginal income tax rates for the same amount of income, a corporation’s owners can save money by keeping some profits in the company. (This does not apply to professional corporations, however, as they are taxed at a flat rate of 35%.) In contrast, owners of sole proprietorships, partnerships and LLCs must pay taxes on all business profits at their individual income tax rates, whether they take the profits out of the business or not.

The IRS will allow you to leave profits in your corporation up to a point: Most corporations can safely keep a total of $250,000 (at any one time) in the corporation without facing tax penalties (some professional corporations may not retain more than $150,000)."

http://articles.bplans.com/growing-a-business/how-corporations-are-taxed/137#ixzz14LRZwG4T.

ADVANTAGES OF CORPORATION TAX TO THE SHAREHOLDERS AND CORPORATIONS

Fringe Benefits

“A corporation can provide corporate retirement and medical plans, as well as greater retirement and life insurance contribution limits than unincorporated entities. Consult with an accountant or tax advisor when establishing an employee benefit package for your corporation."

Retained earnings

“Often a corporation will want or need to retain some of profits in the business at the end of the year — for instance, to fund expansion and future growth. If it does, that money will be taxed to the corporation at corporate income tax rates. Because initial corporate income tax rates (15% – 25% on profits up to the first $75,000) are lower than most owners’ marginal income tax rates for the same amount of income, a corporation’s owners can save money by keeping some profits in the company. (This does not apply to professional corporations, however, as they are taxed at a flat rate of 35%.) In contrast, owners of sole proprietorships, partnerships and LLCs must pay taxes on all business profits at their individual income tax rates, whether they take the profits out of the business or not.

The IRS will allow you to leave profits in your corporation up to a point: Most corporations can safely keep a total of $250,000 (at any one time) in the corporation without facing tax penalties (some professional corporations may not retain more than $150,000)."

DISADVANTAGES TO CORPORATION AND SHAREHOLDERS

Double taxation. This means that besides paying corporate income taxes, any dividends to shareholders are taxed again at the applicable tax rate.

Formalities and regulations must be followed very closely in conjunction with the laws regarding incorporating in a specific state. Failure to do so can create a situation where shareholders may be held liable.

It's costlier to start than a sole proprietorship or partnership.

It takes more time and effort to maintain. http://www.legalzoom.com/incorporation-guide/corporate-tax-advantage.html

When or if corporate taxes are not paid, it remains as a debt and secrecy of state or attorney general can dissolve the corporation. In addition, before carrying out the dissolution, the corporation must ensure that all debts and liabilities are paid off.

REFERENCES: http://www.legalzoom.com/incorporation-guide/corporate-tax-advantage.html

http://articles.bplans.com/growing-a-business/how-corporations-are-taxed/137#ixzz14LRZwG4T.

http://www.nolo.com/legal-encyclopedia/article-30157.html

http://en.wikipedia.org/wiki/Corporation

even after incorporation unless the third party releases the promoter or the corporation assumes the contract by novation."