Description
of Corporations Organized in Delaware
Before
deciding which type of corporation best suits your business needs,
always consult with your legal or financial advisors. Global
Corporate Services, Inc. is a registered agent in the State of
Delaware and does not offer legal or tax advice. We are here to help
you start your new business as quickly and cost effectively as
possible.
General
Corporation
The
general corporation is the most common corporate structure. This
type of corporation is a separate legal entity that is owned by
stockholders. A general corporation may have an unlimited number of
stockholders that, due to the separate legal nature of the
corporation, are protected from the creditors of the business. A
stockholder's personal liability is usually limited to the amount of
investment in the corporation and no more.
Advantages
-
Owners'
personal assets are protected from business debt and liability
-
Corporations
have unlimited life extending beyond the illness or death of the
owners
-
Tax
free benefits such as insurance, travel, and retirement plan
deductions
-
Transfer
of ownership facilitated by sale of stock
-
Shares
of stock owned by individuals outside the State are not subject to
any Delaware taxes.
-
Change
of ownership need not affect management
-
Shares
of stock owned by individuals outside the State are not subject to
any Delaware taxes.
-
Easier
to raise capital through sale of stocks and bonds
Disadvantages
Close
Corporation
There
are a few minor, but significant, differences between general
corporations and close corporations. In most states where they are
recognized, close corporations are limited to 30 to 50 stockholders.
In addition, many close corporation statutes require that the
directors of a close corporation must first offer the shares to
existing stockholders before selling to new shareholders.
This
type of corporation is particularly well suited for a group of
individuals who will own the corporation with some members actively
involved in the management and other members only involved on a
limited or indirect level.
It is
very important to note that a Close Corporation does not have the
right to go public or make a public offering.
If you do not operate your business in Delaware you are not required
to pay the state an income tax. However, you are required to file
with the IRS every year whether or not your corporation or LLC or
Limited Liability Company earns any money. Please refer to
Tax and Accounting Services.
Non Profit/Non
Stock Corporation
The
Non-Stock Corporation is owned by its members, because it has no
stockholders. The members are defined in the by-laws, as well as the
qualifications for membership. There can be different classes of
members, including voting and non-voting members.
Some
organizations offer memberships to anyone who joins and pays annual
dues, others define the members as a specific group of people, such
as a homeowners association where the members may be all the owners
of property in a specific geographic area. You define the
qualifications of membership.
If you
are forming a not for profit company dedicated to religious,
charitable, scientific, testing or public safety, literary, or
educational purposes, or to foster national or international amateur
sports competition (but only if no part of its activities involve
the providing of facilities or equipment) or for the prevention of
cruelty to children or animals, then you want to start with a non
stock corporation and apply to the IRS for your 501(c) (3) approval.
Personal gain is prohibited in a non stock non profit corporation,
except as the benefits of membership apply.
The
Non-stock form of company can also be used for political
associations, homeowners associations, political candidates campaign
committees, fraternal organizations, trade associations and
community activities, with the proper language in the Certificate of
Incorporation.
Key
Elements:
-
Board
of Directors runs the corporation
-
Voting
members elect the Board of Directors
-
May
be structured to have a self-perpetuating board
-
Membership
qualifications defined in the bylaws
-
No
Stockholders, thus no "Owners"
Frequently
used for:
All corporations unless exempt under
Section 501(c) (3) or Section 501(c) (4 of
the IRS Internal Revenue Code who have been in existence since the
beginning of the tax year (including corporations in
bankruptcy) must file an income tax return whether or not they
have taxable income. If you do not operate your business in
Delaware you are not required to pay the state an income tax.
However,
you are required to file with the IRS every year whether or not your
corporation or LLC or Limited Liability Company earns any money. Please
refer to Tax
and Accounting Services.
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Limited
Liability Company (LLC)
LLCs
have long been a traditional form of business structure in Europe
and Latin America. The LLC was first introduced in the United States
by the State of Wyoming in 1977 and authorized for pass-through
taxation (similar to partnerships and "S" Corporations) by
the IRS in 1988. With the recent inclusion of Hawaii, all 50 states
and Washington, D.C. have now adopted some form of LLC legislation
for both domestic and foreign (out of state) Limited Liability
Companies.
Many
business professionals believe the LLC presents a superior
alternative to corporations and partnerships because the LLC
combines many of the advantages of both. With an LLC, the owners can
have the corporate liability protection for their personal assets
from business debt as well as the tax advantages of partnerships or
"S" Corporations. It is similar to an "S"
Corporation without the IRS' restrictions.
Advantages
-
Protection
of personal assets from business debt
-
Profits/losses
pass through to personal income tax returns of the owners
-
If
you are the only member of an Limited Liability Company, you can
elect to file a "Schedule C" as part of your personal
tax return.
-
Great
flexibility in management and organization of the business
-
The
LLC does not have the ownership restrictions of an "S"
Corporation making them ideal business structures for foreign
investors
Disadvantages
As with
the "S" Corporation listing, these lists are not
inclusive. For more detailed information, please be sure to speak
with a qualified legal and/or financial advisor. You may
address your questions to our
Tax and Accounting Services at tax@delawarecorp.us.
Important
Note Regarding the Federal Taxation of the LLC
Before
January 1, 1997, the Internal Revenue Service determined whether a
limited liability company would be taxed "like a
partnership" or "like a corporation" by analyzing
its legal structure or by requiring the members to elect the tax
status on a special form. Effective January 1, 1997, the IRS has
simplified this process.
Pursuant
to these new IRS regulations, if a limited liability company has
satisfied IRS requirements, it can be treated as a partnership for
federal tax purposes. As such, the LLC is required to file the
same federal tax forms as partnerships and take advantage of the
same benefits. However, this is still a highly technical area, and
if you require further information, it is recommended that you
communicate with the Internal Revenue Service or consult a
competent professional such as a tax accountant or attorney.
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Incorporation
Vs. Sole Owner Proprietorship
-
Affords
you personal liability protection. Protects your personal
assets.
-
Corporations
afford substantial tax advantages. You can file to become a Sub
Chapter "S" if all qualifications are met.
-
High
degree of flexibility in structuring pension plans. You can
establish pension, profit sharing and stock options.
-
Deductibility
of health insurance premiums (in most cases).
-
Greater
control in transferring ownership. Owners can quickly transfer
ownership interest represented by shares of stock.
-
More
attractive business structure for bringing in outside investors.
Gives you the opportunity to raise capital without incurring
debt and interest payments.
-
A
corporation's capital can be expanded in a private offering by
issuing and selling additional shares of stock.
-
Makes
estate and family planning a lot easier. Shares of a corporation
can be easily distributed to family members.
You may
address your questions to our Tax
and Accounting Services at tax@delawarecorp.us.
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What is a Sub-Chapter "S" Corporation?
You can
elect to be a sub-chapter "S" corporation by filing the
IRS Form 2553. It has nothing to do with the state where you
incorporate, but refers to the way you pay your income tax.
Upon approval
by the IRS for this status, you can pass early losses through to
the shareholders giving you and your investor a tax write-off
against ordinary income, up to the actual amount of money they have
invested in the company. Once the corporation turns a profit, the
Sub-Chapter "S" status eliminates taxation for the company
entirely. The tax liability is passed on to the stockholders.
"S"
Corporation
With the
Tax Reform Act of 1986, the "S" Corporation became a
highly desirable entity for corporate tax purposes. An "S"
Corporation is not really a different type of corporation. It is a
special tax designation applied for and granted by the IRS to
corporations that have already been formed. Many entrepreneurs and
small business owners are partial to the "S" Corporation
because it combines many of the advantages of a sole proprietorship,
partnership and the corporate forms of business structure.
"S"
Corporations have the same basic advantages and disadvantages of
general or close corporation with the added benefit of the
"S" Corporation special tax provisions. When a standard
corporation (general, close or professional) makes a profit, it pays
a federal corporate income tax on the profit. If the company
declares a dividend, the shareholders must report the dividend as
personal income and pay more taxes.
"S"
Corporations avoid this "double taxation" (once at the
corporate level and again at the personal level) because all income
or loss is reported only once on the personal tax returns of the
shareholders. However, like standard corporations (and unlike some
partnerships), the "S" Corporation shareholders are exempt
from personal liability for business debt.
"S"
Corporation Restrictions
To elect
"S" Corporation status, your corporation must meet
specific guidelines. As a result of the 1996 Tax Law, which became
effective January 1, 1997, many of these qualifying guidelines have
been changed. A few of these changes are noted below:
-
Prior
to the 1996 Tax Law, the maximum number of shareholders was 35.
The maximum number of shareholders for an "S"
Corporation has been increased to 75.
-
Previously,
"S" Corporation ownership was limited to individuals,
estates, and certain trusts. Under the new law, stock of an
"S" Corporation may be held by a new "electing
small business trust." All beneficiaries of the trust must
be individuals or estates, except that charitable organizations
may hold limited interests. Interests in the trust must be
acquired by gift or bequest -- not by purchase. Each potential
current beneficiary of the trust is counted towards the 75
shareholder limit on "S" Corporation shareholders.
-
"S"
Corporations are now allowed to own 80 percent or more of the
stock of a regular "C" corporation, which may elect to
file a consolidated return with other affiliated regular
"C" corporations. The "S" Corporation itself
may not join in that election. In addition, an "S"
Corporation is now allowed to own a qualified subchapter
"S" subsidiary." The parent "S"
Corporation must own 100 percent of the stock of the subsidiary.
-
Qualified
retirement plans or Section 501(c)(3) charitable organizations
may now be shareholders in "S" Corporations. All
"S" Corporations must have shareholders who are
citizens or residents of the United States. Nonresident aliens
cannot be shareholders.
-
"S"
Corporations may only issue one class of stock.
-
No
more than 25 percent of the gross corporate income may be
derived from passive income. An "S" Corporation can
generally provide employee benefits and deferred compensation
plans.
-
"S"
Corporations eliminate the problems faced by standard
corporations whose shareholder-employees might be subject to IRS
claims of excessive compensation.
-
Not
all domestic general business corporations are eligible for
"S" Corporation status. These exclusions include:
It
should be noted that these lists of qualifying "S"
Corporation aspects are not all inclusive. In addition, there are
specific circumstances in which an "S" Corporation may owe
income tax. For more detailed information about these changes and
other aspects regarding "S" Corporation status, contact
your personal accountant, attorney or local IRS office.
Where to
File
as a "S" Corporation
To
become a " S" Corporation, you must know the mechanics of
filing for this special tax status. Your first step is to form a
general, close or professional corporation in the state of your
choice. Second, you must obtain the formal consent of the
corporation's shareholders. This consent should be noted in the
corporation's minutes. Once the filing is approved, your company must
complete Form 2553, Election by a Small Business Corporation.
This form must be filed with the appropriate IRS office for your
region. Please consult the IRS' instructions for Form 2553 to
determine your proper deadline for completing and submitting this
form.
You may
address your questions to our Tax
and Accounting Services at tax@delawarecorp.us.
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