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Corporations are business structures that create a separate legal entity. This separate legal entity will protect the owners from personal liability. This means that the owners are generally not liable for the corporation’s debt, lawsuits, and other business related liabilities. Below are some of the benefits of forming a corporation:
The owners are protected from the corporation’s debt, lawsuits, and other business related liabilities.
The corporate structure makes it easier to raise capital by selling stock to investors.
The corporate structure can reduce taxes by avoiding self-employment tax and utilizing income splitting strategies.
A corporation has a perpetual life. This means that the business continues to exist even if the owners leave the company or dies.
The corporate structure can help develop credibility and professionalism.
When a corporation is formed, it always starts off taxed as a C-corporation. However, a special election may be filed with the IRS to change its tax structure to an S-corporation. Below is a chart outlining the differences between a C-corporation and an S-corporation.
| Taxed as a S-corporation | Taxed as a C-corporation | |
|---|---|---|
| Taxed as a C-corporation |
Pass through taxation. All profits must be distributed to the owners and will be taxed only once. |
Profits are taxed at the corporate level and any profits distributed to the owners will be taxed again at the individual level which creates double taxation. However, income splitting strategies may be used to reduce tax liability. |
| Self Employment Tax |
Generally, no self-employment tax on pass through income. |
Generally, no self-employment tax on profits distributed to owners. |
| Ownership Restrictions |
Some ownership restrictions apply. |
Generally, no ownership restrictions. |
| Usage |
Used among businesses that would like pass through taxation and to avoid paying self-employment tax. |
Used among businesses that would prefer to leave some or all profits with the company rather than having to distribute all profits to the owner(s). |
My Legal Depot can form your corporation promptly and accurately at affordable rates. Our experienced staff will review your questionnaire for errors, prepare the formation documents, file them with the appropriate government office, create your post-formation documents, and ship the completed documents to you.
Forming a corporation can be time consuming and expensive. My Legal Depot has registered Legal Document Assistants (LDAs) that have experience in preparing and filing thousands of legal documents. Let us form your corporation promptly and accurately at affordable prices.
*Documents will be prepared and emailed to you within 2 business days. Delays are uncommon, but may occur due to uncontrollable circumstances.
The cost to form a corporation varies depending on the formation state, business activity, tax structure, and other factors. Please contact us at 1-800-820-2144 for exact pricing.
In California, the corporation's legal name does not require a corporate designator unless the corporation's legal name is the name of an individual (i.e. John Doe, Inc). The corporate designators that can be used are "Incorporated," "Corporation," "Company," "Limited," or the abbreviations "Inc.," "Corp.," "Co.," "Ltd." Although corporate designators are typically not required in California, it should be used anyways in order to tell the general public that you are a corporation.
Special Note: If you are forming a professional corporation, you may be required to comply with special naming requirements. As a general rule, if your profession requires a license, you should always check with the licensing board for special naming requirements before incorporating.
Corporate Record Requirements:California corporations are required to keep their corporate bylaws and meeting minutes at their principal office in the State of California.
State Corporate Taxes:Below is an overview of the California corporate taxes:
S-Corporation Tax: A S-corporation must pay a tax in the amount of 1.5% of the net income or $800.00, whichever generates the higher tax. The tax must be estimated and prepaid to the California tax authority in 4 installment payments. The $800.00 minimum tax is waived for a corporation's first tax year. In the first tax year, new corporations are only required to estimate and prepay 1.5% on their net income (no $800.00 minimum).
C-Corporation Tax: A C-corporation must pay a tax in the amount of 8.84% of the net income or $800.00, whichever generates the higher tax. The tax must be estimated and prepaid to the California tax authority in 4 installment payments. The $800.00 minimum tax is waived for a corporation's first tax year. In the first tax year, new corporations are only required to estimate and prepay 8.84% of their net income (no $800.00 minimum).
Banks and Financial Corporations: For banks and financial corporations, the tax rate is 10.84% and the tax rate for financial S-corporations is 3.5%. The minimum tax, estimating requirements, and first year exemptions are the same as above.
Special Note: As a general rule, all profits derived in California will be subject to California taxes. If you are also operating in another state, the income from the other state is subject to the other state's tax rules and is not applicable to California (you will need to apportion the income in order to properly calculate taxes).
California's Reporting Requirements:All corporations are required to file a "Statement of Information" with the Secretary of State in order to disclose the directors' names, officers' names, and name/address of the registered agent. The filing fee is $25.00. After formation, you must file an initial statement within 90 calendar days after the articles are filed. Afterwards, you must file this statement each year during the 5 month period before your articles anniversary date (i.e. If your articles were filed in August, then you must file your statement anytime between March to August of each year).
Special State Level S-Corporation Election:California recognizes the federal S-corporation election and no extra state level election is required. However, it is a good idea to file your first year tax returns along with any "IRS S-corporation approval letters" as proof of your S-corporation tax structure.
Professional Services:California allows professional services (i.e. doctors, lawyers, accountants, architects, etc) to form a Professional Corporation. Professional service C-corporations must pay federal income tax based on the federal personal service corporation (PSC) tax rate which is a flat 35% on all income instead of the regular progressive tax rates. The PSC flat tax can be avoided by electing to be a Professional S-corporation instead.
State Director Requirements:Below is a brief overview of California's director requirements:
Minimum Number: In California, you must have at least 3 directors. A lower number of directors can be achieved under the following exceptions:
If there is only 1 owner or if shares have not been issued yet, then you may have 1 or 2 directors.
If there are only 2 owners, then you may have 2 owners.
State Residence Requirements: The directors are not required to be California residents.
In Delaware, the corporation’s legal name must contain one of the following words: "Incorporated," "Corporation," "Company," "Limited," "Association," "Club," "Foundation," "Fund," "Institute," "Society," "Union," "Syndicate," or the abbreviations "Inc.," "Corp.," "Co.," "Ltd."
Special Note: If you are forming a professional corporation, you may be required comply to with special naming requirements. As a general rule, if your profession requires a license, you should always check with the licensing board for special naming requirements before incorporating.
Corporate Record Requirements:Delaware corporations are required to keep their corporate records at their principal place of business.
State Corporate Taxes:In Delaware, corporations are subject to a corporate income tax (only for C-corporations) and a corporate franchise tax (the franchise tax is a special tax for being a corporation in the state). Below is an overview of Delaware’s franchise tax and corporate income tax:
Franchise Taxes – Applies to C-corporations and S-corporations: In Delaware, all domestic corporations must pay a franchise tax (certain foreign or non-profit corporations may be exempt). The franchise tax is calculated based on the number of authorized shares (the "Authorized Share Method") OR based on the corporation’s gross assets (the "Assumed Par Value Capital Method"), whichever method generates the lowest tax. Currently, the lowest franchise tax available in Delaware is $75.00. In order to pay the lowest franchise tax available, you should select 5,000 or less authorized shares. Click here to view some computation examples.
C-corporation Income Tax: All C-corporations must pay an annual corporate income tax of 8.7% on income generated in Delaware. Income generated outside of Delaware is exempt from Delaware’s corporate income tax.
S-corporation Income Tax: Since a S-corporation is a pass through entity, there are no corporate level income taxes. However, the owners must report and pay individual income taxes on the profits received.
All corporations are required to file an "Annual Report" with the Secretary of State and pay the franchise tax described above. The filing fee for the annual report is $50.00 and the franchise tax will vary (lowest franchise tax available is $75.00). New corporations are not required to file an initial report for the first year. However, you must file an annual report each year thereafter by March 1st.
Special State Level S-Corporation Election:Delaware recognizes the federal S-corporation election and no extra state level election is required. However, it is a good idea to file your first year tax returns along with any "IRS S-corporation approval letters" as proof of your S-corporation tax structure.
Professional Services:Delaware allows professional services (i.e. doctors, lawyers, accountants, architects, etc.) to form a Professional Corporation. Professional service C-corporations must pay federal income tax based on the federal personal service corporation (PSC) tax rate which is a flat 35% on all income instead of the regular progressive tax rates. The PSC flat tax can be avoided by electing to be a Professional S-corporation instead.
State Director Requirements:Below is a brief overview of Delaware’s director requirements:
In Nevada, the corporation's legal name does not require a corporate designator unless the corporation's legal name is the name of an individual (i.e. John Doe, Inc). The corporate designators that can be used are "Incorporated," "Corporation," "Company," "Limited," or the abbreviations "Inc.," "Corp.," "Co.," "Ltd." Although corporate designators are typically not required in Nevada, it should be used anyway in order to tell the general public that you are a corporation.
Special Note: If you are forming a professional corporation, you may be required to comply with special naming requirements. As a general rule, if your profession requires a license, you should always check with the licensing board for special naming requirements before incorporating.
Corporate Record Requirements:Nevada corporations are required to keep a copy of the following documents at their Registered Agent's office:
There are no state income or franchise taxes in Nevada.
Nevada's Reporting and License Requirements:All corporations are required to file a "List of Directors/Officers and Business License" with the Secretary of State. The filing fee for the list is $125.00 and the business license is $200.00. After formation, you must file an initial list by the last day of the month which follows the incorporation date (i.e. if your articles were filed in January, then your must file your initial list and business license before the end of February). Afterwards, you must file this list and business license each year anytime before your articles anniversary date (i.e. if your articles were filed in August, then you must file your list and business license anytime before the end of August of each year).
Special State Level S-Corporation Election:Since there are no state income taxes in Nevada, there is no state level election is required.
Professional Services:Nevada allows professional services (i.e. doctors, lawyers, accountants, architects, etc) to form a Professional Corporation. Professional service C-corporations must pay federal income tax based on the federal personal service corporation (PSC) tax rate which is a flat 35% on all income instead of the regular progressive tax rates. The PSC flat tax can be avoided by electing to be a Professional S-corporation instead.
State Director Requirements:Below is a brief overview of Nevada's director requirements:
Corporate laws are complex and the information provided in this site is not legal advice. Laws are constantly changing, and although we try our best to keep the information up to date, My Legal Depot makes no warranties, representations, or guarantees of any kind, expressed or implied. All information contained within this site is intended to be used for informational and entertainment purposes only. Click here for the disclaimer.
Below are some of the benefits of forming a corporation:
In order to understand the corporate structure, you must first understand the key players and their role in the corporation.
| Corporate Players | Role in the corporation |
|---|---|
| Shareholders | Shareholders are the owners of the corporation. |
| Directors |
The shareholders will elect directors; the directors’ general duties are to create corporate policies and manage corporate affairs. The directors’ duties include hiring officers, reviewing and approving budgets, and dealing with corporate governance matters. |
| Officers |
The officers are the President, Vice-President, Treasurer, and Secretary. These individuals are in charge of the day-to-day business activities. |
In a corporation, the shareholders will elect the directors (the policy makers/managers of corporate affairs). The directors will then hire officers to run the day-to-day operations. In most small businesses, the shareholders, directors, and officers are usually the same people.
Generally, there are no ownership restrictions for a C-corporation. However, if you are forming a S-corporation, there are some ownership restrictions that you must comply with.Click here for a summary of the S-Corporation ownership restrictions.
Below is a brief overview of the common reasons why businesses choose one tax structure over the other:
S-corporation: Most small businesses tend to choose the S-corporation because of its pass through taxation and the ability to avoid paying self-employment taxes on the pass through profits. However, one drawback of a S-corporation is that you must distribute all profits to the owners. You do not have the ability to retain the profits within the company. Additionally, there are ownership restrictions in order to be taxed as a S-Corporation. Click here for a summary of the S-Corporation ownership restrictions.
C-corporation: Businesses that want to retain the profits within the company in order to grow the business would typically form a C-corporation instead (can later be converted to a S-corporation by a simple IRS filing). When taxed as a C-corporation, the corporation’s profits will be taxed at the corporate level as business income and any profits distributed to the owners will be taxed as income to the owner thus causing double taxation. However, a C-corporation does not have to distribute the profits to the owner and may choose to only distribute a portion of the profits to its owners and retain the difference (i.e. ABC Company profits $100,000 this year and distributes $30,000 in dividends to owners and retains the $70,000 for the company’s use). Only profits that are distributed to the owners will be taxed twice (taxed at corporate and individual level). The profits that are left as retained earnings will only be taxed once at the corporate level.
Below is a chart to help you compare the differences between the most common business structures:
| Sole Proprietorship | Partnership | LLC | S-corporation | C-corporation | |
|---|---|---|---|---|---|
| Ownership Requirement | 1 owner. | 2 or more owners. | 1 or more owners. | Between 1 to 100 owners. Click here for details. | 1 or more owners. |
| Liability Protection | No, the owner is personally liable. | No, the partners are personally liable. | Yes, generally the owners are protected from personal liability. | Yes, generally the owners are protected from personal liability. | Yes, generally the owners are protected from personal liability. |
| Perpetual Existence | No, this structure ends when the owner dies or withdraws. | No, this structure ends when the owner dies or withdraws. | Maybe, a LLC’s life will depend on the state of formation. | Yes, a corporation continues to exist after an owner dies or withdraws. | Yes, a corporation continues to exist after an owner dies or withdraws. |
| Taxation | Profits are only taxed at the individual level, also known as “pass through taxation.” | Profits are only taxed at the individual level, also known as “pass through taxation.” | Flexible tax structure (aLLCs can choose to be taxed as a sole proprietorship, partnership, S-corp, or C-corp). | Profits are only taxed at the individual level, also known as “pass through taxation.” | Profits are taxed at the corporate level and any profits distributed to the owners will be taxed again at the individual level, also known as “double taxation.” |
| Self Employment Tax | Yes, profits are typically subject to SE Tax. | Yes, profits are typically subject to SE Tax. | Maybe, it will depend on the tax structure selected. | No, profits are typically not subject to SE Tax. | No, profits are typically not subject to SE Tax. |
| Passive Investment Income | Yes, this structure can be used for passive investment income (i.e. rental income, royalties, etc.). | Yes, this structure can be used for passive investment income (i.e. rental income, royalties, etc.). | Yes, this structure can be used for passive investment income. However, there is a 25% income rule if you elect to be taxed as a S-Corporation. | Yes, this structure can be used for passive investment income. However, there is a 25% income rule if you elect to be taxed as a S-Corporation. | Yes, this structure can be used for passive investment income (i.e. rental income, royalties, etc.). |
| Professional Services | Yes, this structure can be used professional services (i.e. doctors, lawyers, etc.) | Yes, this structure can be used professional services (i.e. doctors, lawyers, etc.) | Maybe, it will depend on the state where business is being conducted. | Maybe, it will depend on the state where business is being conducted. | Yes, this structure can be used professional services. However, there is a special federal PSC 35% flat tax. |
| Formalities | Few formalities. Business must comply with DBA laws. | Few formalities. Business must comply with DBA laws. | Must comply with state reporting requirements, if any. | Corporations must hold annual meeting and comply with state reporting requirements. | Corporations must hold annual meeting and comply with state reporting requirements. |
| Disadvantages | No liability protection and must also pay SE tax on income. | No liability protection and must also pay SE tax on income. | Higher start-up cost, more formalities, and higher maintenance cost. | Higher start-up cost, more formalities, and higher maintenance cost. | Higher start-up cost, more formalities, higher maintenance cost, and double-taxation. |
| Advantages | Few formalities and low start-up costs. | Few formalities and low start-up costs. | Personal liability protection, flexible tax structure, and no annual meeting requirement. | Personal liability protection and possible SE tax savings. | Personal liability protection and the ability to retain earnings and to split income. |
| Usage | For businesses that have low liabilities or new start-ups with low capital. | For businesses that have low liabilities or new start-ups with low capital. | For businesses that want personal liability protection and a flexible tax structure. | For businesses that want personal liability protection and possible SE tax savings. | For businesses that want personal liability protection and prefer to keep some or all of the profits within the business. |
Most small businesses will form a corporation in their home state (athe state where their business is located). Filing in another state will usually require more paperwork, additional maintenance fees, and additional state taxes (awhere applicable).
If you intend to conduct business in only one state and do not expect any major corporate governance issues (ashareholder/investor disputes, director disputes, company policy disputes, etc.), then you should consider forming a corporation in your home state. This is because the additional paperwork, fees, and taxes usually outweigh the benefits of forming a corporation in a more business friendly state.
However, if the corporation will seek funding from venture capitalists, professional investors, a public stock offering, or expect corporate governance issues, then you should consider forming a corporation in a more business friendly state (i.e. Delaware, Nevada, etc). The major benefit of forming a corporation in another state is the quick and predictable results from corporate governance lawsuits.
No. You can always prepare and file your own formation documents. My Legal Depot can help you incorporate and save money on attorney fees. However, if you need legal advice, you should consult an attorney.
All corporations must designate a registered agent who is available during normal business hours to accept notices and documents. The registered agent may either be: (1) an adult individual residing in the state of incorporation OR (2) a company authorized by the Secretary of State to serve as agent (such as My Legal Depot).