Download `C` Corporation

'C' Corporation
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
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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.
Capital generation--may sell common or preferred stock, issue bonds, borrow money,
mortgage assets, or contract for many types of financing.
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.
Ease of ownership transfer--the assets may be sold, transferred, pledged, or mortgaged
simply by using stock.
Centralized management--practical control of business is performed by officers at the
direction of the board of directors.
DISADVANTAGES
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We believe that corporations have few disadvantages and, virtually none which
cannot be easily overcome. For example double taxation can occur when
corporate profits are taxed at the entity level and are returned to investors as
dividends to be taxed again as individual income. Family and "closely held"
corporations frequently return money to investors by other means thereby
avoiding the double tax.
TAX IMPLICATIONS
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Read IRS Publication 542 on corporate taxation.
Corporations file on IRS Form 1120 and report earnings and taxable profit.
May be subject to estimated tax payments (quarterly). Read IRS Publication 542 and
Form 1120-W.
Must withhold and match employment taxes on any wages paid its employees.
Must file for a "Federal Tax Identification Number" using Form SS4.
CLOSE CORPORATION
"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 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.
Legal basis--Wyoming Statutory Close Corporation Supplement to the Wyoming
Business Corporation Act, W.S. 17-17-101 et seq.
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.
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.
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.
Advantages
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Limited liability--the law says shareholders don’t have personal liability even
though they relax corporate formalities in operations.
Ease of operation--operates without pomp and circumstance required in regular
corporations where hundreds of shareholders must receive information and vote.
Cost of operation--relaxed corporate governance means lower legal, accounting
and administrative fees for lower total costs of operation.
Deadlock prevention--provides access to court when shareholders are
deadlocked and harm could befall the corporation through lack of action.
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.
"S" CORPORATION
"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
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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
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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
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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.
LLC
"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
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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
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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.
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Shareholder restrictions—foreigners, corporations, and partnerships can be members of
an LLC
Disadvantages
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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.
CLOSE LLC
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.