Form a Corporation
What is a corporation, and what does a corporation do for you?
A corporation (or C-Corp or S-Corp) is a type of corporate entity whereby the owners (a group of people called shareholders) are authorized to act as a single entity (legally a person) and recognized as such in law. Corporations were very popular, until LLC’s came into prominence in the last decade. Otherwise, corporations were the go-to entity type to help isolate shareholder liability from the workings of the corporation.
If your accountant says you need a “S-Corp,” a LLC will actually work, provided it’s setup with the IRS to be taxed as an S-Corp. Learn more about LLC’s.
There are several types of corporations, but the two main ones are called “C-Corporations” and “S-Corporations”, and both have their own unique tax structures and advantages and disadvantages. S-Corporations are considered “pass-thru” entities, where the profits and losses pass-through to the owners, on a prorata basis according to ownership. As such, it is possible to save from paying self-employment tax although the IRS does require the business to pay the owner-employees a “reasonable salary” before distributing profits (or losses). An S-Corporation has many limitations and requirements for setting up, and is generally more expensive to create and maintain, from a legal standpoint. Tax savings generally occurs for larger incomes.
C-Corporations are their own taxable entities, and as such, are taxed very much like a person (although they have their own tax rules and rates). C-Corporations are the only entity type that may be publicly traded, and thus, if you intend to “IPO” someday, a C-Corporation may be a wise choice. C-Corporations have a big disadvantage from other entities, in that its distributions of profits (known as “dividends”) are subject to double taxation. In other words, the corporation is taxed once on its income, and then the shareholders are taxed upon any dividends they receive.
Corporations are governed by a Bylaws, and if a S-Corporation, also a Partnership Agreement. Bylaws are relatively straightforward and control how the corporation is managed, how the corporation can be dissolved, how it adds new shareholders, how existing shareholders can be removed or resign, and many other issues about the corporation. State law requires Bylaws, and if you have one or more partners, you should strongly consider a Partnership Agreement to help address issues outside of the typical Bylaws (for example, do you want right of first refusal to buy your partner’s shares, if he or she leaves, dies or becomes incapacitated?).
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What’s Not Included?
- Opinion on Entity Type. We assume you’ve determined that a corporation is best suited for your needs, and our helping you form a corporation doesn’t mean we’ve made a determined or otherwise recommended a corporation is best for your particular needs.
- Custom Bylaws or Partnership Agreement. The Bylaws we provide is a “standard” document that is designed as “one-size-fits-all”. Review the document carefully, and check with us for personalized or customized Bylaws that are drafted to meet your particular needs.
Common Questions About Corporations:
- My accountant said I needed an S-Corp, not an LLC?
Maybe your accountant isn’t familiar with LLC’s, or perhaps you misheard what your accountant was trying to say. LLC’s are unique, in that they may be treated in different ways by the IRS, depending on their “tax designation” with the IRS. If a LLC is owned by one person only (i.e. a sole-member LLC) or just a husband and wife, the IRS treats the IRS as a “disregarded entity,” which is similar to a sole proprietorship. If the LLC is owned by more than one person, the IRS can treat it as a partnership, S-Corporation or C-Corporation. Therefore, when an accountant says “you need an S-Corporation,” what your accountant is really meaning to say, is that “you should make sure your LLC is designated for S-Corporation tax treatment. If you are consideration a Corporation, as opposed to a LLC, because of something your accountant said, we strongly encourage you to contact us to ascertain whether you still need a corporation versus a LLC.
- Is a corporation expensive to run?
Corporations can be expensive to create and run, as their costs relate to the number of shares authorized (or issued), and the corporation must submit ongoing reports back to the state. Remember the corporation will still have state taxes to contend with.
- What is a Registered Agent?
A Registered Agent is necessary for all corporate entities, and it is a person or company with a physical address in New Mexico (or wherever your company is located) that can be served in lawsuits, court actions, etc. Therefore, literally anyone can be a registered agent of a company, provided they have an actual physical address in the state where the company is registered. Note that US Post Office boxes are NOT physical addresses.
- Can the Registered Agent sign documents on behalf of the corporation?
A Registered Agent can only accept service of process on behalf of the corporation, and is not authorized to do more. Of course, an owner, director or agent can also be the Registered Agent, and such an individual can sign or execute documents on behalf of the corporation, but that individual would be doing so under authority as a shareholder, director or agent, not as a Registered Agent.
- Do I need to by physically located in New Mexico to form a New Mexico Corporation?
You do NOT need to be physically located in New Mexico to form a New Mexico Corporation. People form New Mexico Corporations from all over the US and the rest of the world. The only issue, is that the State of New Mexico requires an “original signature” (i.e. not faxed documents and not scanned documents) for documents submitted to the state. The only other document that needs an original signature is the Acceptance of Appointment of Registered Agent. If you want L4SB to be your Registered Agent, then L4SB will sign that document as well, and there is nothing for you to sign other than the Articles of Incorporation.
- What documentation is needed to start the process of forming a corporation?
All you need to do, is fill out several questionnaires when you start the process with L4SB. One is our Engagement Agreement, the other is a “Corporate Formation Questionnaire” that helps us understand your specific needs.
- Can a Corporation be anonymous, like an "Anonymous LLC "?
While New Mexico is one of the few states that permits an “anonymous LLC,” this is not the case for corporations. A directors of a corporation must be reported to the State of New Mexico, and those names will be made publicly available on the NM Secretary of State website.
- Do you need multiple corporations to hold various assets?
No, not necessarily, although there is some strategy at play here. For example, if the assets are significant, and/or there are significant risks of a lawsuit, attachment, or whatever, then it makes sense to have multiple corporations hold different assets. Although, the simple fact that corporations own different assets, in of itself, isn’t necessarily automatic protection for those assets. There is a legal theory in the US called “Piercing the Corporate Veil”, where the personal assets of the shareholders of the corporations and/or other similarly held corporations could potentially be exposed in a cause of action, if the plaintiff can make an argument that the corporations’ veil of protection should be lifted. The most common reasons for this include “commingling funds” (which can include assets, bank accounts, people, resources, etc) and not following corporate formalities (I.e. doing business in a manner that your Bylaws don’t permit). The commingling is a big problem for people, because they will use the same people to help in different closely held corporations. If you do this, you MUST make sure the work of those people are properly allocated amongst the different corporations. This could also happen with a lease. If you have all your corporations having their physical location in the same space, make sure all of them pay their apportioned share of the rent.
- Can I invest through the corporation without exposing my identity as the owner?
No. Ownership is disclosed by the state, and at the end of the day, the IRS requires that a corporation has a proper FEIN (I.e. Federal Employer Identification Number), and no bank or brokerage will allow you to open an account in the corporation’s name, without providing a valid SS-4 from the IRS (which contains the FEIN). Now, in order for the IRS to give a corporation a valid FEIN, the IRS will want to know who the “Responsibility Party” is, which can be another corporation (with a valid FEIN), US Citizen (with a valid Social Security Number) or a non-citizen (with a valid ITN). So, the corporation can invest, but at the end of the day, the IRS will know who is controlling the corporation.
- Can a corporation open bank accounts?
Yes. See the answer immediately above.
- Can a corporation operate and own assets in any state? Foreign Countries?
Yes. Think of a corporation as a “person” for all intensive purposes. In the US, it can own assets in any state, although some states may require “foreign registration” of the corporation if it owns property in that state. As it relates to assets in a foreign country, that depends on the foreign jurisdiction, and each foreign country has different rules and laws relating to this.
- AWhat can you tell me about re-patriating offshore funds through a corporation??
People do it all the time, although you have limitations. The IRS / US Treasury / Homeland Security requires proper reporting for amounts greater than $10,000 being moved through the country. Your bank can help you with that, although they will probably have additional paperwork for you.
- What impact, if any, does a corporation have with IRS declarations, etc?
Think of a corporation as a “person.” If it earns income, it needs to report it to the IRS. There are different ways of reporting it, depending on the particular type of corporation (i.e. C-Corp versus S-Corp). This is actually a sophisticated question and depending on your needs, you would be well-served to consult with a CPA. Contact us, if you would like a reference to a competent CPA.
- What is the realistic level of protection against the IRS for a shareholder?
This depends on what sort of protection you’re looking for. At the end of the day, the IRS, US Treasury and Homeland Security have a LOT of power. If you’re looking at a corporation to help you skirt some laws or rules, somehow, it’s not going to protect you. Also, reference the “piercing the corporate veil” information above. Committing criminal acts in the name of a corporation is a great way to have the corporate veil pierced. In other words, the feds (and plaintiffs’ attorneys) will go straight after the owners in an illegal enterprise.