StartABizzy.com FAQs

An “S” corporation is a for-profit corporation that has made an election with the IRS under subchapter S of the Internal Revenue Code to be treated for tax purposes as a “pass-through entity” – meaning that profits and losses of the corporation are passed through to the shareholders (owners) who report them on their personal tax returns and pay the tax at the individual level. The corporation pays generally pays no federal income tax at the corporation level.

Both entities provide the benefits of pass-through taxation to avoid “double taxation” of profits as well as limited liability for the owners. An LLC has more operating flexibility and fewer restrictions than a S-corporation. For example, there are restrictions on the type and number of shareholders that are permitted in an S corporation that are not imposed on the member-owners in an LLC. Corporations must hold annual meetings of shareholders and follow certain other record keeping requirements not legally required of an LLC. On the other hand, shareholder-employees of an S corporation may pay less taxes overall than members (owners) of an LLC. It is generally less expensive to form an S corporation than an LLC, particularly in California where additional taxes are imposed on LLC’s.

The person forming a corporation is known as the Incorporator. This may be one of the principals of the corporation or an attorney or service company preparing and filing the Articles of Incorporation with the state.

After the corporation has been formed, one individual may fill all of the required capacities: i.e., as the sole shareholder and director, and serving as president, secretary, and treasurer or chief financial officer.

Yes. Corporations that do not have a physical address in the incorporating state or simply prefer to use an outside registered agent may use a private service company to act as the registered agent for an annual fee. Any change in the registered agent (name or address) must be documented with a change document filed with the formation state.

The processing time varies in each state. Normal processing time may be just a few days in states with a small number of corporate filings. States having large volumes of corporate filings may take several weeks to a couple of months to process filings. Many states offer expedited filing services for an additional fee that reduce the filing times to generally 1 to 4 days.

Keep in mind that you will need to open a separate bank account for your corporation to deposit income and pay expenses. Most banks will require you to present a copy of your filed Articles of Incorporation from the Secretary of State together with your federal tax number (EIN) in order to open a corporate bank account. You should therefore consider expedited filing services, when available, if you need to open a corporate back account quickly.

There are very few restrictions on who may serve as a director or an officer of a corporation.

The most important restriction is that only natural persons may serve. This means that a corporation (or any other business entity) may not serve as a director or officer.

The other restrictions deal with legal capacity to contract. Individuals less than eighteen years of age, or who are mentally incompetent, may not enter into legally binding agreements and therefore cannot serve as directors or officers in most states.

Shares are ownership units in a corporation, and are evidenced by a stock certificate of the corporation. A stock certificate indicates the number of shares issued to a shareholder. A share entitles its holder to a proportionate share of the assets of the corporation, whether by dividend payments or upon the ultimate distribution of its assets when the corporation is dissolved (terminated). Shares also confer other rights to shareholders, such as the right to vote and attend meetings.

Yes, even if you are the only owner (shareholder). There are two main reasons:

First, issuing shares of stock is a corporate formality, which must be followed to assure compliance with all of your state’s statutory requirements with respect to proper formation of a corporation. Completing this formality is also important in preserving the limited liability protection for shareholders.

Second, as mentioned above, shares indicate ownership of your corporation.

If the shares of your corporation have a “par value” (see question below about par value), the number of shares issued to a shareholder should be a mathematical calculation based on the value of the items contributed to the corporation by the person to receive the stock and the par value established for each share. For example, if the corporation established a par value of $1.00 per share and a person contributes $1,000 in cash or property to the corporation, he should receive 1,000 shares of stock.

If your corporation’s shares do not have a par value (called “no par” stock), then the number of shares issued to each shareholder should reflect the ownership percentage that each shareholder is intended to have. For example, if a total of 100 shares of the authorized shares will be issued to two shareholders, one of whom will own 75% of the corporation and the other 25% of the corporation, they should be issued 75 shares and 25 shares, respectively.