FAQs

Here’s an extensive set of answers to some of the more commonly asked questions in my main practice areas. Feel free to submit a comment or email me with any other questions.

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  • Corporations
  • LLCs
  • Partnerships
  • Entity Choice Generally
  • Steps to Take When Forming an Entity
  • Operating a Corporation/LLC
  • Tax Considerations and Related Q&A's
  • General Business (Legal) Stuff
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  • 1. Do I need a corporation or LLC for my business?
     

    Congratulations! You just asked the best question (which is why it's also at the top of the FAQs). You know (or at least should know) your business best, and so that also means you know what liabilities you may face. Make a list. Call up your insurance broker (you have one, right?) and talk through what’s covered and then what isn’t. Are there things out of your control, such as employees? Those are some things to consider. You can read my post on this or watch the video on this topic. It’s very important that you not waste time and money on something you may not need.

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    Viewed 261 Times
  • 2. What's a Corporation?
     

    A corporation happens when “charter documents” are filed with the state, usually in a form either prescribed by the state or drafted by an attorney [ahem] and, once filed, creates a corporation. Corporations are a legal entity designed to protect its shareholders and directors from liability.

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    Viewed 249 Times
  • 3. What's an LLC?
     

    An LLC, or limited liability company, is a type of entity that protects its owners and mangers from liability, unless they personally do bad things. Like a corporation, an LLC happens when its Articles of Organization are filed with the state authority. In California, this is an online form. Keep in mind, there are other filings, and then ongoing responsibilities of those managers and members to continue shielding them from liability. And if there’s more than one Member, having a written operating agreement is highly advised. There may also be tax advantages to filing as an LLC.

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    Viewed 284 Times
  • 4. What's the difference between an LLC and a corporation?
     

    Call me! Seriously, the differences are numerous; here are a couple to get you started: LLCs have a more flexible tax structure, have fewer housekeeping requirements, but aren’t ideal for larger companies, especially those seeking outside investors. Corporations are, well, just read that last sentence but the opposite.

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  • 5. What's better . . . an LLC or a Corporation?
     

    Aaah, if life were only that easy. Actually, sometimes it is. One rule of thumb -- is it a small business not providing professional services, with no plans for investors and modest gross receipts? That's a case where you might lean heavily toward an LLC. Investors on the horizon? Corporation. The analysis can get tortured for businesses that are larger or are growing. Real estate tends toward LLCs.

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    Viewed 262 Times
  • 6. What is a C Corporation?
     

    A C Corporation is a Corporation that hasn’t elected under the Internal Revenue Code to be taxed as an S Corporation. The best way to describe it is to check out what an S Corporation is. Trust me; it’s not circular.

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    Viewed 258 Times
  • 7. What is an S Corporation?
     

    An S Corporation is a corporation that has made an election (i.e., timely filed a form) to be taxed as a “pass-through”, i.e., the corporation itself is generally not taxed, but all of the taxes for profits and income, as well as for losses and expenses, are passed through to become the obligations of the individual shareholders. There are limitations to what corporations can be S Corporations. For example, S Corporations cannot be owned by more than 100 shareholders or by non-resident aliens. The “S” stands for . . . wait for it . . . small.

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    Viewed 251 Times
  • 8. How do I form a Corporation?
     

    Nice. Figuring if you click here you’re home free. In a way, yes. To form one, you file Articles of Incorporation with the governing corporate authority in your state. In California, where my practice is, that’s the Secretary of State. Articles should contain certain provisions that may or may not be obvious to you, and are not contained in most templates offered by the state or online corporate mills. Additionally, formation is the first of several steps to take to ensure that your corporation is protecting you.

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    Viewed 239 Times
  • 9. Should I incorporate in Nevada?
     

    You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.

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    Viewed 248 Times
  • 10. Should I incorporate in Delaware?
     

    You’ve read a lot about that, I’m sure. There can be reasons to form there. Here are two that come up a lot: One, your business is going to have big deal investors who like being in Delaware, sometimes for reason number . . . Two: Delaware law is corporate-centric, efficient, and can provide better protections for the corporation’s officers and directors. But like filing anywhere else, if the principal place of business is in another state, you’ll need to register your corporation (or LLC) in that state as well as a “foreign” corporation/LLC.

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    Viewed 247 Times
  • 11. Should I form my LLC or corporation in a state other than where I live?
     

    If you’re not thinking about Delaware, then maybe. Sometimes you’re going to have to. If, for example, you’re forming an LLC for investment real estate, with a few exceptions, that state will require you to form your LLC in the state where the property is. There may be other reasons to be in another state, but those come up rarely.

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    Viewed 240 Times
  • 12. When does a corporation become a corporation? An LLC?
     

    I wish the answer to this were more existential, and thus more interesting. Alas, it’s as simple as this: when you duly file Articles of Incorporation, also know as charter documents, with the state official authorized to recognize and process such filings. In California, it’s the Secretary of State. In Delaware, it’s the Division of Corporations. Same for LLCs, except it tends to be called Articles of Organization.

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  • 13. Why should I form a corporation/LLC for my business?
     

    Corporations provide liability protection for its owners, as well as its officers and directors, with some exceptions. So, there’s that. Insurance covers some things, not all things. And sometimes a corporation won’t help you . . . for example, if you’re a lawyer and you commit malpractice. That’s on you, individually – corporation or not. Tax may also drive a reason to incorporate or organize an LLC.

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    Viewed 246 Times
  • 14. What are Articles of Incorporation?
     

    This is about as arcane as it gets . . . “Articles”. Be that as it may, we’re stuck with it as a word in corporate lingo. This is the document which provides the state, and therefore the public, with the initial information needed to bring the corporation into existence. It must follow certain state requirements minimally, and may also contain certain other provisions that may either be recommended generally, or may be required by certain investors. Sometimes this is referred to as the “corporate charter”.

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    Viewed 252 Times
  • 15. What are Articles of Organization?
     

    Like Articles of Incorporation, this is the document used for bringing your LLC into existence. It’s filed with the state’s authority for, well, filing such documents. In California, this is the Secretary of State. In Delaware, it’s the Division of Corporations.

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    Viewed 245 Times
  • 16. Will a corporation or LLC protect me from liability?
     

    That’s supposed to be the point of them, so I’m going to say . . . yes! However, you can become personally liable for your own negligence (or intentional bad acts). You may also become personally liable of the person suing you can prove that you didn’t follow corporate formalities, like holding meetings, maintaining minutes, or keeping enough working capital in the business’s accounts.

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  • 17. If I'm the only member of my LLC, do I really have liability protection?
     

    Yes. Well, you have the same liability protection as a multi-member LLC. There will be some specific exceptions. For example, if you are personally negligent or you are responsible for your company's payroll tax obligations, then you'll be exposed to personal liability. But being a single-member LLC won't change that. There may be instances where being in a partnership may change an outcome in an insolvency situation and certain specific other circumstances.

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    Viewed 200 Times
  • 18. Is the liability protection for LLCs and corporations the same?
     

    Yes. There are some very case-specific nuances, especially when you get down to single-member LLCs, but unlikely anything that is going to effect you generally. Don’t obsess over this one unless you have plans to not pay taxes, for example.

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  • 19. What is a "Certificate of Incorporation"?
     

    Some states use “Certificate of Incorporation” as an alternative to Articles of Incorporation; for example, New York and Delaware.

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  • 20. I'm a professional. What's right for me?
     

    First things first: the question really is whether an entity is going to do you any good at all. From a liability perspective, keep in mind that anything you do is your personal problem; putting your medical practice into a corporation won’t shield you from your own malpractice. But it could, for example, shield you from your employee’s malpractice, or your file clerk’s sexual harassment claim against a fellow doctor. And it may also shield you from your partner’s malpractice. So there are upsides.

    Some states, like California (where I practice), restrict the use of certain entities by professionals. The term “professional” itself has some grey area. Typically, professionals required to have a certain education, training, and experience aren’t permitted to use an LLC for their business (in California). So lawyers, doctors, etc. will generally use a corporation, though certain professions, like lawyers, have other specific partnership entities available to them. Others, like real estate appraisers, are still permitted to use an LLC. There may also be tax reasons, as a professional, to put your business into an entity. There’s much to consider.

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    Viewed 234 Times
  • 21. Should I form as a Professional Corporation?
     

    Should you? Probably not. Are you required to? Maybe. It depends on the type of profession you’re in. Lawyers, for example, are required to be in professional corporations (“PC”). Forming as a PC may require additional restrictions in your bylaws, for example concerning ownership. So if you don’t need to, generally you shouldn’t. But you may not have a choice.

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    Viewed 238 Times
  • 22. What/who is an incorporator?
     

    This is the person who signs and causes the filing of the Articles of Incorporation (or, in the case of an LLC the Articles of Organization) with the designated state authority. In a small business, this is usually the owner/shareholder/member. Some folks have their attorney sign the documents to help expedite the process, and that’s ok (but not necessary).

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    Viewed 241 Times
  • 23. What are Officers?
     

    Officers, in a corporate (and even LLC) setting are the individuals who perform the tasks of managing and operating the entity. In California, every corporation is required to have at least three officers: CEO, CFO, and Secretary. There can be more, but no less. LLCs don’t typically have officers, but they may at the discretion of its members.

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    Viewed 235 Times
  • 24. What's a director, and what's the difference between a director and an officer?
     

    Directors . . . direct! They set policy and guide the company with its business and direction. Directors are like the captains of ships; they know where the ship should go, and they tell the officers to make it happen.

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  • 25. Can one person be all of the officers?
     

    In a word, yes. Is that always advisable? No. Is it typical in a very small single-shareholder corporation? Yes.

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    Viewed 238 Times
  • 26. What's an LLC manager?
     

    The term "manager" has a specific meaning with respect to an LLC. The manager in an LLC is somewhat akin to the director in a corporation. The confusing part is that it can also be akin to the CEO or other officers of a corporation as well. Typically, the manager, well, manages the affairs of the LLC. The manager is authorized to bind the LLC, subject to restrictions that they may be bound to by law or in the operating agreement. The manager may or may not also be responsible for the operations of the LLC, though in larger LLCs, those roles are typically spread out between several individuals. In what are member-managed LLCs, each of the members may act as a manager, binding the LLC. So be careful about how you file your LLC, as you may not want every member eligible to sign contracts, and if you do, then the bank or the landlord will be looking for everyone's signatures.

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    Viewed 239 Times
  • 27. What's a registered agent?
     

    That’s the short way to say “registered agent for service of process”, which, I realize, probably still doesn’t answer your question. This is the individual or business that is charged with receiving legal process, i.e., claims from third parties and government agencies against the company. This gives the public someone to serve with legal process, since entities aren’t individuals you can find at work or home.

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    Viewed 240 Times
  • 28. Can anyone own an S Corporation?
     

    You probably didn’t think to ask this until you saw it was a question. Answer: No. S Corporations are restricted with respect to their ownership, one of the key factors why they can’t always be used. For example, no more than 100 shareholders can own shares in an S Corp, no shareholder can be a non-resident alien, and unless certain filings and compliance rules are met, they generally can’t be owned by other entities, only individuals.

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    Viewed 243 Times
  • 29. Can anyone own an interest in an LLC?
     

    And therein lies a major difference between LLCs and S Corporations – because LLCs can be owned by practically anyone or anything, making them very useful for pass-through taxation, while being owned by other entities.

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    Viewed 231 Times
  • 30. When I form my corporation or LLC, is that a license?
     

    No, but thanks for asking a weird question. You’re likely getting confused with some industries, like talent management, that may require you to obtain a license from a particular state agency. The formation of the entity doesn’t trigger automatic licensure, nor does it automatically require you to get a license for your business. Licensure for your business is separate and apart from forming an entity. And, in some instances, if you are required to obtain a license, that may dictate the kind of entity your form.

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    Viewed 235 Times
  • 31. What's a Tax ID number?
     

    I find that this is much more critical than some people think. A tax ID number is your corporation or LLC’s separate tax identity. Whether it’s opening a bank account, setting up payroll, or filing a tax return, this number is THE number for all purposes. Here’s how you can get one (good luck to you) or here's how you can get one (answered by me).

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  • 32. How do I get a tax identification number?
     

    You can go to the IRS’s website, and go through their multi-page question and answer pages. Make sure you're ready with your SS-4, as the IRS may ask for that over the phone if it doesn’t like one of your answers. (PS, the IRS is not in the habit of liking.) Important note: you need some kind of tax identification to get a Tax ID Number. Usually that original identification comes in the form of an individual's Social Security Number (usually the person forming the entity if it's a small business). But foreign owners have a more difficult time doing this since they don't usually have Social Security Numbers; in that case, they need to apply for an individual tax ID number, and then use that number to get the Tax ID Number for the corporation or LLC.

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    Viewed 248 Times
  • 33. Do I need an attorney for this process?
     

    YES! Of course!!
    Actually, no. Though "need" is a funny word.
    An attorney is not required to incorporate an entity. But if you learn nothing else from bouncing around this website, it’s that there may be a great deal of things to consider, traps for the unwary, and housekeeping items that may make or break your liability protection. Consider yourself warned!

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  • 34. What's an assignment?
     

    An assignment is a document used to transfer assets from one entity or owner to another. Click here to see if you need one.

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    Viewed 230 Times
  • 35. What's a capital contribution?
     

    In its most basic terms, this is the money (or sometimes the assets, like equipment) you put into your business. It differs from a loan in that it doesn’t accrue interest payable to you. If you put money into your corporation or LLC (or partnership), then the return of that money to you as you start to distribute money to you, is non-taxable.

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  • 36. Do I have to make a capital contribution?
     

    No, a capital contribution isn't necessary. But typically you would, and should, make one. You would because there’s almost no way to start a business with zero invested in it. And you should because if your corporation is “under-capitalized”, then you could be exposing yourself and fellow shareholders or members to personal liability, making the formation of the entity a waste of time and money. And it takes more than $1.00 to protect yourself (but nice try).

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  • 37. Will putting my personal residence into an LLC protect it from my creditors?
     

    Sorry, but . . . LOL – no. People do try this, though. The purpose of an LLC, and therefore what it ultimately protects, by law, is the business that’s operating inside it. Unless you have turned your personal residence into a business (not really a personal residence anymore), then it’s not protectable this way. However, one of the main reasons people put their business into an LLC is to protect their personal assets, like their home. Nice try, though.

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    Viewed 237 Times
  • 38. Can any corporation be an S Corporation?
     

    Any corporation can be an S Corporation, unless it doesn’t meet certain criteria. For example, an S Corporation cannot be owned by another corporation, with certain very narrow exceptions. And sometimes you don’t want your corporation to be an S Corporation, for example, when you are seeking VC investments.

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  • 39. Why is an S Corporation called an S Corporation?
     

    S = “Small”, and, yes, that’s per the Internal Revenue Code.

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  • 40. When is an S Corp election due?
     

    For a corporation to be an S Corporation, the paperwork to make that effective is due no more than two months and 15 days after the beginning of the tax year the election is to take effect (yes, I copied that from the IRS instructions). If you’re really ahead of the game, then anytime during a tax year preceding the year you want it to be in effect. For new corporations, the tax year typically begins on a day other than January 1, unless you formed on that date. So, for example, if your corporation was formed on July 8, then the S Corp election would be due 15 days after September 7, or September 22.

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  • 41. Can I cause my corporation to be an S Corp at the end of the year, after I see how my year has been?
     

    You wish. But no. Congress treats this election as a go-forward business decision, not a look-back election. The good news is that it’s easy to revoke, or even “bust”, the election. But be careful about switching back and forth – as in, things don’t work that way.

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  • 42. I'm causing my corporation to elect to be taxed as an S Corporation. Does my spouse have to sign?
     

    You’re going to get different answers, depending on the advisor you ask, and the state you’re in. Generally, though, best practice is yes, and sometimes required.

    PS - If you're keeping this a secret from your spouse, then an S Election is not your biggest problem.

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  • 43. Do I need all of the shareholders' consent for the S Corp election?
     

    Yes. It’s really that simple. Here’s a link to the IRS page that’s chock full of info.

    PS - Spouses too.

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  • 44. Is my business big enough to justify the additional overhead of a corporation or LLC?
     

    “Big” is a relative term. Size isn’t always the only, or even a significant, element to determining whether you should entity-ize your business. If you run a small business, but it’s a high-risk business, like, for example, a liquor store, then an LLC or corporation is probably a good idea, regardless of your revenue.

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  • 45. What are the advantages of a C Corporation versus a sole proprietorship?
     

    Short question . . . long answer. For the most part, the classic answer, which is also correct, is a C Corporation (or an S Corporation) provides limited liability for its owners and management. An S Corporation could provide additional tax benefits. On a less obvious level, having your business in a corporation may provide it with more “respect” in the business community, and may fend off nuisance suits.

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  • 46. I've heard that California has limitations on what type of business can be operated through an LLC. Is that true?
     

    True! California has placed a limit on what businesses can be operated out of an LLC. The general rule is no professionals, and though typically the rules point to any professional named in California’s Business and Professions Code, there are some exceptions. One exception is contractors; additionally, some “professions” that don’t require testing, experience, or certain skills may also be exempt.

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  • 47. How long does it take to form a corporation or LLC, in California? What about other states?
     

    California varies – sometimes it’s a matter of days, but sometimes, especially at the beginning of the year, it can take a couple weeks. You can always submit your documents on a rush (24 hours or even same day) basis. Other states? It really depends. Delaware’s quick.

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  • 48. Will putting my business into a corporation or LLC help me save taxes?
     

    It can, but not always. It’s not often the case that a business will put their business into an entity solely to save on taxes, although S Corporations for small businesses are frequently and legitimately used for that purpose.

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  • 49. What does it mean to "file" a corporation?
     

    Actually, nothing. To bring a corporation into existence, you submit your Articles of Incorporation with the government agency responsible for processing that paperwork in your state. By submitting the Articles, or “Charter Documents”, and the act by the agency of approving same, you have formed a corporation. You can say “file”, if you want.

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  • 50. Is there a lot of paperwork? Do I have to do it all?
     

    There’s some paperwork . . . corporations tend to have more paperwork, which is why some people might immediately gravitate to LLCs, or nothing at all. And, yes, if you want to maintain your status as a corporation, and maintain your limited liability, don’t cut corners on the paperwork. It’s important.

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  • 51. I just put my business into a corporation/LLC. Do I have to file paperwork for that?
     

    If you have an existing business, then its assets and contracts should get transferred to your corporation. This can look like an assignment, or a bill of sale. There are tax considerations regarding contribution of the assets of your existing business. You may also need to notify third parties, such as vendors and landlords. A stitch in time, as they say. Paperwork is king.

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  • 52. Is there more paperwork with an S Corporation than, say, with an LLC?
     

    The answer in most situations is going to be yes. One of the virtues of an LLC is its simplicity. Once you choose to form your business as a corporation (and then an S Corporation), or to have your LLC elect to be taxed as an S Corporation, costs for tax returns, payroll, corporate state compliance paperwork, and other accounting items get triggered. You’ll need to balance the benefits of an S Corporation against the ease of use that comes with an LLC.

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  • 53. Will there be a background check for me to incorporate?
     

    No. You may get background checked as a vendor, even if you put your business in a corporation. But incorporating does not require any background checking.

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  • 54. What is a fictitious business name?
     

    Also known as a DBA (doing business as), if your entity is using a name for its business that’s different from its entity name, then you are using a fictitious business name, and state law requires that you file a fictitious business name statement in the county you are operating out of that records the name of your business and the name of the entity using that name. It’s also a good idea to do file that even if you don’t want to, because it’s helpful evidence to prove the use of your name from a certain point in time, which helps you to defend or bring trademark infringement claims.

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  • 55. Can I use my old bank account for my new corporation or LLC?
     

    That would be nice, but this is the beginning of you needing to think about why you formed the corporation to begin with: to make it separate from the sins of the past. So, no, new bank account, with a new tax ID number. Sorry.

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  • 56. What are authorized shares?
     

    Authorized shares are the number of shares your corporation is authorized to issue. You do not have to issue all of your authorized shares, and frequently it can be a mistake to do so. Authorized shares do not vote, and do not participate in dividends.

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  • 57. What is a board of directors?
     

    Directors are the individuals who direct or guide the corporation with respect its overall business model and, well, direction. The board sets policy and votes on major or extraordinary decisions. Shareholders elect directors, and directors elect officers. The “board” is the entirety of all of the directors.

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  • 58. What are bylaws?
     

    Whether for a corporation or in any business or political setting, bylaws are the rules that govern the procedures of the particular entity. In a corporation, the bylaws is the set of rules which address, for example, when meetings will be held, and what the duties of the officers are. Though it’s a standard document for a corporation, some LLCs will also choose to have bylaws separate from their operating agreement. Some bylaws are considered “off the shelf”, but your business, like any other, is unique, and therefore it’s a document that should be reviewed and drafted carefully to suit your particular needs.

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  • 59. What is an Operating Agreement?
     

    Novices to LLCs tend to think that this is the document governing the actual operations of the company. Not so. The operating agreement, also sometimes known as the LLC Agreement (or some variation), is the governing document for the LLC itself. It may be very short, defining merely who the members are and what their respective ownership percentages are. Added to that, there may be restrictions on the transfer of the ownership interest, as well as guidelines for meetings, consent rights, call rights, and so on. These are contracts that can become quite complex.

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  • 60. Do I need an operating agreement for my LLC?
     

    Need? No. And if I were a litigation attorney who made money off of people’s mistakes, I’d say don’t have one and let the chips fall where they may -- better yet, let state law govern your rights and duties. But I’m in the business of preventative law. So, yes, you should have an operating agreement. Just by way of example, without one, and your partner dies, you’ll become partner’s with your dead partner’s surviving spouse -- think about that one for a minute. No way out of that without a written operating agreement providing for a buy-out.

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  • 61. What does "capitalization" mean?
     

    Capitalization can mean a couple of things. At first it usually refers to the contributions of money or property that the owners (shareholders or members) have contributed to the business, their “capital contributions”. Later on, or as a result, or in anticipation of such contributions, it may refer to a capitalization chart or table, which will set out each owner and their percentage interest in the entity.

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  • 62. What are stockholders and shareholders?
     

    Simply put, those are the owners, and they can be in many shapes and sizes. A shareholder can be an individual who owns shares in GM or Microsoft; it can be you, owning 100% of the issued shares in your own corporation. It can be another corporation or venture capital firm owning shares in your start-up. "Stockholder" and "shareholder" typically means the same thing.

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  • 63. What are "issued shares"?
     

    Good question. This concept often gets confused with “authorized shares”. Issued shares are those shares that the corporation has actually “issued”, i.e., transferred to a shareholder. This can be in the form of a certificate, and that can be typical in a small business. In larger businesses, the ownership of issued shares is usually a journal entry in the corporation’s books and records, or with the broker. The number of issues shares cannot exceed the number of authorized shares.

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  • 64. What are directors?
     

    Directors are the individuals who make up the board of directors. Due to the responsibility these individuals have, it’s common for the business to obtain insurance to cover the directors (aka D&O insurance) for the decisions they make, even though the fact of the corporation is supposed to shield – sometimes things don’t go the way you expect . . . pesky lawyers!!

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  • 65. What is a dividend?
     

    Hopefully something that you have plenty of! A dividend is the cash (or property) that is transferred from the corporation to its shareholders after all expenses are paid, including the corporation’s taxes. Only C Corporations pay “dividends”; S Corporations make “distributions”, since S Corporations themselves do not generally pay taxes. A dividend is not a deductible expense of the corporation.

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  • 66. What does a CEO do?
     

    A CEO is the Chief Executive Officer. This is the person responsible for over-seeing all of the day-to-day activities of the corporation. Sometimes LLCs have CEOs. The CEO is the face of the company, and so larger businesses tend to hire a CEO that has appeal to the public to encourage investment in the business, or to attract new customers. The CEO, when it comes to extraordinary decisions, seeks and takes direction from the board of directors. The CEO can be, but need not be, a shareholder.

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  • 67. What does a CFO do?
     

    The Chief Financial Officer, also sometimes known as the treasurer, handles the financial aspects of the corporation or LLC. In larger businesses, the CFO becomes an advisor to the CEO, conferring on best approaches for increasing business or investment. In a very small business, the CEO and CFO are frequently the same person, and there’s nothing wrong with that.

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  • 68. What does a corporate secretary do?
     

    Corporate secretaries are the unsung heroes in the officer world. They are responsible for the grunt work of the corporation or LLC, making sure i’s are dotted, t’s crossed, taking corporate minutes, and frequently interacting with the business’s lawyer to make sure paperwork and corporate housekeeping are all in order. In a very small business, the corporate secretary is frequently the same person as the CFO and the CEO. In larger businesses, you’ll want to try to make the CEO and corporate secretary two different people, since there may be occasion when refinancing or issuing shares to a corporate investor will require that the secretary attest to the identity of the CEO, which gets awkward when it’s the same person. The position of Secretary is required under California law.

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  • 69. What does a COO do?
     

    The position of Chief Operating Officer is not required under state law, but businesses that are growing, or intend to grow, will almost always have one. The COO is responsible for the day-to-day of the business, and usually reports to the CEO. And so I know I said that that’s the CEO’s job; in larger businesses, those responsibilities are handed over to the COO, so that the CEO has more time to develop new strategies to grow the business.

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    Viewed 232 Times
  • 70. What is an "annual meeting"?
     

    Corporations under most state laws, including California, require that the shareholders and the board of directors of a corporation hold an annual meeting. Some LLC statutes require it as well, though not in California. Those meetings are opportunities to vote on annual issues, like elections of officers and review of last year’s financials. In very small businesses, these meetings may be memorialized by consents . . . you don’t have to hold an actual meeting with yourself (unless that’s your thing and you’re looking for a “legit” reason to deduct a trip to Hawaii for a shareholder’s meeting – that won’t really work, by the way).

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  • 71. What's a K-1?
     

    In very lay terms, a K-1 is the partnership equivalent of an employee’s W-2 or a contractor’s 1099. Because a partnership doesn’t generally pay taxes of its own, it issues a form to each of its partners, telling the partners what each of them needs to put on his/her/its own tax return. LLCs taxed as a partnership (the default for multiple-member LLCs) issue K-1s. For more on forming partnerships, here’s an article. Or, if you prefer to be entertained, here’s a video.

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    Viewed 256 Times
  • 72. What is an LLC "member"?
     

    Being a member in an LLC is similar to being a shareholder in a corporation, or simply being an owner in a business. The members of an LLC are its owners, and typically if there's more than one, they will sign an Operating Agreement which is a contract governing their rights and duties with respect to each other and the LLC.

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  • 73. I want to add my boyfriend to my single-member LLC. Is that complicated?
     

    Well, if I was your mother, I’d say yes, that’s very complicated, and please just pay him for services rendered. But, as your lawyer, adding him is not that complicated. However, the result is that you’ve now turned what was essentially a sole proprietorship into a partnership, requiring tax returns, fiduciary duties, and ideally, a written partnership agreement for when you want to show your boyfriend the door.

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  • 74. Can I name my corporation anything?
     

    Nope. There are some pretty strict rules on what you get to name your corporation. Most of those rules can be found in a document regularly updated by the Secretary of State (in California) -- click here to take a look. For example, a corporation need not have "Inc." at the end of its name, but an LLC needs to have "LLC", or "limited liability company", after its name. And here's a new one, even on me: The word "Holding" or "Holdings" is considered to be a "dropped" word in a corporate name, i.e., it's ignored for purposes of figuring out if your name matches one already taken. For example, Herzog Wonderful Legal, Inc. is the same as Herzog Wonderful Legal Holding, Inc.

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    Viewed 216 Times
  • 75. Is it easy to change my company's name once it's established?
     

    Hate to be a lawyer about this, but it depends. Typically there’s the name you formed your entity with, and then there’s the name you do business as, which may be two different things, and both require paperwork. In the case of the name you do business as, that may be expose you to trademark or service mark infringement.

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  • 76. I want to convert my LLC into a corporation. Can I? How? Vice versa?
     

    Depending on what state your company is located in, this could be as simple as filing a single form with that state’s governing agency. In some states, this may be more complicated, but there’s always a way. Keep in mind, by converting the entity, you will likely have to get it a new Tax ID Number, since it’s now a different entity. If there’s a partnership agreement, or certain rights with respect to voting or capital return, be careful about property transferring all of that over. Consult with tax and legal counsel.

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    Viewed 240 Times
  • 77. What is a Statement of Information (California)?
     

    California, and many other states, require an annual or biannual report filing detailing the names and addresses of the directors and officers (or managers in the case of an LLC). It’s part of the social contract entities have with the public – liability protection in return for transparency. Not filing can lead eventually to suspension of the corporate or LLC charter, thereby exposing the entity’s owners to personal liability. In California, the first one is due within 90 days of filing the Articles of Incorporation or Articles of Organization.

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    Viewed 236 Times
  • 78. Can I be the CEO, CFO and Secretary of my corporation?
     

    Yes. It’s not always ideal, especially if you’re looking at growing or bringing in investors, but the law allows it.

    And please stop calling it "my corporation". The more you do that, the more you expose yourself to personal liability. Think of it as separate and apart from you, and the rest of the world will too.

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    Viewed 244 Times
  • 79. Does my corporation have to have more than one director?
     

    Not necessarily. In California, the default rule is one director per shareholder, and if there are more than 3 shareholders, then 3 minimum. You can always have more than you need.

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    Viewed 249 Times
  • 80. What's the bare minimum I need to operate as a corporation?
     

    In terms of capital (i.e., cash money), it depends on your business; one common rule of thumb is 3 months’ worth of cash to run the business. If you mean compliance, you’ll need annual minutes and, in California, an annual filing with the Secretary of State. You’ll also need to memorialize extraordinary transactions, like leases and financings, in your corporate records. Without minutes and/or consents, you could expose the shareholders personally to liability.

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    Viewed 235 Times
  • 81. What's the bare minimum I need to operate as an LLC?
     

    The answer to this is similar to the answer for the same question for corporations. However, with LLCs, unless the members require it in their operating agreement, there’s no requirement for meetings and consents, unless the written consents are required by a third party, like a bank. This is the reason some folks try to use LLCs instead of corporations.

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  • 82. Are my expenses in setting up the corporation or LLC deductible?
     

    Yes. But depending on what stage the business is at, they may not be immediately deductible as an operating expense, but may need to be treated as a start-up expense. This can get complicated; you should consult a tax advisor.

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    Viewed 241 Times
  • 83. Do I need a separate bank account for my corporation or LLC?
     

    Remember, one point of the entity is to keep your business separate from your personal, thereby protecting the personal assets. So, the answer is going to be yes. As such, that will also involve obtaining a tax identification number.

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  • 84. Do I have to pay directors and officers?
     

    No. But depending on the directors' background, level of experience, and the value they bring to your business, you may want to consider some kind of compensation or even equity. Not only are they worth it, but you’ll get a commitment from them that won’t otherwise exist if they’re just donating time and expertise. Specifically with respect to officers, there is an expectation of payment.

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  • 85. What's the difference between a member in an LLC and a shareholder in a corporation?
     

    I’m proud of you for asking such a clever question. Makes me wish the answer was just as thoughtful. Alas, it’s not: there’s no difference. A shareholder in a corporation, and a member in an LLC, are both nomenclature for defining owner. In fact, LLCs are flexible enough such that they can be structured to look like corporations, so their owners may also end up being “shareholders”. All that said, members in LLCs and shareholders in corporations are governed by different statutes, so their respective rights may differ.

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    Viewed 240 Times
  • 86. What is "par value"?
     

    It used to mean more than it does now. California has dropped this as a concept, and where it’s still used, it’s for tax and fees purposes. Some states tax corporations based on capitalization, and they use par value to assess that tax. So you should not just “pick a number”. Some of the fees and taxes can be very expensive, so proceed cautiously. Delaware, for example, uses par value.

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  • 87. Do shares in my corporation need to have a par value?
     

    You need to declare a par value only when the state in which your corporation has been filed requires it. Delaware requires it.

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  • 1. Do I need a corporation or LLC for my business?
     

    Congratulations! You just asked the best question (which is why it's also at the top of the FAQs). You know (or at least should know) your business best, and so that also means you know what liabilities you may face. Make a list. Call up your insurance broker (you have one, right?) and talk through what’s covered and then what isn’t. Are there things out of your control, such as employees? Those are some things to consider. You can read my post on this or watch the video on this topic. It’s very important that you not waste time and money on something you may not need.

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    Viewed 261 Times
  • 2. What's a Corporation?
     

    A corporation happens when “charter documents” are filed with the state, usually in a form either prescribed by the state or drafted by an attorney [ahem] and, once filed, creates a corporation. Corporations are a legal entity designed to protect its shareholders and directors from liability.

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    Viewed 249 Times
  • 3. What's the difference between an LLC and a corporation?
     

    Call me! Seriously, the differences are numerous; here are a couple to get you started: LLCs have a more flexible tax structure, have fewer housekeeping requirements, but aren’t ideal for larger companies, especially those seeking outside investors. Corporations are, well, just read that last sentence but the opposite.

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  • 4. What's better . . . an LLC or a Corporation?
     

    Aaah, if life were only that easy. Actually, sometimes it is. One rule of thumb -- is it a small business not providing professional services, with no plans for investors and modest gross receipts? That's a case where you might lean heavily toward an LLC. Investors on the horizon? Corporation. The analysis can get tortured for businesses that are larger or are growing. Real estate tends toward LLCs.

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    Viewed 262 Times
  • 5. What is a C Corporation?
     

    A C Corporation is a Corporation that hasn’t elected under the Internal Revenue Code to be taxed as an S Corporation. The best way to describe it is to check out what an S Corporation is. Trust me; it’s not circular.

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    Viewed 258 Times
  • 6. What is an S Corporation?
     

    An S Corporation is a corporation that has made an election (i.e., timely filed a form) to be taxed as a “pass-through”, i.e., the corporation itself is generally not taxed, but all of the taxes for profits and income, as well as for losses and expenses, are passed through to become the obligations of the individual shareholders. There are limitations to what corporations can be S Corporations. For example, S Corporations cannot be owned by more than 100 shareholders or by non-resident aliens. The “S” stands for . . . wait for it . . . small.

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    Viewed 251 Times
  • 7. How do I form a Corporation?
     

    Nice. Figuring if you click here you’re home free. In a way, yes. To form one, you file Articles of Incorporation with the governing corporate authority in your state. In California, where my practice is, that’s the Secretary of State. Articles should contain certain provisions that may or may not be obvious to you, and are not contained in most templates offered by the state or online corporate mills. Additionally, formation is the first of several steps to take to ensure that your corporation is protecting you.

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    Viewed 239 Times
  • 8. Should I incorporate in Nevada?
     

    You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.

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    Viewed 248 Times
  • 9. Should I incorporate in Delaware?
     

    You’ve read a lot about that, I’m sure. There can be reasons to form there. Here are two that come up a lot: One, your business is going to have big deal investors who like being in Delaware, sometimes for reason number . . . Two: Delaware law is corporate-centric, efficient, and can provide better protections for the corporation’s officers and directors. But like filing anywhere else, if the principal place of business is in another state, you’ll need to register your corporation (or LLC) in that state as well as a “foreign” corporation/LLC.

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    Viewed 247 Times
  • 10. Should I form my LLC or corporation in a state other than where I live?
     

    If you’re not thinking about Delaware, then maybe. Sometimes you’re going to have to. If, for example, you’re forming an LLC for investment real estate, with a few exceptions, that state will require you to form your LLC in the state where the property is. There may be other reasons to be in another state, but those come up rarely.

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    Viewed 240 Times
  • 11. When does a corporation become a corporation? An LLC?
     

    I wish the answer to this were more existential, and thus more interesting. Alas, it’s as simple as this: when you duly file Articles of Incorporation, also know as charter documents, with the state official authorized to recognize and process such filings. In California, it’s the Secretary of State. In Delaware, it’s the Division of Corporations. Same for LLCs, except it tends to be called Articles of Organization.

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    Viewed 238 Times
  • 12. Why should I form a corporation/LLC for my business?
     

    Corporations provide liability protection for its owners, as well as its officers and directors, with some exceptions. So, there’s that. Insurance covers some things, not all things. And sometimes a corporation won’t help you . . . for example, if you’re a lawyer and you commit malpractice. That’s on you, individually – corporation or not. Tax may also drive a reason to incorporate or organize an LLC.

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    Viewed 246 Times
  • 13. What are Articles of Incorporation?
     

    This is about as arcane as it gets . . . “Articles”. Be that as it may, we’re stuck with it as a word in corporate lingo. This is the document which provides the state, and therefore the public, with the initial information needed to bring the corporation into existence. It must follow certain state requirements minimally, and may also contain certain other provisions that may either be recommended generally, or may be required by certain investors. Sometimes this is referred to as the “corporate charter”.

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    Viewed 252 Times
  • 14. Will a corporation or LLC protect me from liability?
     

    That’s supposed to be the point of them, so I’m going to say . . . yes! However, you can become personally liable for your own negligence (or intentional bad acts). You may also become personally liable of the person suing you can prove that you didn’t follow corporate formalities, like holding meetings, maintaining minutes, or keeping enough working capital in the business’s accounts.

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    Viewed 245 Times
  • 15. Is the liability protection for LLCs and corporations the same?
     

    Yes. There are some very case-specific nuances, especially when you get down to single-member LLCs, but unlikely anything that is going to effect you generally. Don’t obsess over this one unless you have plans to not pay taxes, for example.

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  • 16. What is a "Certificate of Incorporation"?
     

    Some states use “Certificate of Incorporation” as an alternative to Articles of Incorporation; for example, New York and Delaware.

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    Viewed 255 Times
  • 17. I'm a professional. What's right for me?
     

    First things first: the question really is whether an entity is going to do you any good at all. From a liability perspective, keep in mind that anything you do is your personal problem; putting your medical practice into a corporation won’t shield you from your own malpractice. But it could, for example, shield you from your employee’s malpractice, or your file clerk’s sexual harassment claim against a fellow doctor. And it may also shield you from your partner’s malpractice. So there are upsides.

    Some states, like California (where I practice), restrict the use of certain entities by professionals. The term “professional” itself has some grey area. Typically, professionals required to have a certain education, training, and experience aren’t permitted to use an LLC for their business (in California). So lawyers, doctors, etc. will generally use a corporation, though certain professions, like lawyers, have other specific partnership entities available to them. Others, like real estate appraisers, are still permitted to use an LLC. There may also be tax reasons, as a professional, to put your business into an entity. There’s much to consider.

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    Viewed 234 Times
  • 18. Should I form as a Professional Corporation?
     

    Should you? Probably not. Are you required to? Maybe. It depends on the type of profession you’re in. Lawyers, for example, are required to be in professional corporations (“PC”). Forming as a PC may require additional restrictions in your bylaws, for example concerning ownership. So if you don’t need to, generally you shouldn’t. But you may not have a choice.

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    Viewed 238 Times
  • 19. What/who is an incorporator?
     

    This is the person who signs and causes the filing of the Articles of Incorporation (or, in the case of an LLC the Articles of Organization) with the designated state authority. In a small business, this is usually the owner/shareholder/member. Some folks have their attorney sign the documents to help expedite the process, and that’s ok (but not necessary).

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    Viewed 241 Times
  • 20. What are Officers?
     

    Officers, in a corporate (and even LLC) setting are the individuals who perform the tasks of managing and operating the entity. In California, every corporation is required to have at least three officers: CEO, CFO, and Secretary. There can be more, but no less. LLCs don’t typically have officers, but they may at the discretion of its members.

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    Viewed 235 Times
  • 21. What's a director, and what's the difference between a director and an officer?
     

    Directors . . . direct! They set policy and guide the company with its business and direction. Directors are like the captains of ships; they know where the ship should go, and they tell the officers to make it happen.

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    Viewed 243 Times
  • 22. Can one person be all of the officers?
     

    In a word, yes. Is that always advisable? No. Is it typical in a very small single-shareholder corporation? Yes.

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    Viewed 238 Times
  • 23. Can anyone own an S Corporation?
     

    You probably didn’t think to ask this until you saw it was a question. Answer: No. S Corporations are restricted with respect to their ownership, one of the key factors why they can’t always be used. For example, no more than 100 shareholders can own shares in an S Corp, no shareholder can be a non-resident alien, and unless certain filings and compliance rules are met, they generally can’t be owned by other entities, only individuals.

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    Viewed 243 Times
  • 24. Can anyone own an interest in an LLC?
     

    And therein lies a major difference between LLCs and S Corporations – because LLCs can be owned by practically anyone or anything, making them very useful for pass-through taxation, while being owned by other entities.

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    Viewed 231 Times
  • 25. When I form my corporation or LLC, is that a license?
     

    No, but thanks for asking a weird question. You’re likely getting confused with some industries, like talent management, that may require you to obtain a license from a particular state agency. The formation of the entity doesn’t trigger automatic licensure, nor does it automatically require you to get a license for your business. Licensure for your business is separate and apart from forming an entity. And, in some instances, if you are required to obtain a license, that may dictate the kind of entity your form.

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    Viewed 235 Times
  • 26. What's a Tax ID number?
     

    I find that this is much more critical than some people think. A tax ID number is your corporation or LLC’s separate tax identity. Whether it’s opening a bank account, setting up payroll, or filing a tax return, this number is THE number for all purposes. Here’s how you can get one (good luck to you) or here's how you can get one (answered by me).

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    Viewed 282 Times
  • 27. How do I get a tax identification number?
     

    You can go to the IRS’s website, and go through their multi-page question and answer pages. Make sure you're ready with your SS-4, as the IRS may ask for that over the phone if it doesn’t like one of your answers. (PS, the IRS is not in the habit of liking.) Important note: you need some kind of tax identification to get a Tax ID Number. Usually that original identification comes in the form of an individual's Social Security Number (usually the person forming the entity if it's a small business). But foreign owners have a more difficult time doing this since they don't usually have Social Security Numbers; in that case, they need to apply for an individual tax ID number, and then use that number to get the Tax ID Number for the corporation or LLC.

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    Viewed 248 Times
  • 28. Do I need an attorney for this process?
     

    YES! Of course!!
    Actually, no. Though "need" is a funny word.
    An attorney is not required to incorporate an entity. But if you learn nothing else from bouncing around this website, it’s that there may be a great deal of things to consider, traps for the unwary, and housekeeping items that may make or break your liability protection. Consider yourself warned!

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    Viewed 246 Times
  • 29. What's an assignment?
     

    An assignment is a document used to transfer assets from one entity or owner to another. Click here to see if you need one.

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    Viewed 230 Times
  • 30. What's a capital contribution?
     

    In its most basic terms, this is the money (or sometimes the assets, like equipment) you put into your business. It differs from a loan in that it doesn’t accrue interest payable to you. If you put money into your corporation or LLC (or partnership), then the return of that money to you as you start to distribute money to you, is non-taxable.

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    Viewed 264 Times
  • 31. Do I have to make a capital contribution?
     

    No, a capital contribution isn't necessary. But typically you would, and should, make one. You would because there’s almost no way to start a business with zero invested in it. And you should because if your corporation is “under-capitalized”, then you could be exposing yourself and fellow shareholders or members to personal liability, making the formation of the entity a waste of time and money. And it takes more than $1.00 to protect yourself (but nice try).

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    Viewed 241 Times
  • 32. Can any corporation be an S Corporation?
     

    Any corporation can be an S Corporation, unless it doesn’t meet certain criteria. For example, an S Corporation cannot be owned by another corporation, with certain very narrow exceptions. And sometimes you don’t want your corporation to be an S Corporation, for example, when you are seeking VC investments.

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    Viewed 248 Times
  • 33. Why is an S Corporation called an S Corporation?
     

    S = “Small”, and, yes, that’s per the Internal Revenue Code.

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    Viewed 232 Times
  • 34. When is an S Corp election due?
     

    For a corporation to be an S Corporation, the paperwork to make that effective is due no more than two months and 15 days after the beginning of the tax year the election is to take effect (yes, I copied that from the IRS instructions). If you’re really ahead of the game, then anytime during a tax year preceding the year you want it to be in effect. For new corporations, the tax year typically begins on a day other than January 1, unless you formed on that date. So, for example, if your corporation was formed on July 8, then the S Corp election would be due 15 days after September 7, or September 22.

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    Viewed 234 Times
  • 35. Can I cause my corporation to be an S Corp at the end of the year, after I see how my year has been?
     

    You wish. But no. Congress treats this election as a go-forward business decision, not a look-back election. The good news is that it’s easy to revoke, or even “bust”, the election. But be careful about switching back and forth – as in, things don’t work that way.

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    Viewed 238 Times
  • 36. I'm causing my corporation to elect to be taxed as an S Corporation. Does my spouse have to sign?
     

    You’re going to get different answers, depending on the advisor you ask, and the state you’re in. Generally, though, best practice is yes, and sometimes required.

    PS - If you're keeping this a secret from your spouse, then an S Election is not your biggest problem.

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  • 37. Do I need all of the shareholders' consent for the S Corp election?
     

    Yes. It’s really that simple. Here’s a link to the IRS page that’s chock full of info.

    PS - Spouses too.

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  • 38. Is my business big enough to justify the additional overhead of a corporation or LLC?
     

    “Big” is a relative term. Size isn’t always the only, or even a significant, element to determining whether you should entity-ize your business. If you run a small business, but it’s a high-risk business, like, for example, a liquor store, then an LLC or corporation is probably a good idea, regardless of your revenue.

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    Viewed 233 Times
  • 39. What are the advantages of a C Corporation versus a sole proprietorship?
     

    Short question . . . long answer. For the most part, the classic answer, which is also correct, is a C Corporation (or an S Corporation) provides limited liability for its owners and management. An S Corporation could provide additional tax benefits. On a less obvious level, having your business in a corporation may provide it with more “respect” in the business community, and may fend off nuisance suits.

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    Viewed 233 Times
  • 40. How long does it take to form a corporation or LLC, in California? What about other states?
     

    California varies – sometimes it’s a matter of days, but sometimes, especially at the beginning of the year, it can take a couple weeks. You can always submit your documents on a rush (24 hours or even same day) basis. Other states? It really depends. Delaware’s quick.

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  • 41. Will putting my business into a corporation or LLC help me save taxes?
     

    It can, but not always. It’s not often the case that a business will put their business into an entity solely to save on taxes, although S Corporations for small businesses are frequently and legitimately used for that purpose.

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    Viewed 237 Times
  • 42. Is there a lot of paperwork? Do I have to do it all?
     

    There’s some paperwork . . . corporations tend to have more paperwork, which is why some people might immediately gravitate to LLCs, or nothing at all. And, yes, if you want to maintain your status as a corporation, and maintain your limited liability, don’t cut corners on the paperwork. It’s important.

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    Viewed 257 Times
  • 43. I just put my business into a corporation/LLC. Do I have to file paperwork for that?
     

    If you have an existing business, then its assets and contracts should get transferred to your corporation. This can look like an assignment, or a bill of sale. There are tax considerations regarding contribution of the assets of your existing business. You may also need to notify third parties, such as vendors and landlords. A stitch in time, as they say. Paperwork is king.

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  • 44. Is there more paperwork with an S Corporation than, say, with an LLC?
     

    The answer in most situations is going to be yes. One of the virtues of an LLC is its simplicity. Once you choose to form your business as a corporation (and then an S Corporation), or to have your LLC elect to be taxed as an S Corporation, costs for tax returns, payroll, corporate state compliance paperwork, and other accounting items get triggered. You’ll need to balance the benefits of an S Corporation against the ease of use that comes with an LLC.

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    Viewed 215 Times
  • 45. Can I use my old bank account for my new corporation or LLC?
     

    That would be nice, but this is the beginning of you needing to think about why you formed the corporation to begin with: to make it separate from the sins of the past. So, no, new bank account, with a new tax ID number. Sorry.

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    Viewed 228 Times
  • 46. What are authorized shares?
     

    Authorized shares are the number of shares your corporation is authorized to issue. You do not have to issue all of your authorized shares, and frequently it can be a mistake to do so. Authorized shares do not vote, and do not participate in dividends.

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    Viewed 234 Times
  • 47. What is a board of directors?
     

    Directors are the individuals who direct or guide the corporation with respect its overall business model and, well, direction. The board sets policy and votes on major or extraordinary decisions. Shareholders elect directors, and directors elect officers. The “board” is the entirety of all of the directors.

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    Viewed 302 Times
  • 48. What are bylaws?
     

    Whether for a corporation or in any business or political setting, bylaws are the rules that govern the procedures of the particular entity. In a corporation, the bylaws is the set of rules which address, for example, when meetings will be held, and what the duties of the officers are. Though it’s a standard document for a corporation, some LLCs will also choose to have bylaws separate from their operating agreement. Some bylaws are considered “off the shelf”, but your business, like any other, is unique, and therefore it’s a document that should be reviewed and drafted carefully to suit your particular needs.

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    Viewed 239 Times
  • 49. What does "capitalization" mean?
     

    Capitalization can mean a couple of things. At first it usually refers to the contributions of money or property that the owners (shareholders or members) have contributed to the business, their “capital contributions”. Later on, or as a result, or in anticipation of such contributions, it may refer to a capitalization chart or table, which will set out each owner and their percentage interest in the entity.

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    Viewed 239 Times
  • 50. What are stockholders and shareholders?
     

    Simply put, those are the owners, and they can be in many shapes and sizes. A shareholder can be an individual who owns shares in GM or Microsoft; it can be you, owning 100% of the issued shares in your own corporation. It can be another corporation or venture capital firm owning shares in your start-up. "Stockholder" and "shareholder" typically means the same thing.

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  • 51. What are "issued shares"?
     

    Good question. This concept often gets confused with “authorized shares”. Issued shares are those shares that the corporation has actually “issued”, i.e., transferred to a shareholder. This can be in the form of a certificate, and that can be typical in a small business. In larger businesses, the ownership of issued shares is usually a journal entry in the corporation’s books and records, or with the broker. The number of issues shares cannot exceed the number of authorized shares.

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  • 52. What are directors?
     

    Directors are the individuals who make up the board of directors. Due to the responsibility these individuals have, it’s common for the business to obtain insurance to cover the directors (aka D&O insurance) for the decisions they make, even though the fact of the corporation is supposed to shield – sometimes things don’t go the way you expect . . . pesky lawyers!!

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    Viewed 229 Times
  • 53. What is a dividend?
     

    Hopefully something that you have plenty of! A dividend is the cash (or property) that is transferred from the corporation to its shareholders after all expenses are paid, including the corporation’s taxes. Only C Corporations pay “dividends”; S Corporations make “distributions”, since S Corporations themselves do not generally pay taxes. A dividend is not a deductible expense of the corporation.

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    Viewed 234 Times
  • 54. What does a CEO do?
     

    A CEO is the Chief Executive Officer. This is the person responsible for over-seeing all of the day-to-day activities of the corporation. Sometimes LLCs have CEOs. The CEO is the face of the company, and so larger businesses tend to hire a CEO that has appeal to the public to encourage investment in the business, or to attract new customers. The CEO, when it comes to extraordinary decisions, seeks and takes direction from the board of directors. The CEO can be, but need not be, a shareholder.

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  • 55. What does a CFO do?
     

    The Chief Financial Officer, also sometimes known as the treasurer, handles the financial aspects of the corporation or LLC. In larger businesses, the CFO becomes an advisor to the CEO, conferring on best approaches for increasing business or investment. In a very small business, the CEO and CFO are frequently the same person, and there’s nothing wrong with that.

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  • 56. What does a corporate secretary do?
     

    Corporate secretaries are the unsung heroes in the officer world. They are responsible for the grunt work of the corporation or LLC, making sure i’s are dotted, t’s crossed, taking corporate minutes, and frequently interacting with the business’s lawyer to make sure paperwork and corporate housekeeping are all in order. In a very small business, the corporate secretary is frequently the same person as the CFO and the CEO. In larger businesses, you’ll want to try to make the CEO and corporate secretary two different people, since there may be occasion when refinancing or issuing shares to a corporate investor will require that the secretary attest to the identity of the CEO, which gets awkward when it’s the same person. The position of Secretary is required under California law.

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    Viewed 242 Times
  • 57. What does a COO do?
     

    The position of Chief Operating Officer is not required under state law, but businesses that are growing, or intend to grow, will almost always have one. The COO is responsible for the day-to-day of the business, and usually reports to the CEO. And so I know I said that that’s the CEO’s job; in larger businesses, those responsibilities are handed over to the COO, so that the CEO has more time to develop new strategies to grow the business.

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    Viewed 232 Times
  • 58. What is an "annual meeting"?
     

    Corporations under most state laws, including California, require that the shareholders and the board of directors of a corporation hold an annual meeting. Some LLC statutes require it as well, though not in California. Those meetings are opportunities to vote on annual issues, like elections of officers and review of last year’s financials. In very small businesses, these meetings may be memorialized by consents . . . you don’t have to hold an actual meeting with yourself (unless that’s your thing and you’re looking for a “legit” reason to deduct a trip to Hawaii for a shareholder’s meeting – that won’t really work, by the way).

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  • 59. Can I name my corporation anything?
     

    Nope. There are some pretty strict rules on what you get to name your corporation. Most of those rules can be found in a document regularly updated by the Secretary of State (in California) -- click here to take a look. For example, a corporation need not have "Inc." at the end of its name, but an LLC needs to have "LLC", or "limited liability company", after its name. And here's a new one, even on me: The word "Holding" or "Holdings" is considered to be a "dropped" word in a corporate name, i.e., it's ignored for purposes of figuring out if your name matches one already taken. For example, Herzog Wonderful Legal, Inc. is the same as Herzog Wonderful Legal Holding, Inc.

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    Viewed 216 Times
  • 60. I want to convert my LLC into a corporation. Can I? How? Vice versa?
     

    Depending on what state your company is located in, this could be as simple as filing a single form with that state’s governing agency. In some states, this may be more complicated, but there’s always a way. Keep in mind, by converting the entity, you will likely have to get it a new Tax ID Number, since it’s now a different entity. If there’s a partnership agreement, or certain rights with respect to voting or capital return, be careful about property transferring all of that over. Consult with tax and legal counsel.

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    Viewed 240 Times
  • 61. What is a Statement of Information (California)?
     

    California, and many other states, require an annual or biannual report filing detailing the names and addresses of the directors and officers (or managers in the case of an LLC). It’s part of the social contract entities have with the public – liability protection in return for transparency. Not filing can lead eventually to suspension of the corporate or LLC charter, thereby exposing the entity’s owners to personal liability. In California, the first one is due within 90 days of filing the Articles of Incorporation or Articles of Organization.

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  • 62. Can I be the CEO, CFO and Secretary of my corporation?
     

    Yes. It’s not always ideal, especially if you’re looking at growing or bringing in investors, but the law allows it.

    And please stop calling it "my corporation". The more you do that, the more you expose yourself to personal liability. Think of it as separate and apart from you, and the rest of the world will too.

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  • 63. Does my corporation have to have more than one director?
     

    Not necessarily. In California, the default rule is one director per shareholder, and if there are more than 3 shareholders, then 3 minimum. You can always have more than you need.

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  • 64. What's the bare minimum I need to operate as a corporation?
     

    In terms of capital (i.e., cash money), it depends on your business; one common rule of thumb is 3 months’ worth of cash to run the business. If you mean compliance, you’ll need annual minutes and, in California, an annual filing with the Secretary of State. You’ll also need to memorialize extraordinary transactions, like leases and financings, in your corporate records. Without minutes and/or consents, you could expose the shareholders personally to liability.

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    Viewed 235 Times
  • 65. Do I have to pay directors and officers?
     

    No. But depending on the directors' background, level of experience, and the value they bring to your business, you may want to consider some kind of compensation or even equity. Not only are they worth it, but you’ll get a commitment from them that won’t otherwise exist if they’re just donating time and expertise. Specifically with respect to officers, there is an expectation of payment.

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  • 66. What's the difference between a member in an LLC and a shareholder in a corporation?
     

    I’m proud of you for asking such a clever question. Makes me wish the answer was just as thoughtful. Alas, it’s not: there’s no difference. A shareholder in a corporation, and a member in an LLC, are both nomenclature for defining owner. In fact, LLCs are flexible enough such that they can be structured to look like corporations, so their owners may also end up being “shareholders”. All that said, members in LLCs and shareholders in corporations are governed by different statutes, so their respective rights may differ.

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    Viewed 240 Times
  • 67. What is "par value"?
     

    It used to mean more than it does now. California has dropped this as a concept, and where it’s still used, it’s for tax and fees purposes. Some states tax corporations based on capitalization, and they use par value to assess that tax. So you should not just “pick a number”. Some of the fees and taxes can be very expensive, so proceed cautiously. Delaware, for example, uses par value.

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  • 68. Do shares in my corporation need to have a par value?
     

    You need to declare a par value only when the state in which your corporation has been filed requires it. Delaware requires it.

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  • 1. Do I need a corporation or LLC for my business?
     

    Congratulations! You just asked the best question (which is why it's also at the top of the FAQs). You know (or at least should know) your business best, and so that also means you know what liabilities you may face. Make a list. Call up your insurance broker (you have one, right?) and talk through what’s covered and then what isn’t. Are there things out of your control, such as employees? Those are some things to consider. You can read my post on this or watch the video on this topic. It’s very important that you not waste time and money on something you may not need.

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    Viewed 261 Times
  • 2. What's an LLC?
     

    An LLC, or limited liability company, is a type of entity that protects its owners and mangers from liability, unless they personally do bad things. Like a corporation, an LLC happens when its Articles of Organization are filed with the state authority. In California, this is an online form. Keep in mind, there are other filings, and then ongoing responsibilities of those managers and members to continue shielding them from liability. And if there’s more than one Member, having a written operating agreement is highly advised. There may also be tax advantages to filing as an LLC.

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    Viewed 284 Times
  • 3. What's the difference between an LLC and a corporation?
     

    Call me! Seriously, the differences are numerous; here are a couple to get you started: LLCs have a more flexible tax structure, have fewer housekeeping requirements, but aren’t ideal for larger companies, especially those seeking outside investors. Corporations are, well, just read that last sentence but the opposite.

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    Viewed 249 Times
  • 4. What's better . . . an LLC or a Corporation?
     

    Aaah, if life were only that easy. Actually, sometimes it is. One rule of thumb -- is it a small business not providing professional services, with no plans for investors and modest gross receipts? That's a case where you might lean heavily toward an LLC. Investors on the horizon? Corporation. The analysis can get tortured for businesses that are larger or are growing. Real estate tends toward LLCs.

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    Viewed 262 Times
  • 5. How do I form a Corporation?
     

    Nice. Figuring if you click here you’re home free. In a way, yes. To form one, you file Articles of Incorporation with the governing corporate authority in your state. In California, where my practice is, that’s the Secretary of State. Articles should contain certain provisions that may or may not be obvious to you, and are not contained in most templates offered by the state or online corporate mills. Additionally, formation is the first of several steps to take to ensure that your corporation is protecting you.

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    Viewed 239 Times
  • 6. Should I incorporate in Nevada?
     

    You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.

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    Viewed 248 Times
  • 7. Should I incorporate in Delaware?
     

    You’ve read a lot about that, I’m sure. There can be reasons to form there. Here are two that come up a lot: One, your business is going to have big deal investors who like being in Delaware, sometimes for reason number . . . Two: Delaware law is corporate-centric, efficient, and can provide better protections for the corporation’s officers and directors. But like filing anywhere else, if the principal place of business is in another state, you’ll need to register your corporation (or LLC) in that state as well as a “foreign” corporation/LLC.

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    Viewed 247 Times
  • 8. Should I form my LLC or corporation in a state other than where I live?
     

    If you’re not thinking about Delaware, then maybe. Sometimes you’re going to have to. If, for example, you’re forming an LLC for investment real estate, with a few exceptions, that state will require you to form your LLC in the state where the property is. There may be other reasons to be in another state, but those come up rarely.

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    Viewed 240 Times
  • 9. When does a corporation become a corporation? An LLC?
     

    I wish the answer to this were more existential, and thus more interesting. Alas, it’s as simple as this: when you duly file Articles of Incorporation, also know as charter documents, with the state official authorized to recognize and process such filings. In California, it’s the Secretary of State. In Delaware, it’s the Division of Corporations. Same for LLCs, except it tends to be called Articles of Organization.

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    Viewed 238 Times
  • 10. Why should I form a corporation/LLC for my business?
     

    Corporations provide liability protection for its owners, as well as its officers and directors, with some exceptions. So, there’s that. Insurance covers some things, not all things. And sometimes a corporation won’t help you . . . for example, if you’re a lawyer and you commit malpractice. That’s on you, individually – corporation or not. Tax may also drive a reason to incorporate or organize an LLC.

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    Viewed 246 Times
  • 11. What are Articles of Organization?
     

    Like Articles of Incorporation, this is the document used for bringing your LLC into existence. It’s filed with the state’s authority for, well, filing such documents. In California, this is the Secretary of State. In Delaware, it’s the Division of Corporations.

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    Viewed 245 Times
  • 12. Will a corporation or LLC protect me from liability?
     

    That’s supposed to be the point of them, so I’m going to say . . . yes! However, you can become personally liable for your own negligence (or intentional bad acts). You may also become personally liable of the person suing you can prove that you didn’t follow corporate formalities, like holding meetings, maintaining minutes, or keeping enough working capital in the business’s accounts.

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    Viewed 245 Times
  • 13. If I'm the only member of my LLC, do I really have liability protection?
     

    Yes. Well, you have the same liability protection as a multi-member LLC. There will be some specific exceptions. For example, if you are personally negligent or you are responsible for your company's payroll tax obligations, then you'll be exposed to personal liability. But being a single-member LLC won't change that. There may be instances where being in a partnership may change an outcome in an insolvency situation and certain specific other circumstances.

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    Viewed 200 Times
  • 14. Is the liability protection for LLCs and corporations the same?
     

    Yes. There are some very case-specific nuances, especially when you get down to single-member LLCs, but unlikely anything that is going to effect you generally. Don’t obsess over this one unless you have plans to not pay taxes, for example.

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    Viewed 244 Times
  • 15. What is a "Certificate of Incorporation"?
     

    Some states use “Certificate of Incorporation” as an alternative to Articles of Incorporation; for example, New York and Delaware.

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    Viewed 255 Times
  • 16. I'm a professional. What's right for me?
     

    First things first: the question really is whether an entity is going to do you any good at all. From a liability perspective, keep in mind that anything you do is your personal problem; putting your medical practice into a corporation won’t shield you from your own malpractice. But it could, for example, shield you from your employee’s malpractice, or your file clerk’s sexual harassment claim against a fellow doctor. And it may also shield you from your partner’s malpractice. So there are upsides.

    Some states, like California (where I practice), restrict the use of certain entities by professionals. The term “professional” itself has some grey area. Typically, professionals required to have a certain education, training, and experience aren’t permitted to use an LLC for their business (in California). So lawyers, doctors, etc. will generally use a corporation, though certain professions, like lawyers, have other specific partnership entities available to them. Others, like real estate appraisers, are still permitted to use an LLC. There may also be tax reasons, as a professional, to put your business into an entity. There’s much to consider.

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    Viewed 234 Times
  • 17. What/who is an incorporator?
     

    This is the person who signs and causes the filing of the Articles of Incorporation (or, in the case of an LLC the Articles of Organization) with the designated state authority. In a small business, this is usually the owner/shareholder/member. Some folks have their attorney sign the documents to help expedite the process, and that’s ok (but not necessary).

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    Viewed 241 Times
  • 18. What are Officers?
     

    Officers, in a corporate (and even LLC) setting are the individuals who perform the tasks of managing and operating the entity. In California, every corporation is required to have at least three officers: CEO, CFO, and Secretary. There can be more, but no less. LLCs don’t typically have officers, but they may at the discretion of its members.

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    Viewed 235 Times
  • 19. What's a director, and what's the difference between a director and an officer?
     

    Directors . . . direct! They set policy and guide the company with its business and direction. Directors are like the captains of ships; they know where the ship should go, and they tell the officers to make it happen.

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    Viewed 243 Times
  • 20. Can one person be all of the officers?
     

    In a word, yes. Is that always advisable? No. Is it typical in a very small single-shareholder corporation? Yes.

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    Viewed 238 Times
  • 21. What's an LLC manager?
     

    The term "manager" has a specific meaning with respect to an LLC. The manager in an LLC is somewhat akin to the director in a corporation. The confusing part is that it can also be akin to the CEO or other officers of a corporation as well. Typically, the manager, well, manages the affairs of the LLC. The manager is authorized to bind the LLC, subject to restrictions that they may be bound to by law or in the operating agreement. The manager may or may not also be responsible for the operations of the LLC, though in larger LLCs, those roles are typically spread out between several individuals. In what are member-managed LLCs, each of the members may act as a manager, binding the LLC. So be careful about how you file your LLC, as you may not want every member eligible to sign contracts, and if you do, then the bank or the landlord will be looking for everyone's signatures.

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    Viewed 239 Times
  • 22. Can anyone own an interest in an LLC?
     

    And therein lies a major difference between LLCs and S Corporations – because LLCs can be owned by practically anyone or anything, making them very useful for pass-through taxation, while being owned by other entities.

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    Viewed 231 Times
  • 23. When I form my corporation or LLC, is that a license?
     

    No, but thanks for asking a weird question. You’re likely getting confused with some industries, like talent management, that may require you to obtain a license from a particular state agency. The formation of the entity doesn’t trigger automatic licensure, nor does it automatically require you to get a license for your business. Licensure for your business is separate and apart from forming an entity. And, in some instances, if you are required to obtain a license, that may dictate the kind of entity your form.

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    Viewed 235 Times
  • 24. What's a Tax ID number?
     

    I find that this is much more critical than some people think. A tax ID number is your corporation or LLC’s separate tax identity. Whether it’s opening a bank account, setting up payroll, or filing a tax return, this number is THE number for all purposes. Here’s how you can get one (good luck to you) or here's how you can get one (answered by me).

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    Viewed 282 Times
  • 25. How do I get a tax identification number?
     

    You can go to the IRS’s website, and go through their multi-page question and answer pages. Make sure you're ready with your SS-4, as the IRS may ask for that over the phone if it doesn’t like one of your answers. (PS, the IRS is not in the habit of liking.) Important note: you need some kind of tax identification to get a Tax ID Number. Usually that original identification comes in the form of an individual's Social Security Number (usually the person forming the entity if it's a small business). But foreign owners have a more difficult time doing this since they don't usually have Social Security Numbers; in that case, they need to apply for an individual tax ID number, and then use that number to get the Tax ID Number for the corporation or LLC.

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    Viewed 248 Times
  • 26. What's an assignment?
     

    An assignment is a document used to transfer assets from one entity or owner to another. Click here to see if you need one.

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    Viewed 230 Times
  • 27. What's a capital contribution?
     

    In its most basic terms, this is the money (or sometimes the assets, like equipment) you put into your business. It differs from a loan in that it doesn’t accrue interest payable to you. If you put money into your corporation or LLC (or partnership), then the return of that money to you as you start to distribute money to you, is non-taxable.

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    Viewed 264 Times
  • 28. Do I have to make a capital contribution?
     

    No, a capital contribution isn't necessary. But typically you would, and should, make one. You would because there’s almost no way to start a business with zero invested in it. And you should because if your corporation is “under-capitalized”, then you could be exposing yourself and fellow shareholders or members to personal liability, making the formation of the entity a waste of time and money. And it takes more than $1.00 to protect yourself (but nice try).

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    Viewed 241 Times
  • 29. Will putting my personal residence into an LLC protect it from my creditors?
     

    Sorry, but . . . LOL – no. People do try this, though. The purpose of an LLC, and therefore what it ultimately protects, by law, is the business that’s operating inside it. Unless you have turned your personal residence into a business (not really a personal residence anymore), then it’s not protectable this way. However, one of the main reasons people put their business into an LLC is to protect their personal assets, like their home. Nice try, though.

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    Viewed 237 Times
  • 30. Is my business big enough to justify the additional overhead of a corporation or LLC?
     

    “Big” is a relative term. Size isn’t always the only, or even a significant, element to determining whether you should entity-ize your business. If you run a small business, but it’s a high-risk business, like, for example, a liquor store, then an LLC or corporation is probably a good idea, regardless of your revenue.

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    Viewed 233 Times
  • 31. I've heard that California has limitations on what type of business can be operated through an LLC. Is that true?
     

    True! California has placed a limit on what businesses can be operated out of an LLC. The general rule is no professionals, and though typically the rules point to any professional named in California’s Business and Professions Code, there are some exceptions. One exception is contractors; additionally, some “professions” that don’t require testing, experience, or certain skills may also be exempt.

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    Viewed 240 Times
  • 32. How long does it take to form a corporation or LLC, in California? What about other states?
     

    California varies – sometimes it’s a matter of days, but sometimes, especially at the beginning of the year, it can take a couple weeks. You can always submit your documents on a rush (24 hours or even same day) basis. Other states? It really depends. Delaware’s quick.

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  • 33. Is there a lot of paperwork? Do I have to do it all?
     

    There’s some paperwork . . . corporations tend to have more paperwork, which is why some people might immediately gravitate to LLCs, or nothing at all. And, yes, if you want to maintain your status as a corporation, and maintain your limited liability, don’t cut corners on the paperwork. It’s important.

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    Viewed 257 Times
  • 34. I just put my business into a corporation/LLC. Do I have to file paperwork for that?
     

    If you have an existing business, then its assets and contracts should get transferred to your corporation. This can look like an assignment, or a bill of sale. There are tax considerations regarding contribution of the assets of your existing business. You may also need to notify third parties, such as vendors and landlords. A stitch in time, as they say. Paperwork is king.

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    Viewed 234 Times
  • 35. Is there more paperwork with an S Corporation than, say, with an LLC?
     

    The answer in most situations is going to be yes. One of the virtues of an LLC is its simplicity. Once you choose to form your business as a corporation (and then an S Corporation), or to have your LLC elect to be taxed as an S Corporation, costs for tax returns, payroll, corporate state compliance paperwork, and other accounting items get triggered. You’ll need to balance the benefits of an S Corporation against the ease of use that comes with an LLC.

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    Viewed 215 Times
  • 36. Can I use my old bank account for my new corporation or LLC?
     

    That would be nice, but this is the beginning of you needing to think about why you formed the corporation to begin with: to make it separate from the sins of the past. So, no, new bank account, with a new tax ID number. Sorry.

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    Viewed 228 Times
  • 37. What are bylaws?
     

    Whether for a corporation or in any business or political setting, bylaws are the rules that govern the procedures of the particular entity. In a corporation, the bylaws is the set of rules which address, for example, when meetings will be held, and what the duties of the officers are. Though it’s a standard document for a corporation, some LLCs will also choose to have bylaws separate from their operating agreement. Some bylaws are considered “off the shelf”, but your business, like any other, is unique, and therefore it’s a document that should be reviewed and drafted carefully to suit your particular needs.

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    Viewed 239 Times
  • 38. What is an Operating Agreement?
     

    Novices to LLCs tend to think that this is the document governing the actual operations of the company. Not so. The operating agreement, also sometimes known as the LLC Agreement (or some variation), is the governing document for the LLC itself. It may be very short, defining merely who the members are and what their respective ownership percentages are. Added to that, there may be restrictions on the transfer of the ownership interest, as well as guidelines for meetings, consent rights, call rights, and so on. These are contracts that can become quite complex.

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    Viewed 233 Times
  • 39. Do I need an operating agreement for my LLC?
     

    Need? No. And if I were a litigation attorney who made money off of people’s mistakes, I’d say don’t have one and let the chips fall where they may -- better yet, let state law govern your rights and duties. But I’m in the business of preventative law. So, yes, you should have an operating agreement. Just by way of example, without one, and your partner dies, you’ll become partner’s with your dead partner’s surviving spouse -- think about that one for a minute. No way out of that without a written operating agreement providing for a buy-out.

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    Viewed 240 Times
  • 40. What does "capitalization" mean?
     

    Capitalization can mean a couple of things. At first it usually refers to the contributions of money or property that the owners (shareholders or members) have contributed to the business, their “capital contributions”. Later on, or as a result, or in anticipation of such contributions, it may refer to a capitalization chart or table, which will set out each owner and their percentage interest in the entity.

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    Viewed 239 Times
  • 41. What does a CEO do?
     

    A CEO is the Chief Executive Officer. This is the person responsible for over-seeing all of the day-to-day activities of the corporation. Sometimes LLCs have CEOs. The CEO is the face of the company, and so larger businesses tend to hire a CEO that has appeal to the public to encourage investment in the business, or to attract new customers. The CEO, when it comes to extraordinary decisions, seeks and takes direction from the board of directors. The CEO can be, but need not be, a shareholder.

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    Viewed 244 Times
  • 42. What does a COO do?
     

    The position of Chief Operating Officer is not required under state law, but businesses that are growing, or intend to grow, will almost always have one. The COO is responsible for the day-to-day of the business, and usually reports to the CEO. And so I know I said that that’s the CEO’s job; in larger businesses, those responsibilities are handed over to the COO, so that the CEO has more time to develop new strategies to grow the business.

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    Viewed 232 Times
  • 43. What is an "annual meeting"?
     

    Corporations under most state laws, including California, require that the shareholders and the board of directors of a corporation hold an annual meeting. Some LLC statutes require it as well, though not in California. Those meetings are opportunities to vote on annual issues, like elections of officers and review of last year’s financials. In very small businesses, these meetings may be memorialized by consents . . . you don’t have to hold an actual meeting with yourself (unless that’s your thing and you’re looking for a “legit” reason to deduct a trip to Hawaii for a shareholder’s meeting – that won’t really work, by the way).

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    Viewed 243 Times
  • 44. What's a K-1?
     

    In very lay terms, a K-1 is the partnership equivalent of an employee’s W-2 or a contractor’s 1099. Because a partnership doesn’t generally pay taxes of its own, it issues a form to each of its partners, telling the partners what each of them needs to put on his/her/its own tax return. LLCs taxed as a partnership (the default for multiple-member LLCs) issue K-1s. For more on forming partnerships, here’s an article. Or, if you prefer to be entertained, here’s a video.

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    Viewed 256 Times
  • 45. What is an LLC "member"?
     

    Being a member in an LLC is similar to being a shareholder in a corporation, or simply being an owner in a business. The members of an LLC are its owners, and typically if there's more than one, they will sign an Operating Agreement which is a contract governing their rights and duties with respect to each other and the LLC.

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    Viewed 236 Times
  • 46. I want to add my boyfriend to my single-member LLC. Is that complicated?
     

    Well, if I was your mother, I’d say yes, that’s very complicated, and please just pay him for services rendered. But, as your lawyer, adding him is not that complicated. However, the result is that you’ve now turned what was essentially a sole proprietorship into a partnership, requiring tax returns, fiduciary duties, and ideally, a written partnership agreement for when you want to show your boyfriend the door.

    More
    Viewed 240 Times
  • 47. Can I name my corporation anything?
     

    Nope. There are some pretty strict rules on what you get to name your corporation. Most of those rules can be found in a document regularly updated by the Secretary of State (in California) -- click here to take a look. For example, a corporation need not have "Inc." at the end of its name, but an LLC needs to have "LLC", or "limited liability company", after its name. And here's a new one, even on me: The word "Holding" or "Holdings" is considered to be a "dropped" word in a corporate name, i.e., it's ignored for purposes of figuring out if your name matches one already taken. For example, Herzog Wonderful Legal, Inc. is the same as Herzog Wonderful Legal Holding, Inc.

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    Viewed 216 Times
  • 48. I want to convert my LLC into a corporation. Can I? How? Vice versa?
     

    Depending on what state your company is located in, this could be as simple as filing a single form with that state’s governing agency. In some states, this may be more complicated, but there’s always a way. Keep in mind, by converting the entity, you will likely have to get it a new Tax ID Number, since it’s now a different entity. If there’s a partnership agreement, or certain rights with respect to voting or capital return, be careful about property transferring all of that over. Consult with tax and legal counsel.

    More
    Viewed 240 Times
  • 49. What is a Statement of Information (California)?
     

    California, and many other states, require an annual or biannual report filing detailing the names and addresses of the directors and officers (or managers in the case of an LLC). It’s part of the social contract entities have with the public – liability protection in return for transparency. Not filing can lead eventually to suspension of the corporate or LLC charter, thereby exposing the entity’s owners to personal liability. In California, the first one is due within 90 days of filing the Articles of Incorporation or Articles of Organization.

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    Viewed 236 Times
  • 50. What's the bare minimum I need to operate as an LLC?
     

    The answer to this is similar to the answer for the same question for corporations. However, with LLCs, unless the members require it in their operating agreement, there’s no requirement for meetings and consents, unless the written consents are required by a third party, like a bank. This is the reason some folks try to use LLCs instead of corporations.

    More
    Viewed 251 Times
  • 51. What's the difference between a member in an LLC and a shareholder in a corporation?
     

    I’m proud of you for asking such a clever question. Makes me wish the answer was just as thoughtful. Alas, it’s not: there’s no difference. A shareholder in a corporation, and a member in an LLC, are both nomenclature for defining owner. In fact, LLCs are flexible enough such that they can be structured to look like corporations, so their owners may also end up being “shareholders”. All that said, members in LLCs and shareholders in corporations are governed by different statutes, so their respective rights may differ.

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    Viewed 240 Times
  • 1. If I'm the only member of my LLC, do I really have liability protection?
     

    Yes. Well, you have the same liability protection as a multi-member LLC. There will be some specific exceptions. For example, if you are personally negligent or you are responsible for your company's payroll tax obligations, then you'll be exposed to personal liability. But being a single-member LLC won't change that. There may be instances where being in a partnership may change an outcome in an insolvency situation and certain specific other circumstances.

    More
    Viewed 200 Times
  • 2. I'm a professional. What's right for me?
     

    First things first: the question really is whether an entity is going to do you any good at all. From a liability perspective, keep in mind that anything you do is your personal problem; putting your medical practice into a corporation won’t shield you from your own malpractice. But it could, for example, shield you from your employee’s malpractice, or your file clerk’s sexual harassment claim against a fellow doctor. And it may also shield you from your partner’s malpractice. So there are upsides.

    Some states, like California (where I practice), restrict the use of certain entities by professionals. The term “professional” itself has some grey area. Typically, professionals required to have a certain education, training, and experience aren’t permitted to use an LLC for their business (in California). So lawyers, doctors, etc. will generally use a corporation, though certain professions, like lawyers, have other specific partnership entities available to them. Others, like real estate appraisers, are still permitted to use an LLC. There may also be tax reasons, as a professional, to put your business into an entity. There’s much to consider.

    More
    Viewed 234 Times
  • 3. What's a capital contribution?
     

    In its most basic terms, this is the money (or sometimes the assets, like equipment) you put into your business. It differs from a loan in that it doesn’t accrue interest payable to you. If you put money into your corporation or LLC (or partnership), then the return of that money to you as you start to distribute money to you, is non-taxable.

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    Viewed 264 Times
  • 4. Do I have to make a capital contribution?
     

    No, a capital contribution isn't necessary. But typically you would, and should, make one. You would because there’s almost no way to start a business with zero invested in it. And you should because if your corporation is “under-capitalized”, then you could be exposing yourself and fellow shareholders or members to personal liability, making the formation of the entity a waste of time and money. And it takes more than $1.00 to protect yourself (but nice try).

    More
    Viewed 241 Times
  • 5. What's a K-1?
     

    In very lay terms, a K-1 is the partnership equivalent of an employee’s W-2 or a contractor’s 1099. Because a partnership doesn’t generally pay taxes of its own, it issues a form to each of its partners, telling the partners what each of them needs to put on his/her/its own tax return. LLCs taxed as a partnership (the default for multiple-member LLCs) issue K-1s. For more on forming partnerships, here’s an article. Or, if you prefer to be entertained, here’s a video.

    More
    Viewed 256 Times
  • 6. I want to add my boyfriend to my single-member LLC. Is that complicated?
     

    Well, if I was your mother, I’d say yes, that’s very complicated, and please just pay him for services rendered. But, as your lawyer, adding him is not that complicated. However, the result is that you’ve now turned what was essentially a sole proprietorship into a partnership, requiring tax returns, fiduciary duties, and ideally, a written partnership agreement for when you want to show your boyfriend the door.

    More
    Viewed 240 Times
  • 7. I want to convert my LLC into a corporation. Can I? How? Vice versa?
     

    Depending on what state your company is located in, this could be as simple as filing a single form with that state’s governing agency. In some states, this may be more complicated, but there’s always a way. Keep in mind, by converting the entity, you will likely have to get it a new Tax ID Number, since it’s now a different entity. If there’s a partnership agreement, or certain rights with respect to voting or capital return, be careful about property transferring all of that over. Consult with tax and legal counsel.

    More
    Viewed 240 Times
  • 1. Do I need a corporation or LLC for my business?
     

    Congratulations! You just asked the best question (which is why it's also at the top of the FAQs). You know (or at least should know) your business best, and so that also means you know what liabilities you may face. Make a list. Call up your insurance broker (you have one, right?) and talk through what’s covered and then what isn’t. Are there things out of your control, such as employees? Those are some things to consider. You can read my post on this or watch the video on this topic. It’s very important that you not waste time and money on something you may not need.

    More
    Viewed 261 Times
  • 2. What's a Corporation?
     

    A corporation happens when “charter documents” are filed with the state, usually in a form either prescribed by the state or drafted by an attorney [ahem] and, once filed, creates a corporation. Corporations are a legal entity designed to protect its shareholders and directors from liability.

    More
    Viewed 249 Times
  • 3. What's an LLC?
     

    An LLC, or limited liability company, is a type of entity that protects its owners and mangers from liability, unless they personally do bad things. Like a corporation, an LLC happens when its Articles of Organization are filed with the state authority. In California, this is an online form. Keep in mind, there are other filings, and then ongoing responsibilities of those managers and members to continue shielding them from liability. And if there’s more than one Member, having a written operating agreement is highly advised. There may also be tax advantages to filing as an LLC.

    More
    Viewed 284 Times
  • 4. What's the difference between an LLC and a corporation?
     

    Call me! Seriously, the differences are numerous; here are a couple to get you started: LLCs have a more flexible tax structure, have fewer housekeeping requirements, but aren’t ideal for larger companies, especially those seeking outside investors. Corporations are, well, just read that last sentence but the opposite.

    More
    Viewed 249 Times
  • 5. What's better . . . an LLC or a Corporation?
     

    Aaah, if life were only that easy. Actually, sometimes it is. One rule of thumb -- is it a small business not providing professional services, with no plans for investors and modest gross receipts? That's a case where you might lean heavily toward an LLC. Investors on the horizon? Corporation. The analysis can get tortured for businesses that are larger or are growing. Real estate tends toward LLCs.

    More
    Viewed 262 Times
  • 6. What is a C Corporation?
     

    A C Corporation is a Corporation that hasn’t elected under the Internal Revenue Code to be taxed as an S Corporation. The best way to describe it is to check out what an S Corporation is. Trust me; it’s not circular.

    More
    Viewed 258 Times
  • 7. What is an S Corporation?
     

    An S Corporation is a corporation that has made an election (i.e., timely filed a form) to be taxed as a “pass-through”, i.e., the corporation itself is generally not taxed, but all of the taxes for profits and income, as well as for losses and expenses, are passed through to become the obligations of the individual shareholders. There are limitations to what corporations can be S Corporations. For example, S Corporations cannot be owned by more than 100 shareholders or by non-resident aliens. The “S” stands for . . . wait for it . . . small.

    More
    Viewed 251 Times
  • 8. Should I incorporate in Nevada?
     

    You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.

    More
    Viewed 248 Times
  • 9. Should I incorporate in Delaware?
     

    You’ve read a lot about that, I’m sure. There can be reasons to form there. Here are two that come up a lot: One, your business is going to have big deal investors who like being in Delaware, sometimes for reason number . . . Two: Delaware law is corporate-centric, efficient, and can provide better protections for the corporation’s officers and directors. But like filing anywhere else, if the principal place of business is in another state, you’ll need to register your corporation (or LLC) in that state as well as a “foreign” corporation/LLC.

    More
    Viewed 247 Times
  • 10. Should I form my LLC or corporation in a state other than where I live?
     

    If you’re not thinking about Delaware, then maybe. Sometimes you’re going to have to. If, for example, you’re forming an LLC for investment real estate, with a few exceptions, that state will require you to form your LLC in the state where the property is. There may be other reasons to be in another state, but those come up rarely.

    More
    Viewed 240 Times
  • 11. Why should I form a corporation/LLC for my business?
     

    Corporations provide liability protection for its owners, as well as its officers and directors, with some exceptions. So, there’s that. Insurance covers some things, not all things. And sometimes a corporation won’t help you . . . for example, if you’re a lawyer and you commit malpractice. That’s on you, individually – corporation or not. Tax may also drive a reason to incorporate or organize an LLC.

    More
    Viewed 246 Times
  • 12. What are Articles of Organization?
     

    Like Articles of Incorporation, this is the document used for bringing your LLC into existence. It’s filed with the state’s authority for, well, filing such documents. In California, this is the Secretary of State. In Delaware, it’s the Division of Corporations.

    More
    Viewed 245 Times
  • 13. Will a corporation or LLC protect me from liability?
     

    That’s supposed to be the point of them, so I’m going to say . . . yes! However, you can become personally liable for your own negligence (or intentional bad acts). You may also become personally liable of the person suing you can prove that you didn’t follow corporate formalities, like holding meetings, maintaining minutes, or keeping enough working capital in the business’s accounts.

    More
    Viewed 245 Times
  • 14. If I'm the only member of my LLC, do I really have liability protection?
     

    Yes. Well, you have the same liability protection as a multi-member LLC. There will be some specific exceptions. For example, if you are personally negligent or you are responsible for your company's payroll tax obligations, then you'll be exposed to personal liability. But being a single-member LLC won't change that. There may be instances where being in a partnership may change an outcome in an insolvency situation and certain specific other circumstances.

    More
    Viewed 200 Times
  • 15. Is the liability protection for LLCs and corporations the same?
     

    Yes. There are some very case-specific nuances, especially when you get down to single-member LLCs, but unlikely anything that is going to effect you generally. Don’t obsess over this one unless you have plans to not pay taxes, for example.

    More
    Viewed 244 Times
  • 16. I'm a professional. What's right for me?
     

    First things first: the question really is whether an entity is going to do you any good at all. From a liability perspective, keep in mind that anything you do is your personal problem; putting your medical practice into a corporation won’t shield you from your own malpractice. But it could, for example, shield you from your employee’s malpractice, or your file clerk’s sexual harassment claim against a fellow doctor. And it may also shield you from your partner’s malpractice. So there are upsides.

    Some states, like California (where I practice), restrict the use of certain entities by professionals. The term “professional” itself has some grey area. Typically, professionals required to have a certain education, training, and experience aren’t permitted to use an LLC for their business (in California). So lawyers, doctors, etc. will generally use a corporation, though certain professions, like lawyers, have other specific partnership entities available to them. Others, like real estate appraisers, are still permitted to use an LLC. There may also be tax reasons, as a professional, to put your business into an entity. There’s much to consider.

    More
    Viewed 234 Times
  • 17. Should I form as a Professional Corporation?
     

    Should you? Probably not. Are you required to? Maybe. It depends on the type of profession you’re in. Lawyers, for example, are required to be in professional corporations (“PC”). Forming as a PC may require additional restrictions in your bylaws, for example concerning ownership. So if you don’t need to, generally you shouldn’t. But you may not have a choice.

    More
    Viewed 238 Times
  • 18. What/who is an incorporator?
     

    This is the person who signs and causes the filing of the Articles of Incorporation (or, in the case of an LLC the Articles of Organization) with the designated state authority. In a small business, this is usually the owner/shareholder/member. Some folks have their attorney sign the documents to help expedite the process, and that’s ok (but not necessary).

    More
    Viewed 241 Times
  • 19. Can anyone own an S Corporation?
     

    You probably didn’t think to ask this until you saw it was a question. Answer: No. S Corporations are restricted with respect to their ownership, one of the key factors why they can’t always be used. For example, no more than 100 shareholders can own shares in an S Corp, no shareholder can be a non-resident alien, and unless certain filings and compliance rules are met, they generally can’t be owned by other entities, only individuals.

    More
    Viewed 243 Times
  • 20. Can anyone own an interest in an LLC?
     

    And therein lies a major difference between LLCs and S Corporations – because LLCs can be owned by practically anyone or anything, making them very useful for pass-through taxation, while being owned by other entities.

    More
    Viewed 231 Times
  • 21. When I form my corporation or LLC, is that a license?
     

    No, but thanks for asking a weird question. You’re likely getting confused with some industries, like talent management, that may require you to obtain a license from a particular state agency. The formation of the entity doesn’t trigger automatic licensure, nor does it automatically require you to get a license for your business. Licensure for your business is separate and apart from forming an entity. And, in some instances, if you are required to obtain a license, that may dictate the kind of entity your form.

    More
    Viewed 235 Times
  • 22. Will putting my personal residence into an LLC protect it from my creditors?
     

    Sorry, but . . . LOL – no. People do try this, though. The purpose of an LLC, and therefore what it ultimately protects, by law, is the business that’s operating inside it. Unless you have turned your personal residence into a business (not really a personal residence anymore), then it’s not protectable this way. However, one of the main reasons people put their business into an LLC is to protect their personal assets, like their home. Nice try, though.

    More
    Viewed 237 Times
  • 23. Can any corporation be an S Corporation?
     

    Any corporation can be an S Corporation, unless it doesn’t meet certain criteria. For example, an S Corporation cannot be owned by another corporation, with certain very narrow exceptions. And sometimes you don’t want your corporation to be an S Corporation, for example, when you are seeking VC investments.

    More
    Viewed 248 Times
  • 24. Why is an S Corporation called an S Corporation?
     

    S = “Small”, and, yes, that’s per the Internal Revenue Code.

    More
    Viewed 232 Times
  • 25. Is my business big enough to justify the additional overhead of a corporation or LLC?
     

    “Big” is a relative term. Size isn’t always the only, or even a significant, element to determining whether you should entity-ize your business. If you run a small business, but it’s a high-risk business, like, for example, a liquor store, then an LLC or corporation is probably a good idea, regardless of your revenue.

    More
    Viewed 233 Times
  • 26. What are the advantages of a C Corporation versus a sole proprietorship?
     

    Short question . . . long answer. For the most part, the classic answer, which is also correct, is a C Corporation (or an S Corporation) provides limited liability for its owners and management. An S Corporation could provide additional tax benefits. On a less obvious level, having your business in a corporation may provide it with more “respect” in the business community, and may fend off nuisance suits.

    More
    Viewed 233 Times
  • 27. I've heard that California has limitations on what type of business can be operated through an LLC. Is that true?
     

    True! California has placed a limit on what businesses can be operated out of an LLC. The general rule is no professionals, and though typically the rules point to any professional named in California’s Business and Professions Code, there are some exceptions. One exception is contractors; additionally, some “professions” that don’t require testing, experience, or certain skills may also be exempt.

    More
    Viewed 240 Times
  • 28. How long does it take to form a corporation or LLC, in California? What about other states?
     

    California varies – sometimes it’s a matter of days, but sometimes, especially at the beginning of the year, it can take a couple weeks. You can always submit your documents on a rush (24 hours or even same day) basis. Other states? It really depends. Delaware’s quick.

    More
    Viewed 235 Times
  • 29. Will putting my business into a corporation or LLC help me save taxes?
     

    It can, but not always. It’s not often the case that a business will put their business into an entity solely to save on taxes, although S Corporations for small businesses are frequently and legitimately used for that purpose.

    More
    Viewed 237 Times
  • 30. Is there a lot of paperwork? Do I have to do it all?
     

    There’s some paperwork . . . corporations tend to have more paperwork, which is why some people might immediately gravitate to LLCs, or nothing at all. And, yes, if you want to maintain your status as a corporation, and maintain your limited liability, don’t cut corners on the paperwork. It’s important.

    More
    Viewed 257 Times
  • 31. I just put my business into a corporation/LLC. Do I have to file paperwork for that?
     

    If you have an existing business, then its assets and contracts should get transferred to your corporation. This can look like an assignment, or a bill of sale. There are tax considerations regarding contribution of the assets of your existing business. You may also need to notify third parties, such as vendors and landlords. A stitch in time, as they say. Paperwork is king.

    More
    Viewed 234 Times
  • 32. Is there more paperwork with an S Corporation than, say, with an LLC?
     

    The answer in most situations is going to be yes. One of the virtues of an LLC is its simplicity. Once you choose to form your business as a corporation (and then an S Corporation), or to have your LLC elect to be taxed as an S Corporation, costs for tax returns, payroll, corporate state compliance paperwork, and other accounting items get triggered. You’ll need to balance the benefits of an S Corporation against the ease of use that comes with an LLC.

    More
    Viewed 215 Times
  • 33. Will there be a background check for me to incorporate?
     

    No. You may get background checked as a vendor, even if you put your business in a corporation. But incorporating does not require any background checking.

    More
    Viewed 244 Times
  • 34. What are stockholders and shareholders?
     

    Simply put, those are the owners, and they can be in many shapes and sizes. A shareholder can be an individual who owns shares in GM or Microsoft; it can be you, owning 100% of the issued shares in your own corporation. It can be another corporation or venture capital firm owning shares in your start-up. "Stockholder" and "shareholder" typically means the same thing.

    More
    Viewed 240 Times
  • 35. What's the bare minimum I need to operate as a corporation?
     

    In terms of capital (i.e., cash money), it depends on your business; one common rule of thumb is 3 months’ worth of cash to run the business. If you mean compliance, you’ll need annual minutes and, in California, an annual filing with the Secretary of State. You’ll also need to memorialize extraordinary transactions, like leases and financings, in your corporate records. Without minutes and/or consents, you could expose the shareholders personally to liability.

    More
    Viewed 235 Times
  • 36. What's the bare minimum I need to operate as an LLC?
     

    The answer to this is similar to the answer for the same question for corporations. However, with LLCs, unless the members require it in their operating agreement, there’s no requirement for meetings and consents, unless the written consents are required by a third party, like a bank. This is the reason some folks try to use LLCs instead of corporations.

    More
    Viewed 251 Times
  • 1. Do I need a corporation or LLC for my business?
     

    Congratulations! You just asked the best question (which is why it's also at the top of the FAQs). You know (or at least should know) your business best, and so that also means you know what liabilities you may face. Make a list. Call up your insurance broker (you have one, right?) and talk through what’s covered and then what isn’t. Are there things out of your control, such as employees? Those are some things to consider. You can read my post on this or watch the video on this topic. It’s very important that you not waste time and money on something you may not need.

    More
    Viewed 261 Times
  • 2. What's a Corporation?
     

    A corporation happens when “charter documents” are filed with the state, usually in a form either prescribed by the state or drafted by an attorney [ahem] and, once filed, creates a corporation. Corporations are a legal entity designed to protect its shareholders and directors from liability.

    More
    Viewed 249 Times
  • 3. What's an LLC?
     

    An LLC, or limited liability company, is a type of entity that protects its owners and mangers from liability, unless they personally do bad things. Like a corporation, an LLC happens when its Articles of Organization are filed with the state authority. In California, this is an online form. Keep in mind, there are other filings, and then ongoing responsibilities of those managers and members to continue shielding them from liability. And if there’s more than one Member, having a written operating agreement is highly advised. There may also be tax advantages to filing as an LLC.

    More
    Viewed 284 Times
  • 4. What is an S Corporation?
     

    An S Corporation is a corporation that has made an election (i.e., timely filed a form) to be taxed as a “pass-through”, i.e., the corporation itself is generally not taxed, but all of the taxes for profits and income, as well as for losses and expenses, are passed through to become the obligations of the individual shareholders. There are limitations to what corporations can be S Corporations. For example, S Corporations cannot be owned by more than 100 shareholders or by non-resident aliens. The “S” stands for . . . wait for it . . . small.

    More
    Viewed 251 Times
  • 5. How do I form a Corporation?
     

    Nice. Figuring if you click here you’re home free. In a way, yes. To form one, you file Articles of Incorporation with the governing corporate authority in your state. In California, where my practice is, that’s the Secretary of State. Articles should contain certain provisions that may or may not be obvious to you, and are not contained in most templates offered by the state or online corporate mills. Additionally, formation is the first of several steps to take to ensure that your corporation is protecting you.

    More
    Viewed 239 Times
  • 6. Should I incorporate in Nevada?
     

    You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.

    More
    Viewed 248 Times
  • 7. Should I incorporate in Delaware?
     

    You’ve read a lot about that, I’m sure. There can be reasons to form there. Here are two that come up a lot: One, your business is going to have big deal investors who like being in Delaware, sometimes for reason number . . . Two: Delaware law is corporate-centric, efficient, and can provide better protections for the corporation’s officers and directors. But like filing anywhere else, if the principal place of business is in another state, you’ll need to register your corporation (or LLC) in that state as well as a “foreign” corporation/LLC.

    More
    Viewed 247 Times
  • 8. Should I form my LLC or corporation in a state other than where I live?
     

    If you’re not thinking about Delaware, then maybe. Sometimes you’re going to have to. If, for example, you’re forming an LLC for investment real estate, with a few exceptions, that state will require you to form your LLC in the state where the property is. There may be other reasons to be in another state, but those come up rarely.

    More
    Viewed 240 Times
  • 9. When does a corporation become a corporation? An LLC?
     

    I wish the answer to this were more existential, and thus more interesting. Alas, it’s as simple as this: when you duly file Articles of Incorporation, also know as charter documents, with the state official authorized to recognize and process such filings. In California, it’s the Secretary of State. In Delaware, it’s the Division of Corporations. Same for LLCs, except it tends to be called Articles of Organization.

    More
    Viewed 238 Times
  • 10. Why should I form a corporation/LLC for my business?
     

    Corporations provide liability protection for its owners, as well as its officers and directors, with some exceptions. So, there’s that. Insurance covers some things, not all things. And sometimes a corporation won’t help you . . . for example, if you’re a lawyer and you commit malpractice. That’s on you, individually – corporation or not. Tax may also drive a reason to incorporate or organize an LLC.

    More
    Viewed 246 Times
  • 11. What are Articles of Incorporation?
     

    This is about as arcane as it gets . . . “Articles”. Be that as it may, we’re stuck with it as a word in corporate lingo. This is the document which provides the state, and therefore the public, with the initial information needed to bring the corporation into existence. It must follow certain state requirements minimally, and may also contain certain other provisions that may either be recommended generally, or may be required by certain investors. Sometimes this is referred to as the “corporate charter”.

    More
    Viewed 252 Times
  • 12. What are Articles of Organization?
     

    Like Articles of Incorporation, this is the document used for bringing your LLC into existence. It’s filed with the state’s authority for, well, filing such documents. In California, this is the Secretary of State. In Delaware, it’s the Division of Corporations.

    More
    Viewed 245 Times
  • 13. Will a corporation or LLC protect me from liability?
     

    That’s supposed to be the point of them, so I’m going to say . . . yes! However, you can become personally liable for your own negligence (or intentional bad acts). You may also become personally liable of the person suing you can prove that you didn’t follow corporate formalities, like holding meetings, maintaining minutes, or keeping enough working capital in the business’s accounts.

    More
    Viewed 245 Times
  • 14. Is the liability protection for LLCs and corporations the same?
     

    Yes. There are some very case-specific nuances, especially when you get down to single-member LLCs, but unlikely anything that is going to effect you generally. Don’t obsess over this one unless you have plans to not pay taxes, for example.

    More
    Viewed 244 Times
  • 15. What is a "Certificate of Incorporation"?
     

    Some states use “Certificate of Incorporation” as an alternative to Articles of Incorporation; for example, New York and Delaware.

    More
    Viewed 255 Times
  • 16. What/who is an incorporator?
     

    This is the person who signs and causes the filing of the Articles of Incorporation (or, in the case of an LLC the Articles of Organization) with the designated state authority. In a small business, this is usually the owner/shareholder/member. Some folks have their attorney sign the documents to help expedite the process, and that’s ok (but not necessary).

    More
    Viewed 241 Times
  • 17. What's an LLC manager?
     

    The term "manager" has a specific meaning with respect to an LLC. The manager in an LLC is somewhat akin to the director in a corporation. The confusing part is that it can also be akin to the CEO or other officers of a corporation as well. Typically, the manager, well, manages the affairs of the LLC. The manager is authorized to bind the LLC, subject to restrictions that they may be bound to by law or in the operating agreement. The manager may or may not also be responsible for the operations of the LLC, though in larger LLCs, those roles are typically spread out between several individuals. In what are member-managed LLCs, each of the members may act as a manager, binding the LLC. So be careful about how you file your LLC, as you may not want every member eligible to sign contracts, and if you do, then the bank or the landlord will be looking for everyone's signatures.

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    Viewed 239 Times
  • 18. When I form my corporation or LLC, is that a license?
     

    No, but thanks for asking a weird question. You’re likely getting confused with some industries, like talent management, that may require you to obtain a license from a particular state agency. The formation of the entity doesn’t trigger automatic licensure, nor does it automatically require you to get a license for your business. Licensure for your business is separate and apart from forming an entity. And, in some instances, if you are required to obtain a license, that may dictate the kind of entity your form.

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    Viewed 235 Times
  • 19. What's a Tax ID number?
     

    I find that this is much more critical than some people think. A tax ID number is your corporation or LLC’s separate tax identity. Whether it’s opening a bank account, setting up payroll, or filing a tax return, this number is THE number for all purposes. Here’s how you can get one (good luck to you) or here's how you can get one (answered by me).

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    Viewed 282 Times
  • 20. How do I get a tax identification number?
     

    You can go to the IRS’s website, and go through their multi-page question and answer pages. Make sure you're ready with your SS-4, as the IRS may ask for that over the phone if it doesn’t like one of your answers. (PS, the IRS is not in the habit of liking.) Important note: you need some kind of tax identification to get a Tax ID Number. Usually that original identification comes in the form of an individual's Social Security Number (usually the person forming the entity if it's a small business). But foreign owners have a more difficult time doing this since they don't usually have Social Security Numbers; in that case, they need to apply for an individual tax ID number, and then use that number to get the Tax ID Number for the corporation or LLC.

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    Viewed 248 Times
  • 21. Do I need an attorney for this process?
     

    YES! Of course!!
    Actually, no. Though "need" is a funny word.
    An attorney is not required to incorporate an entity. But if you learn nothing else from bouncing around this website, it’s that there may be a great deal of things to consider, traps for the unwary, and housekeeping items that may make or break your liability protection. Consider yourself warned!

    More
    Viewed 246 Times
  • 22. What's an assignment?
     

    An assignment is a document used to transfer assets from one entity or owner to another. Click here to see if you need one.

    More
    Viewed 230 Times
  • 23. What's a capital contribution?
     

    In its most basic terms, this is the money (or sometimes the assets, like equipment) you put into your business. It differs from a loan in that it doesn’t accrue interest payable to you. If you put money into your corporation or LLC (or partnership), then the return of that money to you as you start to distribute money to you, is non-taxable.

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    Viewed 264 Times
  • 24. Do I have to make a capital contribution?
     

    No, a capital contribution isn't necessary. But typically you would, and should, make one. You would because there’s almost no way to start a business with zero invested in it. And you should because if your corporation is “under-capitalized”, then you could be exposing yourself and fellow shareholders or members to personal liability, making the formation of the entity a waste of time and money. And it takes more than $1.00 to protect yourself (but nice try).

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    Viewed 241 Times
  • 25. When is an S Corp election due?
     

    For a corporation to be an S Corporation, the paperwork to make that effective is due no more than two months and 15 days after the beginning of the tax year the election is to take effect (yes, I copied that from the IRS instructions). If you’re really ahead of the game, then anytime during a tax year preceding the year you want it to be in effect. For new corporations, the tax year typically begins on a day other than January 1, unless you formed on that date. So, for example, if your corporation was formed on July 8, then the S Corp election would be due 15 days after September 7, or September 22.

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    Viewed 234 Times
  • 26. Can I cause my corporation to be an S Corp at the end of the year, after I see how my year has been?
     

    You wish. But no. Congress treats this election as a go-forward business decision, not a look-back election. The good news is that it’s easy to revoke, or even “bust”, the election. But be careful about switching back and forth – as in, things don’t work that way.

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    Viewed 238 Times
  • 27. Do I need all of the shareholders' consent for the S Corp election?
     

    Yes. It’s really that simple. Here’s a link to the IRS page that’s chock full of info.

    PS - Spouses too.

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    Viewed 241 Times
  • 28. How long does it take to form a corporation or LLC, in California? What about other states?
     

    California varies – sometimes it’s a matter of days, but sometimes, especially at the beginning of the year, it can take a couple weeks. You can always submit your documents on a rush (24 hours or even same day) basis. Other states? It really depends. Delaware’s quick.

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    Viewed 235 Times
  • 29. What does it mean to "file" a corporation?
     

    Actually, nothing. To bring a corporation into existence, you submit your Articles of Incorporation with the government agency responsible for processing that paperwork in your state. By submitting the Articles, or “Charter Documents”, and the act by the agency of approving same, you have formed a corporation. You can say “file”, if you want.

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    Viewed 234 Times
  • 30. Is there a lot of paperwork? Do I have to do it all?
     

    There’s some paperwork . . . corporations tend to have more paperwork, which is why some people might immediately gravitate to LLCs, or nothing at all. And, yes, if you want to maintain your status as a corporation, and maintain your limited liability, don’t cut corners on the paperwork. It’s important.

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    Viewed 257 Times
  • 31. I just put my business into a corporation/LLC. Do I have to file paperwork for that?
     

    If you have an existing business, then its assets and contracts should get transferred to your corporation. This can look like an assignment, or a bill of sale. There are tax considerations regarding contribution of the assets of your existing business. You may also need to notify third parties, such as vendors and landlords. A stitch in time, as they say. Paperwork is king.

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    Viewed 234 Times
  • 32. Will there be a background check for me to incorporate?
     

    No. You may get background checked as a vendor, even if you put your business in a corporation. But incorporating does not require any background checking.

    More
    Viewed 244 Times
  • 33. What is a fictitious business name?
     

    Also known as a DBA (doing business as), if your entity is using a name for its business that’s different from its entity name, then you are using a fictitious business name, and state law requires that you file a fictitious business name statement in the county you are operating out of that records the name of your business and the name of the entity using that name. It’s also a good idea to do file that even if you don’t want to, because it’s helpful evidence to prove the use of your name from a certain point in time, which helps you to defend or bring trademark infringement claims.

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    Viewed 238 Times
  • 34. Can I use my old bank account for my new corporation or LLC?
     

    That would be nice, but this is the beginning of you needing to think about why you formed the corporation to begin with: to make it separate from the sins of the past. So, no, new bank account, with a new tax ID number. Sorry.

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    Viewed 228 Times
  • 35. What are bylaws?
     

    Whether for a corporation or in any business or political setting, bylaws are the rules that govern the procedures of the particular entity. In a corporation, the bylaws is the set of rules which address, for example, when meetings will be held, and what the duties of the officers are. Though it’s a standard document for a corporation, some LLCs will also choose to have bylaws separate from their operating agreement. Some bylaws are considered “off the shelf”, but your business, like any other, is unique, and therefore it’s a document that should be reviewed and drafted carefully to suit your particular needs.

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    Viewed 239 Times
  • 36. What is an Operating Agreement?
     

    Novices to LLCs tend to think that this is the document governing the actual operations of the company. Not so. The operating agreement, also sometimes known as the LLC Agreement (or some variation), is the governing document for the LLC itself. It may be very short, defining merely who the members are and what their respective ownership percentages are. Added to that, there may be restrictions on the transfer of the ownership interest, as well as guidelines for meetings, consent rights, call rights, and so on. These are contracts that can become quite complex.

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    Viewed 233 Times
  • 37. Do I need an operating agreement for my LLC?
     

    Need? No. And if I were a litigation attorney who made money off of people’s mistakes, I’d say don’t have one and let the chips fall where they may -- better yet, let state law govern your rights and duties. But I’m in the business of preventative law. So, yes, you should have an operating agreement. Just by way of example, without one, and your partner dies, you’ll become partner’s with your dead partner’s surviving spouse -- think about that one for a minute. No way out of that without a written operating agreement providing for a buy-out.

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    Viewed 240 Times
  • 38. What does "capitalization" mean?
     

    Capitalization can mean a couple of things. At first it usually refers to the contributions of money or property that the owners (shareholders or members) have contributed to the business, their “capital contributions”. Later on, or as a result, or in anticipation of such contributions, it may refer to a capitalization chart or table, which will set out each owner and their percentage interest in the entity.

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    Viewed 239 Times
  • 39. What are stockholders and shareholders?
     

    Simply put, those are the owners, and they can be in many shapes and sizes. A shareholder can be an individual who owns shares in GM or Microsoft; it can be you, owning 100% of the issued shares in your own corporation. It can be another corporation or venture capital firm owning shares in your start-up. "Stockholder" and "shareholder" typically means the same thing.

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    Viewed 240 Times
  • 40. What are "issued shares"?
     

    Good question. This concept often gets confused with “authorized shares”. Issued shares are those shares that the corporation has actually “issued”, i.e., transferred to a shareholder. This can be in the form of a certificate, and that can be typical in a small business. In larger businesses, the ownership of issued shares is usually a journal entry in the corporation’s books and records, or with the broker. The number of issues shares cannot exceed the number of authorized shares.

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    Viewed 239 Times
  • 41. What does a CFO do?
     

    The Chief Financial Officer, also sometimes known as the treasurer, handles the financial aspects of the corporation or LLC. In larger businesses, the CFO becomes an advisor to the CEO, conferring on best approaches for increasing business or investment. In a very small business, the CEO and CFO are frequently the same person, and there’s nothing wrong with that.

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    Viewed 246 Times
  • 42. What does a corporate secretary do?
     

    Corporate secretaries are the unsung heroes in the officer world. They are responsible for the grunt work of the corporation or LLC, making sure i’s are dotted, t’s crossed, taking corporate minutes, and frequently interacting with the business’s lawyer to make sure paperwork and corporate housekeeping are all in order. In a very small business, the corporate secretary is frequently the same person as the CFO and the CEO. In larger businesses, you’ll want to try to make the CEO and corporate secretary two different people, since there may be occasion when refinancing or issuing shares to a corporate investor will require that the secretary attest to the identity of the CEO, which gets awkward when it’s the same person. The position of Secretary is required under California law.

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    Viewed 242 Times
  • 43. Can I name my corporation anything?
     

    Nope. There are some pretty strict rules on what you get to name your corporation. Most of those rules can be found in a document regularly updated by the Secretary of State (in California) -- click here to take a look. For example, a corporation need not have "Inc." at the end of its name, but an LLC needs to have "LLC", or "limited liability company", after its name. And here's a new one, even on me: The word "Holding" or "Holdings" is considered to be a "dropped" word in a corporate name, i.e., it's ignored for purposes of figuring out if your name matches one already taken. For example, Herzog Wonderful Legal, Inc. is the same as Herzog Wonderful Legal Holding, Inc.

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    Viewed 216 Times
  • 44. Is it easy to change my company's name once it's established?
     

    Hate to be a lawyer about this, but it depends. Typically there’s the name you formed your entity with, and then there’s the name you do business as, which may be two different things, and both require paperwork. In the case of the name you do business as, that may be expose you to trademark or service mark infringement.

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    Viewed 236 Times
  • 45. What is a Statement of Information (California)?
     

    California, and many other states, require an annual or biannual report filing detailing the names and addresses of the directors and officers (or managers in the case of an LLC). It’s part of the social contract entities have with the public – liability protection in return for transparency. Not filing can lead eventually to suspension of the corporate or LLC charter, thereby exposing the entity’s owners to personal liability. In California, the first one is due within 90 days of filing the Articles of Incorporation or Articles of Organization.

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    Viewed 236 Times
  • 46. Can I be the CEO, CFO and Secretary of my corporation?
     

    Yes. It’s not always ideal, especially if you’re looking at growing or bringing in investors, but the law allows it.

    And please stop calling it "my corporation". The more you do that, the more you expose yourself to personal liability. Think of it as separate and apart from you, and the rest of the world will too.

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    Viewed 244 Times
  • 47. Does my corporation have to have more than one director?
     

    Not necessarily. In California, the default rule is one director per shareholder, and if there are more than 3 shareholders, then 3 minimum. You can always have more than you need.

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    Viewed 249 Times
  • 48. What's the bare minimum I need to operate as a corporation?
     

    In terms of capital (i.e., cash money), it depends on your business; one common rule of thumb is 3 months’ worth of cash to run the business. If you mean compliance, you’ll need annual minutes and, in California, an annual filing with the Secretary of State. You’ll also need to memorialize extraordinary transactions, like leases and financings, in your corporate records. Without minutes and/or consents, you could expose the shareholders personally to liability.

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    Viewed 235 Times
  • 49. What's the bare minimum I need to operate as an LLC?
     

    The answer to this is similar to the answer for the same question for corporations. However, with LLCs, unless the members require it in their operating agreement, there’s no requirement for meetings and consents, unless the written consents are required by a third party, like a bank. This is the reason some folks try to use LLCs instead of corporations.

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    Viewed 251 Times
  • 50. What is "par value"?
     

    It used to mean more than it does now. California has dropped this as a concept, and where it’s still used, it’s for tax and fees purposes. Some states tax corporations based on capitalization, and they use par value to assess that tax. So you should not just “pick a number”. Some of the fees and taxes can be very expensive, so proceed cautiously. Delaware, for example, uses par value.

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    Viewed 235 Times
  • 51. Do shares in my corporation need to have a par value?
     

    You need to declare a par value only when the state in which your corporation has been filed requires it. Delaware requires it.

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    Viewed 244 Times
  • 1. What's a Corporation?
     

    A corporation happens when “charter documents” are filed with the state, usually in a form either prescribed by the state or drafted by an attorney [ahem] and, once filed, creates a corporation. Corporations are a legal entity designed to protect its shareholders and directors from liability.

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    Viewed 249 Times
  • 2. What's the difference between an LLC and a corporation?
     

    Call me! Seriously, the differences are numerous; here are a couple to get you started: LLCs have a more flexible tax structure, have fewer housekeeping requirements, but aren’t ideal for larger companies, especially those seeking outside investors. Corporations are, well, just read that last sentence but the opposite.

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    Viewed 249 Times
  • 3. What's better . . . an LLC or a Corporation?
     

    Aaah, if life were only that easy. Actually, sometimes it is. One rule of thumb -- is it a small business not providing professional services, with no plans for investors and modest gross receipts? That's a case where you might lean heavily toward an LLC. Investors on the horizon? Corporation. The analysis can get tortured for businesses that are larger or are growing. Real estate tends toward LLCs.

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    Viewed 262 Times
  • 4. How do I form a Corporation?
     

    Nice. Figuring if you click here you’re home free. In a way, yes. To form one, you file Articles of Incorporation with the governing corporate authority in your state. In California, where my practice is, that’s the Secretary of State. Articles should contain certain provisions that may or may not be obvious to you, and are not contained in most templates offered by the state or online corporate mills. Additionally, formation is the first of several steps to take to ensure that your corporation is protecting you.

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    Viewed 239 Times
  • 5. What are Articles of Incorporation?
     

    This is about as arcane as it gets . . . “Articles”. Be that as it may, we’re stuck with it as a word in corporate lingo. This is the document which provides the state, and therefore the public, with the initial information needed to bring the corporation into existence. It must follow certain state requirements minimally, and may also contain certain other provisions that may either be recommended generally, or may be required by certain investors. Sometimes this is referred to as the “corporate charter”.

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    Viewed 252 Times
  • 6. Will a corporation or LLC protect me from liability?
     

    That’s supposed to be the point of them, so I’m going to say . . . yes! However, you can become personally liable for your own negligence (or intentional bad acts). You may also become personally liable of the person suing you can prove that you didn’t follow corporate formalities, like holding meetings, maintaining minutes, or keeping enough working capital in the business’s accounts.

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    Viewed 245 Times
  • 7. If I'm the only member of my LLC, do I really have liability protection?
     

    Yes. Well, you have the same liability protection as a multi-member LLC. There will be some specific exceptions. For example, if you are personally negligent or you are responsible for your company's payroll tax obligations, then you'll be exposed to personal liability. But being a single-member LLC won't change that. There may be instances where being in a partnership may change an outcome in an insolvency situation and certain specific other circumstances.

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    Viewed 200 Times
  • 8. Is the liability protection for LLCs and corporations the same?
     

    Yes. There are some very case-specific nuances, especially when you get down to single-member LLCs, but unlikely anything that is going to effect you generally. Don’t obsess over this one unless you have plans to not pay taxes, for example.

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    Viewed 244 Times
  • 9. What is a "Certificate of Incorporation"?
     

    Some states use “Certificate of Incorporation” as an alternative to Articles of Incorporation; for example, New York and Delaware.

    More
    Viewed 255 Times
  • 10. What are Officers?
     

    Officers, in a corporate (and even LLC) setting are the individuals who perform the tasks of managing and operating the entity. In California, every corporation is required to have at least three officers: CEO, CFO, and Secretary. There can be more, but no less. LLCs don’t typically have officers, but they may at the discretion of its members.

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    Viewed 235 Times
  • 11. What's a director, and what's the difference between a director and an officer?
     

    Directors . . . direct! They set policy and guide the company with its business and direction. Directors are like the captains of ships; they know where the ship should go, and they tell the officers to make it happen.

    More
    Viewed 243 Times
  • 12. Can one person be all of the officers?
     

    In a word, yes. Is that always advisable? No. Is it typical in a very small single-shareholder corporation? Yes.

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    Viewed 238 Times
  • 13. What's an LLC manager?
     

    The term "manager" has a specific meaning with respect to an LLC. The manager in an LLC is somewhat akin to the director in a corporation. The confusing part is that it can also be akin to the CEO or other officers of a corporation as well. Typically, the manager, well, manages the affairs of the LLC. The manager is authorized to bind the LLC, subject to restrictions that they may be bound to by law or in the operating agreement. The manager may or may not also be responsible for the operations of the LLC, though in larger LLCs, those roles are typically spread out between several individuals. In what are member-managed LLCs, each of the members may act as a manager, binding the LLC. So be careful about how you file your LLC, as you may not want every member eligible to sign contracts, and if you do, then the bank or the landlord will be looking for everyone's signatures.

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    Viewed 239 Times
  • 14. What's a registered agent?
     

    That’s the short way to say “registered agent for service of process”, which, I realize, probably still doesn’t answer your question. This is the individual or business that is charged with receiving legal process, i.e., claims from third parties and government agencies against the company. This gives the public someone to serve with legal process, since entities aren’t individuals you can find at work or home.

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    Viewed 240 Times
  • 15. Can anyone own an S Corporation?
     

    You probably didn’t think to ask this until you saw it was a question. Answer: No. S Corporations are restricted with respect to their ownership, one of the key factors why they can’t always be used. For example, no more than 100 shareholders can own shares in an S Corp, no shareholder can be a non-resident alien, and unless certain filings and compliance rules are met, they generally can’t be owned by other entities, only individuals.

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    Viewed 243 Times
  • 16. Can anyone own an interest in an LLC?
     

    And therein lies a major difference between LLCs and S Corporations – because LLCs can be owned by practically anyone or anything, making them very useful for pass-through taxation, while being owned by other entities.

    More
    Viewed 231 Times
  • 17. What's a Tax ID number?
     

    I find that this is much more critical than some people think. A tax ID number is your corporation or LLC’s separate tax identity. Whether it’s opening a bank account, setting up payroll, or filing a tax return, this number is THE number for all purposes. Here’s how you can get one (good luck to you) or here's how you can get one (answered by me).

    More
    Viewed 282 Times
  • 18. How do I get a tax identification number?
     

    You can go to the IRS’s website, and go through their multi-page question and answer pages. Make sure you're ready with your SS-4, as the IRS may ask for that over the phone if it doesn’t like one of your answers. (PS, the IRS is not in the habit of liking.) Important note: you need some kind of tax identification to get a Tax ID Number. Usually that original identification comes in the form of an individual's Social Security Number (usually the person forming the entity if it's a small business). But foreign owners have a more difficult time doing this since they don't usually have Social Security Numbers; in that case, they need to apply for an individual tax ID number, and then use that number to get the Tax ID Number for the corporation or LLC.

    More
    Viewed 248 Times
  • 19. Do I need an attorney for this process?
     

    YES! Of course!!
    Actually, no. Though "need" is a funny word.
    An attorney is not required to incorporate an entity. But if you learn nothing else from bouncing around this website, it’s that there may be a great deal of things to consider, traps for the unwary, and housekeeping items that may make or break your liability protection. Consider yourself warned!

    More
    Viewed 246 Times
  • 20. What's an assignment?
     

    An assignment is a document used to transfer assets from one entity or owner to another. Click here to see if you need one.

    More
    Viewed 230 Times
  • 21. What's a capital contribution?
     

    In its most basic terms, this is the money (or sometimes the assets, like equipment) you put into your business. It differs from a loan in that it doesn’t accrue interest payable to you. If you put money into your corporation or LLC (or partnership), then the return of that money to you as you start to distribute money to you, is non-taxable.

    More
    Viewed 264 Times
  • 22. Do I have to make a capital contribution?
     

    No, a capital contribution isn't necessary. But typically you would, and should, make one. You would because there’s almost no way to start a business with zero invested in it. And you should because if your corporation is “under-capitalized”, then you could be exposing yourself and fellow shareholders or members to personal liability, making the formation of the entity a waste of time and money. And it takes more than $1.00 to protect yourself (but nice try).

    More
    Viewed 241 Times
  • 23. When is an S Corp election due?
     

    For a corporation to be an S Corporation, the paperwork to make that effective is due no more than two months and 15 days after the beginning of the tax year the election is to take effect (yes, I copied that from the IRS instructions). If you’re really ahead of the game, then anytime during a tax year preceding the year you want it to be in effect. For new corporations, the tax year typically begins on a day other than January 1, unless you formed on that date. So, for example, if your corporation was formed on July 8, then the S Corp election would be due 15 days after September 7, or September 22.

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    Viewed 234 Times
  • 24. Can I cause my corporation to be an S Corp at the end of the year, after I see how my year has been?
     

    You wish. But no. Congress treats this election as a go-forward business decision, not a look-back election. The good news is that it’s easy to revoke, or even “bust”, the election. But be careful about switching back and forth – as in, things don’t work that way.

    More
    Viewed 238 Times
  • 25. I'm causing my corporation to elect to be taxed as an S Corporation. Does my spouse have to sign?
     

    You’re going to get different answers, depending on the advisor you ask, and the state you’re in. Generally, though, best practice is yes, and sometimes required.

    PS - If you're keeping this a secret from your spouse, then an S Election is not your biggest problem.

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    Viewed 249 Times
  • 26. Do I need all of the shareholders' consent for the S Corp election?
     

    Yes. It’s really that simple. Here’s a link to the IRS page that’s chock full of info.

    PS - Spouses too.

    More
    Viewed 241 Times
  • 27. Is my business big enough to justify the additional overhead of a corporation or LLC?
     

    “Big” is a relative term. Size isn’t always the only, or even a significant, element to determining whether you should entity-ize your business. If you run a small business, but it’s a high-risk business, like, for example, a liquor store, then an LLC or corporation is probably a good idea, regardless of your revenue.

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    Viewed 233 Times
  • 28. I've heard that California has limitations on what type of business can be operated through an LLC. Is that true?
     

    True! California has placed a limit on what businesses can be operated out of an LLC. The general rule is no professionals, and though typically the rules point to any professional named in California’s Business and Professions Code, there are some exceptions. One exception is contractors; additionally, some “professions” that don’t require testing, experience, or certain skills may also be exempt.

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    Viewed 240 Times
  • 29. What does it mean to "file" a corporation?
     

    Actually, nothing. To bring a corporation into existence, you submit your Articles of Incorporation with the government agency responsible for processing that paperwork in your state. By submitting the Articles, or “Charter Documents”, and the act by the agency of approving same, you have formed a corporation. You can say “file”, if you want.

    More
    Viewed 234 Times
  • 30. Is there a lot of paperwork? Do I have to do it all?
     

    There’s some paperwork . . . corporations tend to have more paperwork, which is why some people might immediately gravitate to LLCs, or nothing at all. And, yes, if you want to maintain your status as a corporation, and maintain your limited liability, don’t cut corners on the paperwork. It’s important.

    More
    Viewed 257 Times
  • 31. I just put my business into a corporation/LLC. Do I have to file paperwork for that?
     

    If you have an existing business, then its assets and contracts should get transferred to your corporation. This can look like an assignment, or a bill of sale. There are tax considerations regarding contribution of the assets of your existing business. You may also need to notify third parties, such as vendors and landlords. A stitch in time, as they say. Paperwork is king.

    More
    Viewed 234 Times
  • 32. Is there more paperwork with an S Corporation than, say, with an LLC?
     

    The answer in most situations is going to be yes. One of the virtues of an LLC is its simplicity. Once you choose to form your business as a corporation (and then an S Corporation), or to have your LLC elect to be taxed as an S Corporation, costs for tax returns, payroll, corporate state compliance paperwork, and other accounting items get triggered. You’ll need to balance the benefits of an S Corporation against the ease of use that comes with an LLC.

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    Viewed 215 Times
  • 33. Will there be a background check for me to incorporate?
     

    No. You may get background checked as a vendor, even if you put your business in a corporation. But incorporating does not require any background checking.

    More
    Viewed 244 Times
  • 34. What is a fictitious business name?
     

    Also known as a DBA (doing business as), if your entity is using a name for its business that’s different from its entity name, then you are using a fictitious business name, and state law requires that you file a fictitious business name statement in the county you are operating out of that records the name of your business and the name of the entity using that name. It’s also a good idea to do file that even if you don’t want to, because it’s helpful evidence to prove the use of your name from a certain point in time, which helps you to defend or bring trademark infringement claims.

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    Viewed 238 Times
  • 35. Can I use my old bank account for my new corporation or LLC?
     

    That would be nice, but this is the beginning of you needing to think about why you formed the corporation to begin with: to make it separate from the sins of the past. So, no, new bank account, with a new tax ID number. Sorry.

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    Viewed 228 Times
  • 36. What are authorized shares?
     

    Authorized shares are the number of shares your corporation is authorized to issue. You do not have to issue all of your authorized shares, and frequently it can be a mistake to do so. Authorized shares do not vote, and do not participate in dividends.

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    Viewed 234 Times
  • 37. What is a board of directors?
     

    Directors are the individuals who direct or guide the corporation with respect its overall business model and, well, direction. The board sets policy and votes on major or extraordinary decisions. Shareholders elect directors, and directors elect officers. The “board” is the entirety of all of the directors.

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    Viewed 302 Times
  • 38. What are bylaws?
     

    Whether for a corporation or in any business or political setting, bylaws are the rules that govern the procedures of the particular entity. In a corporation, the bylaws is the set of rules which address, for example, when meetings will be held, and what the duties of the officers are. Though it’s a standard document for a corporation, some LLCs will also choose to have bylaws separate from their operating agreement. Some bylaws are considered “off the shelf”, but your business, like any other, is unique, and therefore it’s a document that should be reviewed and drafted carefully to suit your particular needs.

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    Viewed 239 Times
  • 39. What is an Operating Agreement?
     

    Novices to LLCs tend to think that this is the document governing the actual operations of the company. Not so. The operating agreement, also sometimes known as the LLC Agreement (or some variation), is the governing document for the LLC itself. It may be very short, defining merely who the members are and what their respective ownership percentages are. Added to that, there may be restrictions on the transfer of the ownership interest, as well as guidelines for meetings, consent rights, call rights, and so on. These are contracts that can become quite complex.

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    Viewed 233 Times
  • 40. Do I need an operating agreement for my LLC?
     

    Need? No. And if I were a litigation attorney who made money off of people’s mistakes, I’d say don’t have one and let the chips fall where they may -- better yet, let state law govern your rights and duties. But I’m in the business of preventative law. So, yes, you should have an operating agreement. Just by way of example, without one, and your partner dies, you’ll become partner’s with your dead partner’s surviving spouse -- think about that one for a minute. No way out of that without a written operating agreement providing for a buy-out.

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    Viewed 240 Times
  • 41. What does "capitalization" mean?
     

    Capitalization can mean a couple of things. At first it usually refers to the contributions of money or property that the owners (shareholders or members) have contributed to the business, their “capital contributions”. Later on, or as a result, or in anticipation of such contributions, it may refer to a capitalization chart or table, which will set out each owner and their percentage interest in the entity.

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    Viewed 239 Times
  • 42. What are "issued shares"?
     

    Good question. This concept often gets confused with “authorized shares”. Issued shares are those shares that the corporation has actually “issued”, i.e., transferred to a shareholder. This can be in the form of a certificate, and that can be typical in a small business. In larger businesses, the ownership of issued shares is usually a journal entry in the corporation’s books and records, or with the broker. The number of issues shares cannot exceed the number of authorized shares.

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    Viewed 239 Times
  • 43. What are directors?
     

    Directors are the individuals who make up the board of directors. Due to the responsibility these individuals have, it’s common for the business to obtain insurance to cover the directors (aka D&O insurance) for the decisions they make, even though the fact of the corporation is supposed to shield – sometimes things don’t go the way you expect . . . pesky lawyers!!

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    Viewed 229 Times
  • 44. What is a dividend?
     

    Hopefully something that you have plenty of! A dividend is the cash (or property) that is transferred from the corporation to its shareholders after all expenses are paid, including the corporation’s taxes. Only C Corporations pay “dividends”; S Corporations make “distributions”, since S Corporations themselves do not generally pay taxes. A dividend is not a deductible expense of the corporation.

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    Viewed 234 Times
  • 45. What does a CEO do?
     

    A CEO is the Chief Executive Officer. This is the person responsible for over-seeing all of the day-to-day activities of the corporation. Sometimes LLCs have CEOs. The CEO is the face of the company, and so larger businesses tend to hire a CEO that has appeal to the public to encourage investment in the business, or to attract new customers. The CEO, when it comes to extraordinary decisions, seeks and takes direction from the board of directors. The CEO can be, but need not be, a shareholder.

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    Viewed 244 Times
  • 46. What does a CFO do?
     

    The Chief Financial Officer, also sometimes known as the treasurer, handles the financial aspects of the corporation or LLC. In larger businesses, the CFO becomes an advisor to the CEO, conferring on best approaches for increasing business or investment. In a very small business, the CEO and CFO are frequently the same person, and there’s nothing wrong with that.

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    Viewed 246 Times
  • 47. What does a corporate secretary do?
     

    Corporate secretaries are the unsung heroes in the officer world. They are responsible for the grunt work of the corporation or LLC, making sure i’s are dotted, t’s crossed, taking corporate minutes, and frequently interacting with the business’s lawyer to make sure paperwork and corporate housekeeping are all in order. In a very small business, the corporate secretary is frequently the same person as the CFO and the CEO. In larger businesses, you’ll want to try to make the CEO and corporate secretary two different people, since there may be occasion when refinancing or issuing shares to a corporate investor will require that the secretary attest to the identity of the CEO, which gets awkward when it’s the same person. The position of Secretary is required under California law.

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    Viewed 242 Times
  • 48. What does a COO do?
     

    The position of Chief Operating Officer is not required under state law, but businesses that are growing, or intend to grow, will almost always have one. The COO is responsible for the day-to-day of the business, and usually reports to the CEO. And so I know I said that that’s the CEO’s job; in larger businesses, those responsibilities are handed over to the COO, so that the CEO has more time to develop new strategies to grow the business.

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    Viewed 232 Times
  • 49. What is an "annual meeting"?
     

    Corporations under most state laws, including California, require that the shareholders and the board of directors of a corporation hold an annual meeting. Some LLC statutes require it as well, though not in California. Those meetings are opportunities to vote on annual issues, like elections of officers and review of last year’s financials. In very small businesses, these meetings may be memorialized by consents . . . you don’t have to hold an actual meeting with yourself (unless that’s your thing and you’re looking for a “legit” reason to deduct a trip to Hawaii for a shareholder’s meeting – that won’t really work, by the way).

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    Viewed 243 Times
  • 50. What's a K-1?
     

    In very lay terms, a K-1 is the partnership equivalent of an employee’s W-2 or a contractor’s 1099. Because a partnership doesn’t generally pay taxes of its own, it issues a form to each of its partners, telling the partners what each of them needs to put on his/her/its own tax return. LLCs taxed as a partnership (the default for multiple-member LLCs) issue K-1s. For more on forming partnerships, here’s an article. Or, if you prefer to be entertained, here’s a video.

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    Viewed 256 Times
  • 51. What is an LLC "member"?
     

    Being a member in an LLC is similar to being a shareholder in a corporation, or simply being an owner in a business. The members of an LLC are its owners, and typically if there's more than one, they will sign an Operating Agreement which is a contract governing their rights and duties with respect to each other and the LLC.

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    Viewed 236 Times
  • 52. I want to add my boyfriend to my single-member LLC. Is that complicated?
     

    Well, if I was your mother, I’d say yes, that’s very complicated, and please just pay him for services rendered. But, as your lawyer, adding him is not that complicated. However, the result is that you’ve now turned what was essentially a sole proprietorship into a partnership, requiring tax returns, fiduciary duties, and ideally, a written partnership agreement for when you want to show your boyfriend the door.

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    Viewed 240 Times
  • 53. Can I name my corporation anything?
     

    Nope. There are some pretty strict rules on what you get to name your corporation. Most of those rules can be found in a document regularly updated by the Secretary of State (in California) -- click here to take a look. For example, a corporation need not have "Inc." at the end of its name, but an LLC needs to have "LLC", or "limited liability company", after its name. And here's a new one, even on me: The word "Holding" or "Holdings" is considered to be a "dropped" word in a corporate name, i.e., it's ignored for purposes of figuring out if your name matches one already taken. For example, Herzog Wonderful Legal, Inc. is the same as Herzog Wonderful Legal Holding, Inc.

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    Viewed 216 Times
  • 54. Is it easy to change my company's name once it's established?
     

    Hate to be a lawyer about this, but it depends. Typically there’s the name you formed your entity with, and then there’s the name you do business as, which may be two different things, and both require paperwork. In the case of the name you do business as, that may be expose you to trademark or service mark infringement.

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    Viewed 236 Times
  • 55. I want to convert my LLC into a corporation. Can I? How? Vice versa?
     

    Depending on what state your company is located in, this could be as simple as filing a single form with that state’s governing agency. In some states, this may be more complicated, but there’s always a way. Keep in mind, by converting the entity, you will likely have to get it a new Tax ID Number, since it’s now a different entity. If there’s a partnership agreement, or certain rights with respect to voting or capital return, be careful about property transferring all of that over. Consult with tax and legal counsel.

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    Viewed 240 Times
  • 56. What is a Statement of Information (California)?
     

    California, and many other states, require an annual or biannual report filing detailing the names and addresses of the directors and officers (or managers in the case of an LLC). It’s part of the social contract entities have with the public – liability protection in return for transparency. Not filing can lead eventually to suspension of the corporate or LLC charter, thereby exposing the entity’s owners to personal liability. In California, the first one is due within 90 days of filing the Articles of Incorporation or Articles of Organization.

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    Viewed 236 Times
  • 57. Can I be the CEO, CFO and Secretary of my corporation?
     

    Yes. It’s not always ideal, especially if you’re looking at growing or bringing in investors, but the law allows it.

    And please stop calling it "my corporation". The more you do that, the more you expose yourself to personal liability. Think of it as separate and apart from you, and the rest of the world will too.

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    Viewed 244 Times
  • 58. Does my corporation have to have more than one director?
     

    Not necessarily. In California, the default rule is one director per shareholder, and if there are more than 3 shareholders, then 3 minimum. You can always have more than you need.

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    Viewed 249 Times
  • 59. What's the bare minimum I need to operate as a corporation?
     

    In terms of capital (i.e., cash money), it depends on your business; one common rule of thumb is 3 months’ worth of cash to run the business. If you mean compliance, you’ll need annual minutes and, in California, an annual filing with the Secretary of State. You’ll also need to memorialize extraordinary transactions, like leases and financings, in your corporate records. Without minutes and/or consents, you could expose the shareholders personally to liability.

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    Viewed 235 Times
  • 60. What's the bare minimum I need to operate as an LLC?
     

    The answer to this is similar to the answer for the same question for corporations. However, with LLCs, unless the members require it in their operating agreement, there’s no requirement for meetings and consents, unless the written consents are required by a third party, like a bank. This is the reason some folks try to use LLCs instead of corporations.

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    Viewed 251 Times
  • 61. Do I need a separate bank account for my corporation or LLC?
     

    Remember, one point of the entity is to keep your business separate from your personal, thereby protecting the personal assets. So, the answer is going to be yes. As such, that will also involve obtaining a tax identification number.

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    Viewed 241 Times
  • 62. Do I have to pay directors and officers?
     

    No. But depending on the directors' background, level of experience, and the value they bring to your business, you may want to consider some kind of compensation or even equity. Not only are they worth it, but you’ll get a commitment from them that won’t otherwise exist if they’re just donating time and expertise. Specifically with respect to officers, there is an expectation of payment.

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    Viewed 244 Times
  • 63. What's the difference between a member in an LLC and a shareholder in a corporation?
     

    I’m proud of you for asking such a clever question. Makes me wish the answer was just as thoughtful. Alas, it’s not: there’s no difference. A shareholder in a corporation, and a member in an LLC, are both nomenclature for defining owner. In fact, LLCs are flexible enough such that they can be structured to look like corporations, so their owners may also end up being “shareholders”. All that said, members in LLCs and shareholders in corporations are governed by different statutes, so their respective rights may differ.

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    Viewed 240 Times
  • 64. What is "par value"?
     

    It used to mean more than it does now. California has dropped this as a concept, and where it’s still used, it’s for tax and fees purposes. Some states tax corporations based on capitalization, and they use par value to assess that tax. So you should not just “pick a number”. Some of the fees and taxes can be very expensive, so proceed cautiously. Delaware, for example, uses par value.

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    Viewed 235 Times
  • 65. Do shares in my corporation need to have a par value?
     

    You need to declare a par value only when the state in which your corporation has been filed requires it. Delaware requires it.

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    Viewed 244 Times
  • 1. What's the difference between an LLC and a corporation?
     

    Call me! Seriously, the differences are numerous; here are a couple to get you started: LLCs have a more flexible tax structure, have fewer housekeeping requirements, but aren’t ideal for larger companies, especially those seeking outside investors. Corporations are, well, just read that last sentence but the opposite.

    More
    Viewed 249 Times
  • 2. What's better . . . an LLC or a Corporation?
     

    Aaah, if life were only that easy. Actually, sometimes it is. One rule of thumb -- is it a small business not providing professional services, with no plans for investors and modest gross receipts? That's a case where you might lean heavily toward an LLC. Investors on the horizon? Corporation. The analysis can get tortured for businesses that are larger or are growing. Real estate tends toward LLCs.

    More
    Viewed 262 Times
  • 3. What is a C Corporation?
     

    A C Corporation is a Corporation that hasn’t elected under the Internal Revenue Code to be taxed as an S Corporation. The best way to describe it is to check out what an S Corporation is. Trust me; it’s not circular.

    More
    Viewed 258 Times
  • 4. Should I incorporate in Nevada?
     

    You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.

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    Viewed 248 Times
  • 5. Is the liability protection for LLCs and corporations the same?
     

    Yes. There are some very case-specific nuances, especially when you get down to single-member LLCs, but unlikely anything that is going to effect you generally. Don’t obsess over this one unless you have plans to not pay taxes, for example.

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    Viewed 244 Times
  • 6. I'm a professional. What's right for me?
     

    First things first: the question really is whether an entity is going to do you any good at all. From a liability perspective, keep in mind that anything you do is your personal problem; putting your medical practice into a corporation won’t shield you from your own malpractice. But it could, for example, shield you from your employee’s malpractice, or your file clerk’s sexual harassment claim against a fellow doctor. And it may also shield you from your partner’s malpractice. So there are upsides.

    Some states, like California (where I practice), restrict the use of certain entities by professionals. The term “professional” itself has some grey area. Typically, professionals required to have a certain education, training, and experience aren’t permitted to use an LLC for their business (in California). So lawyers, doctors, etc. will generally use a corporation, though certain professions, like lawyers, have other specific partnership entities available to them. Others, like real estate appraisers, are still permitted to use an LLC. There may also be tax reasons, as a professional, to put your business into an entity. There’s much to consider.

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    Viewed 234 Times
  • 7. Can anyone own an S Corporation?
     

    You probably didn’t think to ask this until you saw it was a question. Answer: No. S Corporations are restricted with respect to their ownership, one of the key factors why they can’t always be used. For example, no more than 100 shareholders can own shares in an S Corp, no shareholder can be a non-resident alien, and unless certain filings and compliance rules are met, they generally can’t be owned by other entities, only individuals.

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    Viewed 243 Times
  • 8. What's a Tax ID number?
     

    I find that this is much more critical than some people think. A tax ID number is your corporation or LLC’s separate tax identity. Whether it’s opening a bank account, setting up payroll, or filing a tax return, this number is THE number for all purposes. Here’s how you can get one (good luck to you) or here's how you can get one (answered by me).

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    Viewed 282 Times
  • 9. How do I get a tax identification number?
     

    You can go to the IRS’s website, and go through their multi-page question and answer pages. Make sure you're ready with your SS-4, as the IRS may ask for that over the phone if it doesn’t like one of your answers. (PS, the IRS is not in the habit of liking.) Important note: you need some kind of tax identification to get a Tax ID Number. Usually that original identification comes in the form of an individual's Social Security Number (usually the person forming the entity if it's a small business). But foreign owners have a more difficult time doing this since they don't usually have Social Security Numbers; in that case, they need to apply for an individual tax ID number, and then use that number to get the Tax ID Number for the corporation or LLC.

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    Viewed 248 Times
  • 10. What's an assignment?
     

    An assignment is a document used to transfer assets from one entity or owner to another. Click here to see if you need one.

    More
    Viewed 230 Times
  • 11. What's a capital contribution?
     

    In its most basic terms, this is the money (or sometimes the assets, like equipment) you put into your business. It differs from a loan in that it doesn’t accrue interest payable to you. If you put money into your corporation or LLC (or partnership), then the return of that money to you as you start to distribute money to you, is non-taxable.

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    Viewed 264 Times
  • 12. Do I have to make a capital contribution?
     

    No, a capital contribution isn't necessary. But typically you would, and should, make one. You would because there’s almost no way to start a business with zero invested in it. And you should because if your corporation is “under-capitalized”, then you could be exposing yourself and fellow shareholders or members to personal liability, making the formation of the entity a waste of time and money. And it takes more than $1.00 to protect yourself (but nice try).

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    Viewed 241 Times
  • 13. Can any corporation be an S Corporation?
     

    Any corporation can be an S Corporation, unless it doesn’t meet certain criteria. For example, an S Corporation cannot be owned by another corporation, with certain very narrow exceptions. And sometimes you don’t want your corporation to be an S Corporation, for example, when you are seeking VC investments.

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    Viewed 248 Times
  • 14. When is an S Corp election due?
     

    For a corporation to be an S Corporation, the paperwork to make that effective is due no more than two months and 15 days after the beginning of the tax year the election is to take effect (yes, I copied that from the IRS instructions). If you’re really ahead of the game, then anytime during a tax year preceding the year you want it to be in effect. For new corporations, the tax year typically begins on a day other than January 1, unless you formed on that date. So, for example, if your corporation was formed on July 8, then the S Corp election would be due 15 days after September 7, or September 22.

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    Viewed 234 Times
  • 15. Can I cause my corporation to be an S Corp at the end of the year, after I see how my year has been?
     

    You wish. But no. Congress treats this election as a go-forward business decision, not a look-back election. The good news is that it’s easy to revoke, or even “bust”, the election. But be careful about switching back and forth – as in, things don’t work that way.

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    Viewed 238 Times
  • 16. I'm causing my corporation to elect to be taxed as an S Corporation. Does my spouse have to sign?
     

    You’re going to get different answers, depending on the advisor you ask, and the state you’re in. Generally, though, best practice is yes, and sometimes required.

    PS - If you're keeping this a secret from your spouse, then an S Election is not your biggest problem.

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    Viewed 249 Times
  • 17. Do I need all of the shareholders' consent for the S Corp election?
     

    Yes. It’s really that simple. Here’s a link to the IRS page that’s chock full of info.

    PS - Spouses too.

    More
    Viewed 241 Times
  • 18. What are the advantages of a C Corporation versus a sole proprietorship?
     

    Short question . . . long answer. For the most part, the classic answer, which is also correct, is a C Corporation (or an S Corporation) provides limited liability for its owners and management. An S Corporation could provide additional tax benefits. On a less obvious level, having your business in a corporation may provide it with more “respect” in the business community, and may fend off nuisance suits.

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    Viewed 233 Times
  • 19. Will putting my business into a corporation or LLC help me save taxes?
     

    It can, but not always. It’s not often the case that a business will put their business into an entity solely to save on taxes, although S Corporations for small businesses are frequently and legitimately used for that purpose.

    More
    Viewed 237 Times
  • 20. I just put my business into a corporation/LLC. Do I have to file paperwork for that?
     

    If you have an existing business, then its assets and contracts should get transferred to your corporation. This can look like an assignment, or a bill of sale. There are tax considerations regarding contribution of the assets of your existing business. You may also need to notify third parties, such as vendors and landlords. A stitch in time, as they say. Paperwork is king.

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    Viewed 234 Times
  • 21. Is there more paperwork with an S Corporation than, say, with an LLC?
     

    The answer in most situations is going to be yes. One of the virtues of an LLC is its simplicity. Once you choose to form your business as a corporation (and then an S Corporation), or to have your LLC elect to be taxed as an S Corporation, costs for tax returns, payroll, corporate state compliance paperwork, and other accounting items get triggered. You’ll need to balance the benefits of an S Corporation against the ease of use that comes with an LLC.

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    Viewed 215 Times
  • 22. What is a dividend?
     

    Hopefully something that you have plenty of! A dividend is the cash (or property) that is transferred from the corporation to its shareholders after all expenses are paid, including the corporation’s taxes. Only C Corporations pay “dividends”; S Corporations make “distributions”, since S Corporations themselves do not generally pay taxes. A dividend is not a deductible expense of the corporation.

    More
    Viewed 234 Times
  • 23. What's a K-1?
     

    In very lay terms, a K-1 is the partnership equivalent of an employee’s W-2 or a contractor’s 1099. Because a partnership doesn’t generally pay taxes of its own, it issues a form to each of its partners, telling the partners what each of them needs to put on his/her/its own tax return. LLCs taxed as a partnership (the default for multiple-member LLCs) issue K-1s. For more on forming partnerships, here’s an article. Or, if you prefer to be entertained, here’s a video.

    More
    Viewed 256 Times
  • 24. I want to add my boyfriend to my single-member LLC. Is that complicated?
     

    Well, if I was your mother, I’d say yes, that’s very complicated, and please just pay him for services rendered. But, as your lawyer, adding him is not that complicated. However, the result is that you’ve now turned what was essentially a sole proprietorship into a partnership, requiring tax returns, fiduciary duties, and ideally, a written partnership agreement for when you want to show your boyfriend the door.

    More
    Viewed 240 Times
  • 25. I want to convert my LLC into a corporation. Can I? How? Vice versa?
     

    Depending on what state your company is located in, this could be as simple as filing a single form with that state’s governing agency. In some states, this may be more complicated, but there’s always a way. Keep in mind, by converting the entity, you will likely have to get it a new Tax ID Number, since it’s now a different entity. If there’s a partnership agreement, or certain rights with respect to voting or capital return, be careful about property transferring all of that over. Consult with tax and legal counsel.

    More
    Viewed 240 Times
  • 26. Are my expenses in setting up the corporation or LLC deductible?
     

    Yes. But depending on what stage the business is at, they may not be immediately deductible as an operating expense, but may need to be treated as a start-up expense. This can get complicated; you should consult a tax advisor.

    More
    Viewed 241 Times
  • 27. Do I need a separate bank account for my corporation or LLC?
     

    Remember, one point of the entity is to keep your business separate from your personal, thereby protecting the personal assets. So, the answer is going to be yes. As such, that will also involve obtaining a tax identification number.

    More
    Viewed 241 Times
  • 1. Do I need a corporation or LLC for my business?
     

    Congratulations! You just asked the best question (which is why it's also at the top of the FAQs). You know (or at least should know) your business best, and so that also means you know what liabilities you may face. Make a list. Call up your insurance broker (you have one, right?) and talk through what’s covered and then what isn’t. Are there things out of your control, such as employees? Those are some things to consider. You can read my post on this or watch the video on this topic. It’s very important that you not waste time and money on something you may not need.

    More
    Viewed 261 Times
  • 2. What's a Corporation?
     

    A corporation happens when “charter documents” are filed with the state, usually in a form either prescribed by the state or drafted by an attorney [ahem] and, once filed, creates a corporation. Corporations are a legal entity designed to protect its shareholders and directors from liability.

    More
    Viewed 249 Times
  • 3. What's an LLC?
     

    An LLC, or limited liability company, is a type of entity that protects its owners and mangers from liability, unless they personally do bad things. Like a corporation, an LLC happens when its Articles of Organization are filed with the state authority. In California, this is an online form. Keep in mind, there are other filings, and then ongoing responsibilities of those managers and members to continue shielding them from liability. And if there’s more than one Member, having a written operating agreement is highly advised. There may also be tax advantages to filing as an LLC.

    More
    Viewed 284 Times
  • 4. What's the difference between an LLC and a corporation?
     

    Call me! Seriously, the differences are numerous; here are a couple to get you started: LLCs have a more flexible tax structure, have fewer housekeeping requirements, but aren’t ideal for larger companies, especially those seeking outside investors. Corporations are, well, just read that last sentence but the opposite.

    More
    Viewed 249 Times
  • 5. What's better . . . an LLC or a Corporation?
     

    Aaah, if life were only that easy. Actually, sometimes it is. One rule of thumb -- is it a small business not providing professional services, with no plans for investors and modest gross receipts? That's a case where you might lean heavily toward an LLC. Investors on the horizon? Corporation. The analysis can get tortured for businesses that are larger or are growing. Real estate tends toward LLCs.

    More
    Viewed 262 Times
  • 6. What is a C Corporation?
     

    A C Corporation is a Corporation that hasn’t elected under the Internal Revenue Code to be taxed as an S Corporation. The best way to describe it is to check out what an S Corporation is. Trust me; it’s not circular.

    More
    Viewed 258 Times
  • 7. What is an S Corporation?
     

    An S Corporation is a corporation that has made an election (i.e., timely filed a form) to be taxed as a “pass-through”, i.e., the corporation itself is generally not taxed, but all of the taxes for profits and income, as well as for losses and expenses, are passed through to become the obligations of the individual shareholders. There are limitations to what corporations can be S Corporations. For example, S Corporations cannot be owned by more than 100 shareholders or by non-resident aliens. The “S” stands for . . . wait for it . . . small.

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    Viewed 251 Times
  • 8. How do I form a Corporation?
     

    Nice. Figuring if you click here you’re home free. In a way, yes. To form one, you file Articles of Incorporation with the governing corporate authority in your state. In California, where my practice is, that’s the Secretary of State. Articles should contain certain provisions that may or may not be obvious to you, and are not contained in most templates offered by the state or online corporate mills. Additionally, formation is the first of several steps to take to ensure that your corporation is protecting you.

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  • 9. Should I incorporate in Nevada?
     

    You could. But you’d want a good reason to. For example, if you live there and are planning on running your business from there, makes sense. If you’re running your business in California, then incorporating in Nevada may be due to more nefarious reasons. Some attorneys like to organize their clients in Nevada because reaching an LLC’s assets through its members in Nevada is not permitted. Still, if your business is based in California, you’ll still need to register the corporation or LLC in California (too) and pay taxes in California.

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  • 10. Should I incorporate in Delaware?
     

    You’ve read a lot about that, I’m sure. There can be reasons to form there. Here are two that come up a lot: One, your business is going to have big deal investors who like being in Delaware, sometimes for reason number . . . Two: Delaware law is corporate-centric, efficient, and can provide better protections for the corporation’s officers and directors. But like filing anywhere else, if the principal place of business is in another state, you’ll need to register your corporation (or LLC) in that state as well as a “foreign” corporation/LLC.

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  • 11. When does a corporation become a corporation? An LLC?
     

    I wish the answer to this were more existential, and thus more interesting. Alas, it’s as simple as this: when you duly file Articles of Incorporation, also know as charter documents, with the state official authorized to recognize and process such filings. In California, it’s the Secretary of State. In Delaware, it’s the Division of Corporations. Same for LLCs, except it tends to be called Articles of Organization.

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  • 12. What are Articles of Incorporation?
     

    This is about as arcane as it gets . . . “Articles”. Be that as it may, we’re stuck with it as a word in corporate lingo. This is the document which provides the state, and therefore the public, with the initial information needed to bring the corporation into existence. It must follow certain state requirements minimally, and may also contain certain other provisions that may either be recommended generally, or may be required by certain investors. Sometimes this is referred to as the “corporate charter”.

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  • 13. Will a corporation or LLC protect me from liability?
     

    That’s supposed to be the point of them, so I’m going to say . . . yes! However, you can become personally liable for your own negligence (or intentional bad acts). You may also become personally liable of the person suing you can prove that you didn’t follow corporate formalities, like holding meetings, maintaining minutes, or keeping enough working capital in the business’s accounts.

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  • 14. Is the liability protection for LLCs and corporations the same?
     

    Yes. There are some very case-specific nuances, especially when you get down to single-member LLCs, but unlikely anything that is going to effect you generally. Don’t obsess over this one unless you have plans to not pay taxes, for example.

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  • 15. What is a "Certificate of Incorporation"?
     

    Some states use “Certificate of Incorporation” as an alternative to Articles of Incorporation; for example, New York and Delaware.

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    Viewed 255 Times
  • 16. I'm a professional. What's right for me?
     

    First things first: the question really is whether an entity is going to do you any good at all. From a liability perspective, keep in mind that anything you do is your personal problem; putting your medical practice into a corporation won’t shield you from your own malpractice. But it could, for example, shield you from your employee’s malpractice, or your file clerk’s sexual harassment claim against a fellow doctor. And it may also shield you from your partner’s malpractice. So there are upsides.

    Some states, like California (where I practice), restrict the use of certain entities by professionals. The term “professional” itself has some grey area. Typically, professionals required to have a certain education, training, and experience aren’t permitted to use an LLC for their business (in California). So lawyers, doctors, etc. will generally use a corporation, though certain professions, like lawyers, have other specific partnership entities available to them. Others, like real estate appraisers, are still permitted to use an LLC. There may also be tax reasons, as a professional, to put your business into an entity. There’s much to consider.

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    Viewed 234 Times
  • 17. What/who is an incorporator?
     

    This is the person who signs and causes the filing of the Articles of Incorporation (or, in the case of an LLC the Articles of Organization) with the designated state authority. In a small business, this is usually the owner/shareholder/member. Some folks have their attorney sign the documents to help expedite the process, and that’s ok (but not necessary).

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    Viewed 241 Times
  • 18. What are Officers?
     

    Officers, in a corporate (and even LLC) setting are the individuals who perform the tasks of managing and operating the entity. In California, every corporation is required to have at least three officers: CEO, CFO, and Secretary. There can be more, but no less. LLCs don’t typically have officers, but they may at the discretion of its members.

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  • 19. What's a director, and what's the difference between a director and an officer?
     

    Directors . . . direct! They set policy and guide the company with its business and direction. Directors are like the captains of ships; they know where the ship should go, and they tell the officers to make it happen.

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  • 20. What's an LLC manager?
     

    The term "manager" has a specific meaning with respect to an LLC. The manager in an LLC is somewhat akin to the director in a corporation. The confusing part is that it can also be akin to the CEO or other officers of a corporation as well. Typically, the manager, well, manages the affairs of the LLC. The manager is authorized to bind the LLC, subject to restrictions that they may be bound to by law or in the operating agreement. The manager may or may not also be responsible for the operations of the LLC, though in larger LLCs, those roles are typically spread out between several individuals. In what are member-managed LLCs, each of the members may act as a manager, binding the LLC. So be careful about how you file your LLC, as you may not want every member eligible to sign contracts, and if you do, then the bank or the landlord will be looking for everyone's signatures.

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    Viewed 239 Times
  • 21. What's a registered agent?
     

    That’s the short way to say “registered agent for service of process”, which, I realize, probably still doesn’t answer your question. This is the individual or business that is charged with receiving legal process, i.e., claims from third parties and government agencies against the company. This gives the public someone to serve with legal process, since entities aren’t individuals you can find at work or home.

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    Viewed 240 Times
  • 22. Can anyone own an S Corporation?
     

    You probably didn’t think to ask this until you saw it was a question. Answer: No. S Corporations are restricted with respect to their ownership, one of the key factors why they can’t always be used. For example, no more than 100 shareholders can own shares in an S Corp, no shareholder can be a non-resident alien, and unless certain filings and compliance rules are met, they generally can’t be owned by other entities, only individuals.

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    Viewed 243 Times
  • 23. When I form my corporation or LLC, is that a license?
     

    No, but thanks for asking a weird question. You’re likely getting confused with some industries, like talent management, that may require you to obtain a license from a particular state agency. The formation of the entity doesn’t trigger automatic licensure, nor does it automatically require you to get a license for your business. Licensure for your business is separate and apart from forming an entity. And, in some instances, if you are required to obtain a license, that may dictate the kind of entity your form.

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    Viewed 235 Times
  • 24. What's a Tax ID number?
     

    I find that this is much more critical than some people think. A tax ID number is your corporation or LLC’s separate tax identity. Whether it’s opening a bank account, setting up payroll, or filing a tax return, this number is THE number for all purposes. Here’s how you can get one (good luck to you) or here's how you can get one (answered by me).

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    Viewed 282 Times
  • 25. How do I get a tax identification number?
     

    You can go to the IRS’s website, and go through their multi-page question and answer pages. Make sure you're ready with your SS-4, as the IRS may ask for that over the phone if it doesn’t like one of your answers. (PS, the IRS is not in the habit of liking.) Important note: you need some kind of tax identification to get a Tax ID Number. Usually that original identification comes in the form of an individual's Social Security Number (usually the person forming the entity if it's a small business). But foreign owners have a more difficult time doing this since they don't usually have Social Security Numbers; in that case, they need to apply for an individual tax ID number, and then use that number to get the Tax ID Number for the corporation or LLC.

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  • 26. Do I need an attorney for this process?
     

    YES! Of course!!
    Actually, no. Though "need" is a funny word.
    An attorney is not required to incorporate an entity. But if you learn nothing else from bouncing around this website, it’s that there may be a great deal of things to consider, traps for the unwary, and housekeeping items that may make or break your liability protection. Consider yourself warned!

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  • 27. What's an assignment?
     

    An assignment is a document used to transfer assets from one entity or owner to another. Click here to see if you need one.

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    Viewed 230 Times
  • 28. What's a capital contribution?
     

    In its most basic terms, this is the money (or sometimes the assets, like equipment) you put into your business. It differs from a loan in that it doesn’t accrue interest payable to you. If you put money into your corporation or LLC (or partnership), then the return of that money to you as you start to distribute money to you, is non-taxable.

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    Viewed 264 Times
  • 29. Do I have to make a capital contribution?
     

    No, a capital contribution isn't necessary. But typically you would, and should, make one. You would because there’s almost no way to start a business with zero invested in it. And you should because if your corporation is “under-capitalized”, then you could be exposing yourself and fellow shareholders or members to personal liability, making the formation of the entity a waste of time and money. And it takes more than $1.00 to protect yourself (but nice try).

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  • 30. When is an S Corp election due?
     

    For a corporation to be an S Corporation, the paperwork to make that effective is due no more than two months and 15 days after the beginning of the tax year the election is to take effect (yes, I copied that from the IRS instructions). If you’re really ahead of the game, then anytime during a tax year preceding the year you want it to be in effect. For new corporations, the tax year typically begins on a day other than January 1, unless you formed on that date. So, for example, if your corporation was formed on July 8, then the S Corp election would be due 15 days after September 7, or September 22.

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  • 31. Can I cause my corporation to be an S Corp at the end of the year, after I see how my year has been?
     

    You wish. But no. Congress treats this election as a go-forward business decision, not a look-back election. The good news is that it’s easy to revoke, or even “bust”, the election. But be careful about switching back and forth – as in, things don’t work that way.

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  • 32. I'm causing my corporation to elect to be taxed as an S Corporation. Does my spouse have to sign?
     

    You’re going to get different answers, depending on the advisor you ask, and the state you’re in. Generally, though, best practice is yes, and sometimes required.

    PS - If you're keeping this a secret from your spouse, then an S Election is not your biggest problem.

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  • 33. Do I need all of the shareholders' consent for the S Corp election?
     

    Yes. It’s really that simple. Here’s a link to the IRS page that’s chock full of info.

    PS - Spouses too.

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  • 34. Is my business big enough to justify the additional overhead of a corporation or LLC?
     

    “Big” is a relative term. Size isn’t always the only, or even a significant, element to determining whether you should entity-ize your business. If you run a small business, but it’s a high-risk business, like, for example, a liquor store, then an LLC or corporation is probably a good idea, regardless of your revenue.

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  • 35. What are the advantages of a C Corporation versus a sole proprietorship?
     

    Short question . . . long answer. For the most part, the classic answer, which is also correct, is a C Corporation (or an S Corporation) provides limited liability for its owners and management. An S Corporation could provide additional tax benefits. On a less obvious level, having your business in a corporation may provide it with more “respect” in the business community, and may fend off nuisance suits.

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  • 36. I've heard that California has limitations on what type of business can be operated through an LLC. Is that true?
     

    True! California has placed a limit on what businesses can be operated out of an LLC. The general rule is no professionals, and though typically the rules point to any professional named in California’s Business and Professions Code, there are some exceptions. One exception is contractors; additionally, some “professions” that don’t require testing, experience, or certain skills may also be exempt.

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  • 37. How long does it take to form a corporation or LLC, in California? What about other states?
     

    California varies – sometimes it’s a matter of days, but sometimes, especially at the beginning of the year, it can take a couple weeks. You can always submit your documents on a rush (24 hours or even same day) basis. Other states? It really depends. Delaware’s quick.

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  • 38. What does it mean to "file" a corporation?
     

    Actually, nothing. To bring a corporation into existence, you submit your Articles of Incorporation with the government agency responsible for processing that paperwork in your state. By submitting the Articles, or “Charter Documents”, and the act by the agency of approving same, you have formed a corporation. You can say “file”, if you want.

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  • 39. Is there a lot of paperwork? Do I have to do it all?
     

    There’s some paperwork . . . corporations tend to have more paperwork, which is why some people might immediately gravitate to LLCs, or nothing at all. And, yes, if you want to maintain your status as a corporation, and maintain your limited liability, don’t cut corners on the paperwork. It’s important.

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    Viewed 257 Times
  • 40. I just put my business into a corporation/LLC. Do I have to file paperwork for that?
     

    If you have an existing business, then its assets and contracts should get transferred to your corporation. This can look like an assignment, or a bill of sale. There are tax considerations regarding contribution of the assets of your existing business. You may also need to notify third parties, such as vendors and landlords. A stitch in time, as they say. Paperwork is king.

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  • 41. Is there more paperwork with an S Corporation than, say, with an LLC?
     

    The answer in most situations is going to be yes. One of the virtues of an LLC is its simplicity. Once you choose to form your business as a corporation (and then an S Corporation), or to have your LLC elect to be taxed as an S Corporation, costs for tax returns, payroll, corporate state compliance paperwork, and other accounting items get triggered. You’ll need to balance the benefits of an S Corporation against the ease of use that comes with an LLC.

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    Viewed 215 Times
  • 42. Will there be a background check for me to incorporate?
     

    No. You may get background checked as a vendor, even if you put your business in a corporation. But incorporating does not require any background checking.

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    Viewed 244 Times
  • 43. What is a fictitious business name?
     

    Also known as a DBA (doing business as), if your entity is using a name for its business that’s different from its entity name, then you are using a fictitious business name, and state law requires that you file a fictitious business name statement in the county you are operating out of that records the name of your business and the name of the entity using that name. It’s also a good idea to do file that even if you don’t want to, because it’s helpful evidence to prove the use of your name from a certain point in time, which helps you to defend or bring trademark infringement claims.

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    Viewed 238 Times
  • 44. Can I use my old bank account for my new corporation or LLC?
     

    That would be nice, but this is the beginning of you needing to think about why you formed the corporation to begin with: to make it separate from the sins of the past. So, no, new bank account, with a new tax ID number. Sorry.

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    Viewed 228 Times
  • 45. What are authorized shares?
     

    Authorized shares are the number of shares your corporation is authorized to issue. You do not have to issue all of your authorized shares, and frequently it can be a mistake to do so. Authorized shares do not vote, and do not participate in dividends.

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  • 46. What is a board of directors?
     

    Directors are the individuals who direct or guide the corporation with respect its overall business model and, well, direction. The board sets policy and votes on major or extraordinary decisions. Shareholders elect directors, and directors elect officers. The “board” is the entirety of all of the directors.

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    Viewed 302 Times
  • 47. What are bylaws?
     

    Whether for a corporation or in any business or political setting, bylaws are the rules that govern the procedures of the particular entity. In a corporation, the bylaws is the set of rules which address, for example, when meetings will be held, and what the duties of the officers are. Though it’s a standard document for a corporation, some LLCs will also choose to have bylaws separate from their operating agreement. Some bylaws are considered “off the shelf”, but your business, like any other, is unique, and therefore it’s a document that should be reviewed and drafted carefully to suit your particular needs.

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  • 48. Do I need an operating agreement for my LLC?
     

    Need? No. And if I were a litigation attorney who made money off of people’s mistakes, I’d say don’t have one and let the chips fall where they may -- better yet, let state law govern your rights and duties. But I’m in the business of preventative law. So, yes, you should have an operating agreement. Just by way of example, without one, and your partner dies, you’ll become partner’s with your dead partner’s surviving spouse -- think about that one for a minute. No way out of that without a written operating agreement providing for a buy-out.

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  • 49. What does "capitalization" mean?
     

    Capitalization can mean a couple of things. At first it usually refers to the contributions of money or property that the owners (shareholders or members) have contributed to the business, their “capital contributions”. Later on, or as a result, or in anticipation of such contributions, it may refer to a capitalization chart or table, which will set out each owner and their percentage interest in the entity.

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  • 50. What are directors?
     

    Directors are the individuals who make up the board of directors. Due to the responsibility these individuals have, it’s common for the business to obtain insurance to cover the directors (aka D&O insurance) for the decisions they make, even though the fact of the corporation is supposed to shield – sometimes things don’t go the way you expect . . . pesky lawyers!!

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    Viewed 229 Times
  • 51. What is a dividend?
     

    Hopefully something that you have plenty of! A dividend is the cash (or property) that is transferred from the corporation to its shareholders after all expenses are paid, including the corporation’s taxes. Only C Corporations pay “dividends”; S Corporations make “distributions”, since S Corporations themselves do not generally pay taxes. A dividend is not a deductible expense of the corporation.

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  • 52. What does a CEO do?
     

    A CEO is the Chief Executive Officer. This is the person responsible for over-seeing all of the day-to-day activities of the corporation. Sometimes LLCs have CEOs. The CEO is the face of the company, and so larger businesses tend to hire a CEO that has appeal to the public to encourage investment in the business, or to attract new customers. The CEO, when it comes to extraordinary decisions, seeks and takes direction from the board of directors. The CEO can be, but need not be, a shareholder.

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  • 53. What does a CFO do?
     

    The Chief Financial Officer, also sometimes known as the treasurer, handles the financial aspects of the corporation or LLC. In larger businesses, the CFO becomes an advisor to the CEO, conferring on best approaches for increasing business or investment. In a very small business, the CEO and CFO are frequently the same person, and there’s nothing wrong with that.

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  • 54. What does a corporate secretary do?
     

    Corporate secretaries are the unsung heroes in the officer world. They are responsible for the grunt work of the corporation or LLC, making sure i’s are dotted, t’s crossed, taking corporate minutes, and frequently interacting with the business’s lawyer to make sure paperwork and corporate housekeeping are all in order. In a very small business, the corporate secretary is frequently the same person as the CFO and the CEO. In larger businesses, you’ll want to try to make the CEO and corporate secretary two different people, since there may be occasion when refinancing or issuing shares to a corporate investor will require that the secretary attest to the identity of the CEO, which gets awkward when it’s the same person. The position of Secretary is required under California law.

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  • 55. What is an "annual meeting"?
     

    Corporations under most state laws, including California, require that the shareholders and the board of directors of a corporation hold an annual meeting. Some LLC statutes require it as well, though not in California. Those meetings are opportunities to vote on annual issues, like elections of officers and review of last year’s financials. In very small businesses, these meetings may be memorialized by consents . . . you don’t have to hold an actual meeting with yourself (unless that’s your thing and you’re looking for a “legit” reason to deduct a trip to Hawaii for a shareholder’s meeting – that won’t really work, by the way).

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  • 56. What's a K-1?
     

    In very lay terms, a K-1 is the partnership equivalent of an employee’s W-2 or a contractor’s 1099. Because a partnership doesn’t generally pay taxes of its own, it issues a form to each of its partners, telling the partners what each of them needs to put on his/her/its own tax return. LLCs taxed as a partnership (the default for multiple-member LLCs) issue K-1s. For more on forming partnerships, here’s an article. Or, if you prefer to be entertained, here’s a video.

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    Viewed 256 Times
  • 57. I want to add my boyfriend to my single-member LLC. Is that complicated?
     

    Well, if I was your mother, I’d say yes, that’s very complicated, and please just pay him for services rendered. But, as your lawyer, adding him is not that complicated. However, the result is that you’ve now turned what was essentially a sole proprietorship into a partnership, requiring tax returns, fiduciary duties, and ideally, a written partnership agreement for when you want to show your boyfriend the door.

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    Viewed 240 Times
  • 58. Can I name my corporation anything?
     

    Nope. There are some pretty strict rules on what you get to name your corporation. Most of those rules can be found in a document regularly updated by the Secretary of State (in California) -- click here to take a look. For example, a corporation need not have "Inc." at the end of its name, but an LLC needs to have "LLC", or "limited liability company", after its name. And here's a new one, even on me: The word "Holding" or "Holdings" is considered to be a "dropped" word in a corporate name, i.e., it's ignored for purposes of figuring out if your name matches one already taken. For example, Herzog Wonderful Legal, Inc. is the same as Herzog Wonderful Legal Holding, Inc.

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    Viewed 216 Times
  • 59. Is it easy to change my company's name once it's established?
     

    Hate to be a lawyer about this, but it depends. Typically there’s the name you formed your entity with, and then there’s the name you do business as, which may be two different things, and both require paperwork. In the case of the name you do business as, that may be expose you to trademark or service mark infringement.

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    Viewed 236 Times
  • 60. I want to convert my LLC into a corporation. Can I? How? Vice versa?
     

    Depending on what state your company is located in, this could be as simple as filing a single form with that state’s governing agency. In some states, this may be more complicated, but there’s always a way. Keep in mind, by converting the entity, you will likely have to get it a new Tax ID Number, since it’s now a different entity. If there’s a partnership agreement, or certain rights with respect to voting or capital return, be careful about property transferring all of that over. Consult with tax and legal counsel.

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    Viewed 240 Times
  • 61. What is a Statement of Information (California)?
     

    California, and many other states, require an annual or biannual report filing detailing the names and addresses of the directors and officers (or managers in the case of an LLC). It’s part of the social contract entities have with the public – liability protection in return for transparency. Not filing can lead eventually to suspension of the corporate or LLC charter, thereby exposing the entity’s owners to personal liability. In California, the first one is due within 90 days of filing the Articles of Incorporation or Articles of Organization.

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    Viewed 236 Times
  • 62. Can I be the CEO, CFO and Secretary of my corporation?
     

    Yes. It’s not always ideal, especially if you’re looking at growing or bringing in investors, but the law allows it.

    And please stop calling it "my corporation". The more you do that, the more you expose yourself to personal liability. Think of it as separate and apart from you, and the rest of the world will too.

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    Viewed 244 Times
  • 63. Are my expenses in setting up the corporation or LLC deductible?
     

    Yes. But depending on what stage the business is at, they may not be immediately deductible as an operating expense, but may need to be treated as a start-up expense. This can get complicated; you should consult a tax advisor.

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    Viewed 241 Times
  • 64. Do I need a separate bank account for my corporation or LLC?
     

    Remember, one point of the entity is to keep your business separate from your personal, thereby protecting the personal assets. So, the answer is going to be yes. As such, that will also involve obtaining a tax identification number.

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  • 65. Do I have to pay directors and officers?
     

    No. But depending on the directors' background, level of experience, and the value they bring to your business, you may want to consider some kind of compensation or even equity. Not only are they worth it, but you’ll get a commitment from them that won’t otherwise exist if they’re just donating time and expertise. Specifically with respect to officers, there is an expectation of payment.

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  • 66. What's the difference between a member in an LLC and a shareholder in a corporation?
     

    I’m proud of you for asking such a clever question. Makes me wish the answer was just as thoughtful. Alas, it’s not: there’s no difference. A shareholder in a corporation, and a member in an LLC, are both nomenclature for defining owner. In fact, LLCs are flexible enough such that they can be structured to look like corporations, so their owners may also end up being “shareholders”. All that said, members in LLCs and shareholders in corporations are governed by different statutes, so their respective rights may differ.

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