What is a 'S' corporation?
A “S” corporation is a corporation that elects to be taxed under Subchapter S of the Internal Revenue Code by filing Form 2553 with the IRS. Once this filing is properly complete, the corporation is taxed as a “pass-through” entity. This means that the “S” corporation almost never pays taxes itself. Instead, it files Form 1120S with the IRS and issues the shareholders K-1 Forms. The K-1 forms show the shareholders’ portion of the net income of the corporation. So, if the shareholder owns ten percent (10%) of the outstanding capital stock of the company and the corporation’s net income in $400,000, the K-1 for that shareholder will show $40,000 of income. This illustrates how the income of the corporation passes through to the shareholders. A downside to the “S” corporation is that the shareholder has to include his K-1 income on his income tax return even if he received no dividend (cash distribution) from the corporation. This means that the shareholder may have to pay income tax on income he has not actually received.
WHAT IS A SHAREHOLDERS AGREEMENT AND WHY SHOULD MY CORPORATION HAVE ONE?
A shareholders agreement is a contract between the shareholders of a corporation where they agree on one or more of the following: (i) determine how to handle future transfers of the stock of the corporation by a shareholder and issuances of said stock by the corporation; (ii) arrange for the purchase of stock when a shareholders becomes disabled or dies; (iii) determine how the directors of the corporation will be elected; (iv) compensation of shareholder-employees; (iv) when the corporation will distribute dividends; (v) issues relating to the management of the corporation, such as borrowing, budgets, office and facility location, business name, type, etc.
Shareholders Agreements are key for small closely held businesses where the shareholders are usually active in the day-to-day affairs of the business. Since the business is dependent on the shareholders to work for the business, it is important to deal with the points listed above especially in regard to the death of a shareholder and shareholder disputes.
WHAT IS A LIMITED LIABILITY COMPANY (LLC)?
A LLC is neither a corporation nor is it a partnership or sole proprietorship; it is a unique form of legal entity. The limited liability company (LLC) is a relatively new type of organization through which one or more individuals can join together and conduct business. An LLC is created pursuant to state law by completing a filing with the Secretary of State.
A LLC blends certain characteristics of a corporation with certain of those of a partnership. A LLC affords limited liability to all of its owners, known as “members,” mirroring the protections provided to a corporation’s shareholders, and permits “flow through” taxation consistent with the taxation of partnerships under the Internal Revenue Code of 1986, as amended (the “Code”). Federal income taxation under Sub-chapter K of the Code provides members of a LLC with a greater amount of flexibility than is available to shareholders of a corporation electing to be taxed under Sub-Chapter S of the Code. In addition, a LLC provides its members with ease of operation and flexibility in ownership which the shareholders of a small business corporation lack. The LLC has quickly gained popularity among entrepreneurs, attorneys, accountants and venture capitalists. Despite the benefits offered by forming an LLC, there are certain situations that will require a person starting his or her own business to elect to operate a venture as a corporation or limited partnership.
what is a corporation?
A corporation is legal entity created pursuant to state law by filing incorporating documents with the Secretary of State. One or more classes of stock are authorized under the incorporating documents and shares of that stock are issued to one or more shareholders. Corporations can be formed by one person and all owners can participate in management without jeopardizing their liability protections. The shareholders adopt corporate by-laws and elect a board of directors.
The board of directors then elects a president, a treasurer and a secretary; they may also elect one or more vice presidents and any other officers they deem necessary and in the best interests of the corporation. The officers of the corporation under the direction of the board of directors manage the daily affairs of the corporation and its operation.
The statutes governing corporate existence require that regular shareholder and board of director meetings be held and that minutes of these meetings be documented and maintained with the books and records of the corporation. All major corporate action must be approved in formal written resolutions. Shareholders of a corporation are shielded from personal liability for the debts and obligations of the corporation; however, non-compliance with the statutorily mandated requirements of corporate operation can relieve shareholders of their limited liability protections and leave shareholders vulnerable to personal liability for corporate debts and obligations.
The Internal Revenue Service (the “IRS”) treats a corporation as a separate taxpaying entity and corporations must pay an entity level tax on income. In addition, shareholders of a corporation pay income tax on distributions (made from after-tax dollars) they receive from corporations. This is often referred to as “double taxation.” This two-tiered tax regime can be avoided by filing a “Subchapter S” election with the IRS.
when does a business need a buy-sell agreement?
Every co-owned business should have a buy-sell, or buyout, agreement in place at the time of the formation of the corporation. A buy-sell, or buyout, agreement protects the remaining business owners when a co-owner wants to leave the company in addition to protecting the owner who is leaving. If a co-owner wants out of the business, wants to retire, want to sell his shares to someone else, goes through a divorce, or passes away, a buyout contract acts as a predetermined arrangement to protect everyone’s interests, setting the price and the terms of a buyout. Every day that value is added to a business without a plan for future transition of ownership increases the shareholders’ financial risk. Often the buy-sell arrangement is incorporated into a shareholders agreement which deals with the buy-sell arrangement in addition to other major concerns in regard to the ownership of a closely held corporation. A buy-sell agreement is sometimes called a buy-sell agreement.
Do I need a federal employer identification number (EIN)?
In short, the answer is yes. The number is the unique number used to identify your business. You’ll need it when registering your business with state and federal agencies. You must have a EIN if you sell goods or have employees. Occasionally, some sole proprietors choose to use their social security number in lieu of an EIN; however, in today’s world where identity theft is common, it is much safer to protect your social security number and use an EIN, even if you are a sole proprietor.
what is the best way to value a company when a owner is being bought out of the ongoing concern?
You can engage a professional appraiser or use a valuation formula to determine the price using financials from one or more years of the business’ operation. Valuing the business at the time of a sale is messy because at that time the remaining owners and the departing owner typically seize on different valuation formulas which quite often produce radically different results. The departing shareholder will want to maximize the value of his shares to receive greater compensation in a sale, while the remaining shareholders will want to depress the value of the shares at the time of the sale so that they don’t have to make such a large payment out-of-pocket to purchase the departing shareholder’s shares. For this reason, it is imperative for the shareholders to enter into a shareholders or buy-sell agreement at the time they go into business together. This provides the shareholders the opportunity to discuss and agree to a fair valuation method when each shareholder is on even footing. The fact that a fair valuation method was agreed to in advance goes a long way to avoiding conflict when the time comes for a shareholder to leave the business.
What are the types of negotiable instruments?
A negotiable instrument is an unconditioned, signed writing that represents money that is to be transferred to another. Traditionally, these instruments include checks, certificates of deposit, promissory notes and certain other instruments. Negotiable instruments are governed mainly by Article 3 of the Uniform Commercial Code as adopted by the state possessing jurisdiction over said negotiable instrument.
is a llc a better choice than a general partnership or limited partnership?
A general partnership is created when two or more people agree (even verbally) to go into business together. The downside to operating as a general partnership is that each partner is fully liable for the acts and misdeeds of his or her partners as well as his own. The general partnership provides no limited liability protections to its partners. For this reason, it is often not advisable to operate a business as a general partnership.
A limited partnership is created by completing a filing with the Secretary of State. The limited partners in a limited partnership receive limited liability protection and only their investment in the entity is at risk. However, the general partner who is charged with operating the business has unlimited liability for the debts and obligations of the limited partnership. In addition, if the limited partners become involved in the management and operation of the business of the limited partnership, they lose limited liability protection. The LLC provides much greater limited liability protection to its owners. Certain venture funds continue to operate as limited partnerships as certain countries (such as Canada) have traditionally taxed a LLC as a corporation, relieving the LLC of its tax advantages. These venture funds typically choose to have a LLC serve as the general partner of the limited partnership
what is a secured transaction?
Most lenders require a security interest before they will extend a loan. Therefore, a secured transaction occurs when a borrower grants a collateral property interest to secure a loan. In the event the borrower defaults on the loan, the lender may take possession of the specified property.
HOW MUCH DOES IT COST TO ORGANIZE AND MAINTAIN A CORPORATION?
The cost of filing the proper documentation with the Secretary of State differs from jurisdiction to jurisdiction and depends on the number of shares authorized for issuance to shareholders. There is an additional fee on an annual basis to maintain the existence of the corporation under state corporate law. There is also the attorney’s fee for preparation and filing of the formation document. Much of the cost involved in creating a corporation is incurred in the preparation of by-laws, shareholder and board of director resolutions, and agreements among the shareholders. Standard documents can be prepared in just a few hours, while highly complex shareholder agreements can witness over forty hours of attorneys’ time prior to execution.
what body of law governs a contract for the sale of goods?
A contract for the sale of goods is governed mainly by state law. Most states have adopted Article 2 of the Uniform Commercial Code (UCC) as part of their state commercial law. Article 2 provides rules for all phases of a sales contract including formation, modification, performance and available remedies in the case of a breach.
what body of law governs a lease of goods?
A contract for the lease of goods is also primarily regulated by state law. However, most states have adopted Article 2A of the Uniform Commercial Code (UCC).
what is a personal guaranty?
A personal guaranty is a promise made by an entrepreneur to personally repay company debt in the event of a default of the loan by the business. Personal guaranties are a way for lenders protect themselves against the failures of (and misconduct by) business owners. A personal guaranty has a serious downside. Even if the business owner is careful in paying his business debts, circumstances beyond his control can still prevent a business from turning a profit and therefore from keeping current with loan payments. The lender turns to the guarantor to make the payment on behalf of the company. In the event the entrepreneur cannot make the payment from his personal funds, the lender will begin to seize the personal debts of the entrepreneur to satisfy the obligations of the business. If a lender sees that a business is growing in size in revenue and/or it maintains considerable capital in the bank for operations, the lender may waiver or release an entrepreneur’s personal guaranty.
what is a 'DBA'?
DBA is an acronym for “Doing Business As.” A DBA is also referred to as a fictitious business name, trade name or assumed name. DBA registration is required if your business operates under a name other than its legal name. A sole proprietor operating a business under a name other than his legal name must file a DBA registration with the appropriate governmental authority. A corporation or other business entity must also file a DBA registration if it conducts business under a name other than the legal name on its organizational documents filed with the Secretary of State. For example, if John Smith operates a sole proprietorship developing under the name JSoftware Development, Mr. Smith must complete a DBA registration. Similarly, if John Smith forms a corporation named John Smith Technologies, Inc. but operates the business of such corporation as JSoftware Development, the corporation must also complete a DBA filing. In Massachusetts, DBA (or fictitious business name) filings are completed at the municipal level at the local city or town hall where the individual or entity intends to conduct business.
what is a registered agent?
A registered agent, also known as a resident agent or statutory agent, in United States business law, is a individual or entity designated in the organization’s state filings (certificate of organization, annual report, etc.) to receive service of process when a business entity such as a corporation, limited partnership or LLC is a party in a legal action such as a law suit or summons. The registered agent’s address may also be the place to which the Secretary of State sends the paperwork for completing and filing the organization’s annual reports or franchise taxes. The registered agent for a business entity may be an individual employee of the company who is generally available at the registered office during normal business hours. More often, a third party such as the organization’s lawyer or other third party service provider serves as registered agent so as to avoid the surprise of service of process at the organization’s place of business. This is especially common when a organization is a small business and the owner-operators work from a home office.