An “S” Corporation” is a regular corporation that has between 1 and 100 shareholders and that passes-through net income or losses to shareholders under in accordance with Internal Revenue Code, Chapter 1, Subchapter S. Corporations must meet specific eligibility criteria, and they must notify the IRS of their choice to be taxed as an S Corporation within a certain period of time.

A regular corporation, called a “C” Corporation, as described above, is taxed as a separate business entity. Corporations have their own tax form (1120) and their own tax rates (C Corp tax rates). Corporations may choose to retain their profits and earnings as part of their operating capital, or they may choose to distribute some or all of their profits and earnings as dividends paid to shareholders. Dividends paid to shareholders are essentially taxed twice. They are taxed once at the corporate level (on the corporation’s Form 1120), and again at the individual level (on Form 1040).

Instead, an S Corporation passes-through profit (or net losses) to shareholders. The business profits are taxed at individual tax rates on each shareholder’s Form 1040. The pass-through (sometimes called flow-through) nature of the income means that the corporation’s profits are taxed only once – at the shareholder level. The IRS explains it this way: “On their tax returns, the S corporation’s shareholders include their share of the corporation’s separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss.” S corporations therefore avoid the so called “double taxation” of dividends.

S Corporations, like regular C Corporations, can decide to retain their net profits as operating capital. However, all profits are considered as if they were distributed to shareholders. Thus an S Corporation shareholder might be taxed on income they never received.

Though it bears similarities to both, a limited liability company (“LLC”) is neither a corporation nor a partnership. Therefore, the owners of an LLC are not a shareholder or a partner. Rather, they are called members. Nevertheless, you can find in an LLC the combination of the best characteristics of a corporation and a partnership. An LLC’s member can be any person, partnership, other LLCs, corporations or other foreign entities.

What is an LLC to those who are quite concerned with taxes? What is an LLC’s advantage over the other types of business forms? Just like a corporation, a limited liability company offers its owners protection from any personal liability from the business debts. What makes it better is that it is a pass-through entity with regard to tax, something a corporation is not. Being a pass-through entity means it can pass through to its owners the company’s profits as well as losses. They will then reflect these on their personal tax returns just as it is done in a partnership or a sole proprietorship.  Just like with partnerships, LLCs provide greater flexibility for the company’s management.
A limited liability company can have as many members as it wishes to have. The laws of each state even allow LLCs with only one owner, called “single member.”  Forming an LLC does not require bylaws, meetings and the meetings’ recording just like in a corporation. Instead, an Articles of Organization should be filed with the Secretary of State in order for the LLC to be set up. This Articles of Organization should be according the state’s particular guidelines. Along with this, pertinent fees should also be paid. This process makes an LLC a statutory creation.
What is an LLC’s history? When did it come about? LLCs can be considered to be new in the United States’ business scene since its popularity came about only in the 1990s. However, LLCs already existed in Europe way before that. It was formally adopted in Wyoming’s legislature in 1977. Acceptance was not immediate, in fact it was slow.  However, it snowballed in the 1990s when all states passed statutes allowing the formation of LLCs.

YOU WANT TO START A BUSINESS:

So you’ve decided to start your own business – congratulations!  It’s a huge leap to take care of your own taxes, accounting, payroll, inventory, and a myriad of other activities necessary to run a business.  However, running your own business has its advantages, too. You get to be your own boss, set your own hours and days to work, and are responsible for your own success. It can be a great way to free yourself from the tedium of 9 5 and work at doing what you love, but you have to begin by asking a few questions:

1. Are you doing what you love, or just doing something you’re good at? A desire to get away from the regular working world can be a good motivation to work for yourself, but you have to be excited to get up in the morning to do what it is you have chosen to do for a living.

2. What is it you are planning to do? What niche is it going to fill? Is there a need for what you can provide? Will the market bear another entry?

3. What technical skills or talents do you have? Just being able to do something may not be marketable enough to convince customers or financiers that you are a good financial investment.

4. Who are your competitors in your chosen profession and how are you going to do it better? Why should customers come to you? What do you have to offer that no one else does?

Once you are satisfied with the answers to these questions, it is time to decide what business structure you will use. Will you be a sole proprietor responsible for every facet and the penultimate authority as to how to run the business? Will you enter in with a partner? Is it better to share the cost and workload, but also the profits and the business decisions? Perhaps the decision will be made to incorporate. This is our topic, Incorporation.

Corporations are the most common form of business organization and are chartered by a state and given many legal rights as an entity separate from its owners.  This form of business is characterized by the limited liability of its owners, the issuance of shares of easily transferable stock. The process of becoming a corporation, called incorporation, gives a company separate legal standing from its owners and protects those owners from being personally liable in the event that the company is sued (a condition known as limited liability). Incorporation also provides companies with a more flexible way to manage their ownership structure. In addition, there are different tax implications for corporations, although these can be both advantageous and disadvantageous. In these respects, corporations differ from sole proprietorships and limited partnerships.

This type of general, for-profit corporation is referred to as a “C” corporation (referring to Chapter C in the IRS code). “C Corporation” merely refers to a regular, state-formed corporation. A corporation is owned by shareholders and is managed and controlled by the board of directors who elect the president and are responsible for the management and policy decisions of the corporation. The dealings of the corporation are carried out by the officers and employees of the corporation under the authority delegated by the directors of the corporation. To be incorporated an Incorporator must draft legal documents and file the documents with the appropriate government agency, usually the Secretary of State, and pay the required fees. In order to maintain corporate status, certain formalities must be observed – annual meetings must be held, corporate minutes of the meetings must be taken, officers must be appointed, and shares must be issued to shareholders. The corporation will issue stock to its shareholders and keep adequate capitalization on hand to cover any foreseeable business debts.

Some reasons to choose this business structure include:

• Your business needs the ability to issue stock or stock options to attract key employees or outside investment capital.
• Your business is so profitable that you can save significant income tax dollars by keeping some profits in the corporation each year. This strategy is called “income splitting” because profits are essentially split between the individual owners and the corporation.
• You own a family business and you want to begin making gifts of ownership to your family as part of your financial or estate plan or to plan for the next generation of owners. With a corporation it is possible to make gifts of shares in your company without necessarily giving up management control and without paying gift tax.
• Others insist that you incorporate your business.

For the purposes of this article, we will compare the benefits of incorporating in the State of Wyoming (WY) to incorporating in the State of Nevada (NV).
Let’s look at some of the most innovative and progressive statutes in the US relative to creating a company. Wyoming is leading the way with unique time and money-saving ideas as well as progressive corporate protection legislation.

Wyoming offers the following landmark legislation:

1. Lifetime proxy—one of the most flexible, powerful benefits of Wyoming corporate law is the ability to assign a lifetime proxy vote. This can prove invaluable in estate planning. Imagine having the ability to vote your shares (therefore run the company, for your lifetime, while ownership is vested in another. Upon your death, zero estate taxes are due.
2. Relocate your company—If you did not incorporate in Wyoming, you are now able to transfer the origin of your company by law. No existence in a databank of your company’s original state will exist. Anyone examining the Wyoming public record will see a corporation dating back as far as your current corporation does. You can promptly become a Wyoming Corporation without losing the many benefits of the longevity and continuity of operation.  Enjoy the benefits of a Wyoming Corporation now.
3. Reason based annual fees—Annual fees are based only on assets that are within the state of Wyoming. You may pay as little as $50.00 and only as much as $200.00 for every million of assets located in Wyoming. If you have assets residing outside of the state there are NO fees.
4. No limitation on shares of stock issued—In Wyoming, you are free to issue as many shares of stock without regulation as you need for your capitalization needs. There are no restrictions. Just authorize it in your Articles of Incorporation. Public.
5. You can virtually be a one-man corporation—many states mandate who may serve as an officer or director. They don’t allow repeat appointments to multiple offices. You may enjoy the freedom of occupying as many offices as you need for your personnel outline.
6. No Shareholder Disclosure—Wyoming is one of the few states in the US not requiring the disclosure of stockholder information available to the public. This can be invaluable for the purpose of privacy. The more information about you that appears in the public record the easier it is for you to become a target. The only state mandated disclosure is of assets located in the state of Wyoming in the annual report.
7. Privacy—”Nominee officers/directors” are a unique option offered by the State of Wyoming. Protect your identity and remain private at your discretion. In addition, nominee or “third party” shareholders are authorized by Wyoming law. Avoid being singled out for others opportunistic proposals.
8. Normal red tape and formal reporting is at an absolute minimum–Wyoming’s corporate statutes allow the state to get out of your way to conduct business. The bureaucracy has been streamlined and provides a business friendly environment.
9. Capitalize your corporation for as little as one dollar—this allows the person with an idea to start immediately enjoying the same protections as the millionaire investor. Both methods of initial capitalization are welcome in Wyoming.
10. No requirement for meeting to be held in Wyoming—Directors, stockholders or annual meetings may be held anywhere in the world.
11. Stock purchases may be exchanged for any legal consideration—Services, goods, cash or real property. No restrictions.

Let’s debunk some myths about the benefits of incorporating in Nevada.

1. Nevada will not share information with the IRS.

This is true.

However, the rush to Nevada over the last few years has raised the eyebrows of the IRS knowing the reason many corporations are choosing this State. Being on the IRS radar even before your first tax return is not something the author recommends. On the other hand, Wyoming takes the position that assets located within the state should be reported. This generally relieves the IRS of any initial suspicion to motives of the selection of venue relative to incorporation. What you should consider is, how many of your assets are actually located in your state of incorporation? Wyoming requires none.

2. Nevada allows bearer shares.

This is false. Nevada voted to disallow bearer shares in 2008.

3. No public access to an individual’s association to corporations.

This is False.

You may search individuals by name at the office of the Secretary of State. Wyoming only allows searching of corporations, not individuals.

Head to Head Comparisons:
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In addition, consider the following tax savings by way of no personal income tax, corporate income tax, inventory tax, gross receipts tax, franchise tax, business or “per capita” tax, excise tax; and the sales, property and inheritance taxes are among the lowest in America.
In conclusion, the tax savings, increased flexibility in business, liability and privacy protection — as well as substantial regulator favor and decreased fees and investment requirements — make Wyoming an ideal place to incorporate, and by leaps and bounds it is more beneficial to the small business owner!