How Does a C Corporation Work?

dude on couch

How many directors do I need to form a C Corporation?

Most states only require one director, but you are allowed to have more than one listed. Some states use the number of shareholders in the C Corporation to determine the minimum number of directors. 

What is the organizational structure of a C Corporation?

The hierarchy of an C Corporation includes three groups: the shareholders, directors and officers. 

  • Owners of the C corporation are considered to be the shareholders; who are responsible for electing and removing directors, approving or disapproving major business decisions.
  • The board of directors are responsible for managing the C corporation. They are responsible for making major business decisions and are in charge of hiring, firing and managing officers, who make the day-to-day business decisions.
  • Officers are responsible for the day to day operations of the company. 

* It is very common for C Corporations to only have one shareholder who also serves as the only director and officer. 

What are authorized shares of stock?

At the time of incorporation, C Corporations must state the number of shares of stock they wish to issue. The total number of authorized shares is the number of shares to be issued to the shareholders. Shares of stock are certificates of ownership in the C Corporation and each shareholder is issued certificates based their ownership value of the C Corporation. 

What is a share’s par value?

The par value of a share of stock is its minimum stated value. Common par values range from $0.01, $1.00 or no par. Par value typically does not equal the actual value of a share, this is normally determined by the price that someone is actually willing to pay or it is based on the book value of the company. For public companies, actual value is determined by the price investors are willing to pay for each share on the national exchange. 

How is a C Corporation taxed?

A C Corporation is taxed at both the corporate tax rate and its shareholders are taxed at the individual tax rates. First, business profits are reported and taxed at the corporate tax rates, any profit distributions made to shareholders in the form of dividends must also be reported as personal income, which would be taxed at their personal tax rate. This is commonly know as double taxation. To avoid double taxation, many business owners choose to make a special tax election with the IRS to be treated as an S corporation.

What Should I Name my S Corporation?

work and coffee

Choosing the name of your business is one of the most important decisions a business owner can make. There is a lot to consider, such as how you want your brand to be perceived by customers? What image do you want to project? What is your product or service and do you want this to be included in the name? You will also want your name to be easy for your customers to remember and recognize. 

Legally, the name you select for your Corporation must not be similar to any existing business in that state and must be distinguishable from any other business that is already registered in your state of formation. 

There is also the possibility that the name you select will not be available, so it is a good idea to have 3 different options in case your first or second choice is not available. To help distinguish your business structure you will also want to end your business name with either "Incorporated", "INC.", "Corporation" or the abbreviation of "Corp."

What is Required to set up an S Corporation?

How do you form an S Corporation?

In order to register a business as an S Corporation, Articles of Incorporation must be filed with the Office of the Secretary of State and the necessary filing fees paid.The type and amount of information required in the incorporation documents varies by state. 

What is a publication requirement?

A few states require notice to be published in a newspaper that a corporation has been formed in that state. States with this requirement for S corporations include: 

  • Arizona
  • Georgia
  • Nebraska
  • Pennsylvania

Do I Need a Resident Agent for my S Corporation?

project runway girl

A Resident Agent is required when you form an S Corporation. However, you may act as your own Resident Agent if you meet the requirements or you may hire a Resident Agent Service to act as your agent.

Bookly includes this service as an option with each of our incorporation service packages. 

There are a number of benefits with this service including: 

  • Staying Compliant. Bookly will help you stay in compliance with the state requirements for your S Corporation, avoid unnecessary state penalty fees and maintain your company's good standing in your state of incorporation.
  • Privacy. When a company is served with a Service of Process, it is often delivered by local law enforcement. Most business owners do not want police officers showing up in front of customers, employees or neighbors. A Resident Agent service will provide you a layer of anonymity. 
  • Registered Office. The registered agent for a business must be available during normal business hours to accept important documents as they are delivered.

Who can Form an S Corporation?

When a Corporation makes the 2553 election with the IRS to be treated as a S Corporation there are several restrictions that dictate who can be a shareholder of that S Corporation: 

  • S corporations may not have more than 100 shareholders.
  • Shareholders must be resident citizens of the United States.
  • S corporations can have only one class of stock.
  • S corporations cannot be owned partially or wholly by other Corporations, LLCs, Partnerships or Trusts.
  • Most states require shareholders be 18 or older.

For more information regarding the requirements of each state, view the state guide forum in our Education Center.

How Does an S Corporation Work?

S corporation

How many directors do I need to form an S Corporation?

Most states only require one director, but you are allowed to have more than one listed. Some states use the number of shareholders in the S Corporation to determine the minimum number of directors. 

What is the organizational structure of an S Corporation?

The hierarchy of an S Corporation includes three groups: the shareholders, directors and officers. 

  • Owners of the S corporation are considered to be the shareholders; who are responsible for electing and removing directors, approving or disapproving major business decisions.
  • The board of directors are responsible for managing the S corporation. They are responsible for making major business decisions and are in charge of hiring, firing and managing officers, who make the day-to-day business decisions.
  • Officers are responsible for the day to day operations of the company. 

* It is very common for S Corporations to only have one shareholder who also serves as the only director and officer. 

What are authorized shares of stock?

At the time of incorporation, S Corporations must state the number of shares of stock they wish to issue. The total number of authorized shares is the number of shares to be issued to the shareholders. Shares of stock are certificates of ownership in the S Corporation and each shareholder is issued certificates based their ownership value of the S Corporation. 

What is a share’s par value?

The par value of a share of stock is its minimum stated value. Common par values range from $0.01, $1.00 or no par. Par value typically does not equal the actual value of a share, this is normally determined by the price that someone is actually willing to pay or it is based on the book value of the company. 

How is a S Corporation taxed?

As a pass-through entity, S Corporations do not pay corporate tax on company profits. The profits or losses are instead passed and reported on to the shareholders' individual tax return. Any taxes due are paid at the shareholders individual tax rate. However, S Corporations are still required to file an informational tax return known as the 1120S.

How to Prepare for Your Next Quarterly Estimated Tax Deadline Without Panicking

typing

We know how it is when you’re a busy business owner. Sometimes quarterly estimated tax deadlines just sneak up on you. But if you find yourself scrambling to calculate how much you owe each and every time a quarterly estimated tax due date shows up, then we want to help you change that. If you prepare for QET’s four times per year, you’ll be less stressed and that’s one less hassle to keep you from doing what you really need to be doing – running your small business. Check out these things you can start doing today, right now, so you don’t find yourself jumping through flaming hoops the next time the IRS wants a quarterly payment: 

•Keep your books up to date – The IRS wants you to pay a quarter of your tax liability each quarter (hence the name “quarterly” estimated taxes.) That tax liability is your revenue minus expenses plus any tax credits you might receive. If you don’t keep very good track of your income and expenses, how are you to know how much you owe? Use a service like Bookly to make sure that you know exactly how much has come in and gone out in your business throughout the year. This will ensure you don’t overpay or underpay Uncle Sam every quarter. 

Use last year’s totals

Another trick when calculating quarterly estimated taxes is to pay at least 90% of what you owed in taxes the prior year. If you do this, the IRS won’t penalize you if you accidentally underpay throughout the year. So, after you’ve filed your income tax returns in April, note how much you ended up owing in taxes. Divide that number by four, and that is the minimum you should pay in taxes in the coming year. Handy! 

Save up

If you have trouble scraping up the funds for a payment every quarter, you’re not alone. Many businesses – like landscaping over the spring thru fall or an eCommerce toy store at Christmas – are highly seasonal. You may find yourself short on cash or even closing your business down during the year. Unfortunately, Uncle Sam still wants his cut. Use one of the handy apps we profiled here to make sure you’re adequately saving up to pay quarterly estimated taxes each time a deadline rolls around. 

Schedule payments

Did you know that you can also schedule your payments to the IRS? It’s true! The Electronic Federal Tax Payment System (EFTPS) allows you to set payments and forget them. We wrote all about how to pay your taxes online using EFPTS in a previous blog post. Just be sure you’ve set your account up at least two weeks prior to the first date you wish to pay. And, of course, be sure you have enough money in your bank account for the system to deduct! Just like automating your power or cable bill, this allows you to pay your quarterly estimated taxes without worry. The last thing a busy business owners needs is an unexpected deadline. 

How to Pay Quarterly Estimated Taxes Online

stock photo office

Chances are you pay your many of your bills online these days. But did you know that you can also pay the IRS? With quarterly estimated tax time coming up, we thought we would give you the lowdown on paying your tax bills to Uncle Sam the easy way – electronically with the Electronic Federal Tax Payment System (EFTPS). 

Enroll to Pay Your Taxes Online 

Unfortunately, like many things having to do with the IRS and taxes, enrolling in EFTPS isn’t a quick process. For security, you’ll have to wait for your credentials to be mailed to you, so if you’re planning on paying your quarterly estimated taxes due on September 15th of this year through EFTPS, you’d better sign up today! 

First, head over to the EFTPS website and click the red Enroll button. After accepting the terms of service, you’ll be asked whether you want to enroll as an individual, a business or a federal agency. Whether you enroll as a business or an individual will depend on your corporate structure and what taxes you intend to pay with EFTPS. Most of the time you will be paying quarterly estimated taxes as an individual. Ask your Tax Alli advisor if you have questions about how to enroll. 

Next, you’ll be asked to enter some basic information, including your social security number of tax ID. After that, you’ll enter your bank information. EFTPS automatically deducts payments from your bank account. You will then have to verify your information by typing in your name and entering your social security number. From here, the IRS will verify your information and then mail you a PIN number. Don’t lose that pin! You’ll use it to later login and pay your taxes. 

What Else You Need to Know about Paying Your Taxes Online 

Once you are all enrolled, you should be good to go. There are a few things to remember, though, when paying your taxes with EFTPS: 

•Don’t try to do same day payments. Payments through EFTPS must be scheduled by 8pm ET the day before the due date 

•You can also use the telephone to schedule payments, though they must also be scheduled by 8pm the previous day 

•You can schedule tax payments ahead of time through EFTPS. If you know you’ll be paying a fairly steady amount throughout the year, you could “set it and forget it” when it comes to paying quarterly estimated taxes. 

•Though all states’ tax laws vary, you may have to pay quarterly estimated taxes to your state, too. Some states will also allow you to pay online. Check with your state’s taxing authority to find out. We hope this post has helped make tax time a little less stressful for you. 

 

What Types of Letters Could you Receive From the IRS?

irs letters

Utility bill, birthday card from grandma with a five-dollar bill enclosed, credit card solicitation, credit card bill, pizza coupons, and something from… THE INTERNAL REVENUE SERVICE!?! Suddenly cheap pizza doesn’t sound so good and Grandma’s thoughtful gesture is laughable at best. Before you go writing off pizza and your sweet old grandma, take a deep breath and remember your friends at Bookly. 

Today’s post will put you at ease the next time you receive unexpected mail from the IRS. The IRS literally mails out millions of letters and notices to taxpayers each year. Yet, most correspondences sent will fall under one of the following general areas: 

You owe the IRS money: 

Notices saying that you owe the IRS money are really the only dreadful ones. Some of the most common causes resulting in tax debts include: failure to have enough taxes deducted from your wages, miscalculations on return, failure to report all income sources, failure to meet minimum contributions paid into IRA/retirement accounts. Luckily, the IRS is willing to work with you on repaying any tax debts. 

The IRS owes you money: 

It sounds sweet when you first receive notice that the IRS actually owes you money for a change. It feels even better when you receive that check to make it a reality. There are a number of reasons for the IRS to issue a refund. Overpayment, miscalculations (in your favor), and unclaimed credits are some of the most common. The IRS will always notify you of the pending refund via mail before issuing a check. The wait time from notice to payment is typically around six weeks. 

Requests for additional information are sent more frequently than notices indicating a balance due or owed. 

Typically, additional information is needed because information on tax returns either did not match IRS records or was missing altogether. This is a common occurrence amongst taxpayers who attempt to file their returns without assistance from a tax professional. The IRS may also request additional information to verify qualifications for certain credits. For example, if you received a tax credit for a house you purchased, you may need to file a certain form or provide more information about it. For example, proof of residency may be requested for any disaster-relief credits issued. 

Notifications indicating a change or updates made to a tax account make up the bulk of correspondences mailed from the IRS to taxpayers. 

The IRS will usually attempt to correct any miscalculations as well as other common issues on your filed return if at all possible. They will then mail you a letter notifying you of the corrections made. Should you receive such correspondence, carefully compare their changes with your records, and if you agree with the notice, you usually do not need to reply unless it states otherwise. However, if you do not agree with the notice, it’s important for you to respond. You should write a letter to explain why you disagree. Include any information and documents you want the IRS to consider. Mail your reply with the bottom tear-off portion of the notice.Send it to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response. 

Key takeaways: Don’t go bananas the second you realize there’s something from the IRS in that stack of mail. Read everything carefully. Follow directions and deadlines precisely. Keep all correspondences and filed returns somewhere safe and contact a tax professional like Bookly for additional assistance or questions about a letter or notice received from the IRS.

Where Should I set up my Business?

north east city

Where should I set up my business?

Now that you have decided to form an LLC or Corporation, the next step is to determine to either set it up in your home state (physical location) or choose another state. This is a decision you should not make lightly or do it because "someone" said it was a good idea without investigating how it will effect you and your business specifically. 

For most small businesses there are two factors to considered when deciding where to form your LLC or Corporation: 

  • Cost of forming in your home state vs. the cost of forming in another state and foreign registering to do business in your home state. 
  • Taxation & Requirements of both states of registration.

1. Home state incorporation vs. foreign registration

If your business is owned by one or a couple members/shareholders and its primary business activity is conducted within your home state it is typically most efficient to register in your home state. This is usually more cost effective than registering your entity in another state and then registering as a foreign entity to do business in your home state. 

2. Requirements and taxation

Before registering in a foreign state it’s a good idea to research that state’s ongoing business requirements as well as general state taxation requirements. A company that foreign registers to do business in another state is subject to filing taxes and annual report fees in both states. 

Another factor to be aware of is the potential of litigation in each state you are registered to do business in.

What is a Resident Agent?

resident agent

About the Resident Agent (RA)

When you register a new or existing entity to transact business in any state you are required to have a Resident Agent in that state. The function of a Resident Agent is new to most business owners. Below is a summary of what a Resident Agent is and what role he plays for your business. 

A Resident Agent serves as the legal point of contant for "Service of Process". Essentially all important legal and tax documents are sent to the RA on behalf of a business. 

Resident Agent requirements:

  • Physical Address. The RA must be available during normal business hours and have a physical address in the state P.O. boxes and private rented mailboxes are not accepted as a physical address.
  • Publicly-Accessible. The RA’s address must be open to the public. 
  • Appointed Resident Agent. Individuals can act as the RA for your business. However, your company can't act as its own RA. 
  • Resident Agent Service Provider. Tax Alli can act as your professional resident agent service provider.

*A Resident Agent is also know as a Registered Agent or just RA for short.

Am I Required to Collect Sales Tax?

store owner

Good question.

This depends on your type of business activity. Are your sales transactions made online or do your customers visit you in person at a store front? 

If you run a business with a physical storefront, collecting sales tax is straightforward. You charge your customers the sales tax required by the jurisdiction where your business is located. However, if your transactions are made online and you do not have a presence in a particular state, you are not required to collect sales tax. 

This is based on a 1992 Supreme Court ruling in which the justices ruled that states cannot require mail-order businesses, and by extension, online retailers to collect sales tax unless they have a physical presence in the state. 

State Exemptions

Keep in mind that not every state and locality has a sales tax. Alaska, Delaware, Hawaii, Montana, New Hampshire and Oregon do not have a sales tax. If you have additional questions, you can refer to your State's Department of Revenue Office and or website for additional rules

Federal Regulations & Your Business

federal regulations

The federal government does not regulate every industry, however, some companies may have to satisfy some requirements at the federal level. To ensure that your business complies with government rules, it is a good idea to familiarize yourself with the requirements in your industry. 

Here are some links to help you get started: 

Tax Obligations for Business Owners.

Small business owners need to understand their federal tax responsibilities. The IRS publishes tax information for businesses

Labor Laws.

If you plan to hire employees you will be responsible for complying with numerous labor laws regarding wages, benefits, working conditions, and more. To help understand these requirements the U.S. Department of Labor publishes an Employment Law Guide

Posting Requirements.

As a business you must also display certain posters, disclaimers and information regarding worker's rights published by the Occupational Safety and Health Administration, the Employment Standards Administration, and various other departments. The U.S. Department of Labor details the posting requirements

Industry Regulations, Licensing & Permits.

Typically specific industries (Transportation, Construction, Farming, etc.) have special requirements for conducting business. If a federal agency governs your business activities, check with that agency for more information about your requirements. For an alphabetical listing of federal agencies, visit www.usa.gov

How Does an LLC Work?

woman filing taxes

How many people are needed to form an LLC?

There is no rule that requires an LLC to have a certain number of members or to use specific titles such as President, Vice President, Secretary etc. However, the IRS does allow one-member LLCs (single member LLC) to qualify as a pass-through entity. 

How is an LLC managed?

An LLC may either be managed by its members (member managed) or managed by selected managers (manager managed). If the LLC is managed by its members, each member will have an equal vote in the company decision-making process based on their individual stake. If the members elect a manager or managers they will be in charge of the daily affairs of the LLC. 

If managers are not selected in the Articles of Organization the LLC will default into member management. 

What is the organizational structure of an LLC?

An LLC is owned by members. A member's ownership is represented by membership interest, which is either in a percentage or units reflected on a member certificate. 

How is a limited liability company (LLC) taxed?

After organization, by default the IRS will tax an LLC as a disregarded entity, however an LLC can elect to be taxed as an S corporation by filing Form 2553 or elect to be taxed as a C corporation by filing form 8832. 

LLCs are also subject to any franchise taxes imposed by the state. Franchise taxes are typically due annually, and the amount will vary by state. *California LLCs are subject to an annual minimum franchise tax of $800 per year. The first payment must be made within 3 months of forming your LLC. The state will send a bill to remind you to make this payment.

Do I Need a Resident Agent for my LLC?

startup team

A Resident Agent is required when you form an LLC. However, you may act as your own Resident Agent if you meet the requirements or you may hire a Resident Agent Service to act as your agent.

Bookly includes this service as an option with each of our incorporation service packages. 

There are a number of benefits with this service including: 

  • Staying Compliant. Bookly will help you stay in compliance with the state requirements for your LLC, avoid unnecessary state penalty fees and maintain your company's good standing in your state of incorporation.
  • Privacy. When a company is served with a Service of Process, it is often delivered by local law enforcement. Most business owners do not want police officers showing up in front of customers, employees or neighbors. A Resident Agent service will provide you a layer of anonymity. 
  • Registered Office. The registered agent for a business must be available during normal business hours to accept important documents as they are delivered.

What is Required to set up an LLC?

working woman

How do you form an LLC?

In order to register a business as an LLC, Articles of Organization must be filed with the Office of the Secretary of State and the necessary filing fees paid. After organization, by default the IRS will tax an LLC as a disregarded entity, however an LLC can elect to be taxed as an S corporation by filing Form 2553 or elect to be taxed as a C corporation by filing form 8832. 

What is a publication requirement?

There are a handful of states that require a notice to be published in a public newspaper that you hav e formed an LLC. States with this requirement include: 

  • Arizona
  • Nebraska
  • *New York

*A New York, limited liability company is required to publish notice of their formation in two seperate New York newspapers and to file proof of publication with the Department of State within 120 days. The publication is made at the county level in two newspapers. If you fail to publish the required information by the deadline the state reserves the right to prohibit you from conducting business.

LLC vs. S Corporation

woman thinking

For most small business owners choosing between an LLC and an S Corporation is the most common dilemma when picking a business structure. You should consider the advantages of both the LLC and S Corporation before you make your pick. Selecting the right structure from the start can help you maximize your chances for success. Here is a break down of the major differences to help you compare the two:

First, let's look at what is similar

  • Limited liability protection. Both entities offer a level of liability protection.
  • Separate entities. Both entities legally separate the owner(s) from the business.
  • Pass-through taxation. Both entities can be taxed as pass through entities. *LLCs require a special IRS tax election (additional filing)
  • Ongoing state requirements. Both entities are subject to filing annual reports and paying renewal fees.

What is Different?

IRS restrictions

  • S Corporations can have no more than 100 shareholders vs. LLCs can have an unlimited number of members;
  • S Corporations may not have non-U.S. citizens/residents as shareholders vs. Non-U.S. citizens/residents can be members of LLCs
  • S Corporations cannot be owned by other entities, such as Corporations or LLCs vs. LLCs may be owned by other entities

Maintenance

  • S corporations are required to: Adopt bylaws, issue stock, hold initial and annual director and shareholder meetings, and keep meeting minutes with corporate records.
  • It is recommended, not required that LLCs: Adopt an operating agreement, issue membership shares, hold and document annual member meetings/manager meetings and document all major company decisions.

Management

  • S Corporations encompass directors, officers and shareholders. A board of directors oversees corporate affairs and handles major decisions whereas the daily operations are managed by elected officers i.e. CEO, CFO, CIO etc.
  • LLCs can either opt to have members or managers manage the LLC. A member managed LLC is similar to a general partnership. Decisions are made in a consensus of all members usually by a vote. Whereas a manager managed LLC is similar to a corporation leaving members to act as more of a board of directors. 

Lifespan

  • S Corporations are perpetual and are not required to list a dissolution date.
  • LLCs in most states are required to list a dissolution date. Typically you can request an LLC to last for 99 years.