Business: What is a Corporation?

Many of my clients come to me with questions related to what type of business they need to set up. I usually advise them that at least two primary concerns are involved in determining what type of business to go with: liability and taxes. There are obviously other factors to consider but these are usually the primary concerns.

The following are brief definitions of a Corporation. I intend to follow this post with information on other legal entities.

What Is A Corporation?
A corporation is a legal entity created by statute that has all the rights privileges and responsibilities of a natural person. In the eyes of the law a corporation is treated as if it were a natural person. It can open bank accounts, conduct business, and be sued just like you and me.

A corporation possesses attributes of limited liability (i.e. protects its owners from lawsuits), centralized management, continuity of life (i.e no set expiration period) and free transferability of interest (i.e. stocks, etc.).

There are different types of corporations. For small businesses, you may want to look into setting up an S-Corporation.

What Is A For-Profit Corporation?
A For-Profit Corporation is a corporation created for the purpose of conducting business in the broadest sense of the term. Its main purpose is to make money for those who own the business. The one restriction placed on a For-Profit Corporation is that the business it conducts must be legal. In other words, setting up a For-Profit Corporation to run a drug ring will not protect the corporations owners. Sorry Mob Bosses.

What Is A Non-Profit Corporation?
A Non-Profit Corporation is a corporation normally thought of as one created for religious, charitable or educational purposes. A Non-Profit Corporation is not precluded from engaging in a profit making situation. In fact, a Non-Profit Corporation is not necessarily a charitable corporation or one that is tax exempt. They are simply corporations that may not distribute their income to a member, director or officer.

Why Incorporate In Nevada?

The first two rules of incorporation are "What state has the friendliest tax laws and what state provides the most corporate protection." For decades, the answer to these questions has been Delaware. In fact, overwhelmingly Delaware has been the state of choice for businesses desiring to incorporate. Delaware was considered to have the most friendly statutory law and the most sophisticated judicial system for adjudicating the law. Delaware's laws are flexible, corporate friendly and designed to allow businesses to easily incorporate in Delaware and maintain their principal places of business in other states. But recently a new state has begun to take top billing for incorporation: Nevada.

Franchise And State Income Taxes
Delaware has a franchise tax; Nevada doesn't. In Delaware, a corporation with 25,000 shares would have an annual franchise tax of $190. In lieu of using the total corporation shares, Delaware does allow a corporation to determine its franchise tax by reporting the number of issued shares and total gross assets as reported on U.S. Form 1120, Schedule L (Federal Return). This requirement infringes on privacy as businesses are forced to make an additional financial disclosure to the State of Delaware. Delaware also requires a fee for filing the annual report.

Conversely, in Nevada the annual cost to maintain an active corporation with 25,000 shares in Nevada is $85. This is the fee for filing your annual list of officers and designation of registered agent. There is no franchise tax and, therefore, no additional disclosure requirement.

Delaware, unlike Nevada, also has a state income tax. The income tax applies to businesses that do business in Delaware and is currently at 8.7%. The income tax also affects businesses that do not operate in Delaware because it significantly reduces the possibility of reducing or eliminating a business' home state corporate income tax (because the strategy used to do this involves doing business in the preferred state -- in this case, Delaware). In addition, in the same manner as the franchise tax the income tax infringes on privacy.

Financial Privacy
Nevada is the only state which does not share information with the Internal Revenue Service. By statute, Nevada is required to keep its corporate information completely private. Nevada corporations do not have to divulge information such as the date appointed for the next annual meeting of the stockholders or directors, list places of operation outside Nevada notify the state of stock issues or transfers, names of stockholders, etc.

Registered Agent
If a business does decide to incorporate in Nevada, the business will be required to maintain a registered agent in the state. This is true with every state. Most businesses choose to contact a corporate law firm to prepare the legal forms for incorporation documents and act as registered agent. Most corporate law firms will act as registered agent for a relatively small annual fee. If a business has someone to act as registered agent in the state, it may want to prepare the corporate filings itself.

Incorporating In Nevada
Nevada has made filing corporation documents very user friendly. Go to http://sos.state.nv.us/comm_rec/index.htm; click on business entity legal forms; fill them out and send them to the address provided.