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LEARNING CENTER

Corporation

Glossary

Incorporation

The formal process of creating a legal entity that continues in perpetuity until dissolved, acquired or merged through the State government.

Shareholders

The owners of a corporation are called shareholders. You can have 1 to hundreds of million shareholders. The corporation authorizes shares generally in their articles of incorporation. Issued shares must be less than authorized share Each share is an ownership interest. Large public corporations like Walmart, AT&T and Apple have millions of shareholders.

Shareholders in a corporation have various rights as a shareholder. Shareholders elect Directors in the corporation. You must have at a minimum one meeting per year.

Shareholders have rights to vote on material or important issues especially those issues that can affect their ownership such as mergers, acquisitions but also simpler issues such as Dividend Investment programs. Every corporation must have a minimum of 1 share of stock issued. The number of shares do not matter as the percentage ownership of the corporation determines who controls the corporation.

Directors

Directors manage the corporation. Like shareholders every corporation must have a minimum of one director. Some States require directors to be named in the articles of incorporation. Directors appoint officers. It is the control of the Board of Directors that determine who is an Officer, not shareholders.

There is no requirement that a Director is a shareholder. Many corporations have rules and regulations that require Officers and Directors to be mentally competent and not be felons. You may have 100% ownership in a corporation but may not qualify as a Director.

When determining the number of Directors you typically use an odd number. When you have an even number of directors you may become deadlocked. A deadlocked corporation may not take any action until the issue is resolved either internally by the Directors or by a Court if there is no way to get a majority vote. Like Shareholders, Directors must meet at least once per year.

Directors control the big picture issues in the corporation. Directors determine dividends. Dividends are distributions of corporation assets usually cash to the shareholders.

Officers

Officers manage the day to day issues of the corporation. Typically you have a President or Chief Executive Officer, a Chief Financial Officer and a Secretary. You may have even more than 3 officers. Some States require Officers be named in the articles of incorporation.

Officers serve at the direction and benefit of the Directors. Officers may have the right to sign checks or sign a lease binding the corporation. Officers are not required to be a shareholder or director of the corporation. Annually most States require Officers and Directors file a report with the State of incorporation.

The President or Chief Executive Officer is usually the top officer, can hire or fire any officer-sometimes with the permission of the Board Of Directors, can bind the corporation in any manner.

The Chief Financial Officer is usually in charge of the corporation. Typically the Chief Financial Officer is authorized to sign checks on behalf of the corporation. The Secretary is the person who attends meetings and records physically what occurs at the meeting.

A corporation may have one person serve all Officer positions if there is only one shareholder. If a corporation has two shareholders then a minimum of two officers is required. If a corporation has three shareholders than a minimum of three different officers is required. Once a corporation has four shareholders there is a minimum of three different officers.

Taxpayer Identification Number (EIN/TIN)

A corporation, like an individual needs a number to identify their business similar to a social security number. After formation the corporation must apply to the IRS to obtain a taxpayer identification number. To open a bank account, pay employees or independent contractors or file taxes you must have a taxpayer identification number.

In order to apply you must personally have a social security number in addition to other items. You may be able to obtain the number immediately.

S Election

S Election is a taxation method. Every corporation formed is a C corporation. C corporations pay taxes based upon their income. When corporations distribute income to the shareholders via dividends the shareholders are taxed twice.

For example if a C corporation makes $1,000,000 in net profit, the corporation in CA may pay $139,000 as the tax rate is 13.9% plus the IRS taxes. If the corporation then distributes $200,000 as a cash dividend to shareholders then the individual shareholders are paying taxes on the dividend which was previously taxed in the $139,000 payment to the State plus the IRS.

In order to qualify as an S corporation you all shareholders must consent, all shareholders must be United States citizens or a US resident alien and you may have a maximum of 75 shareholders. Any condition not met will prevent you from becoming an S corporation. Even if all conditions are met each shareholder must sign a tax form that must be filed within 75 days of formation. Once all the conditions are met the IRS must approve the election.

Having the articles of incorporation or minutes of the corporation state you are an S corporation is insufficient to be an S corporation. IRS approval is required. If you miss the deadline you may wait until the next tax year or contact Biznessgrowth.com to review your options

Registered Agent

A corporation is not a human. An actual person or company that will accept service of process of a lawsuit or accept documents on behalf of a legal entity. You may serve as a registered agent for a corporation. Many online incorporation services offer a free 6 months but then charge you high rates once you become locked in to the registered agent they select.

The registered agent must be located in the State where incorporated. This becomes important if you incorporate in a different State from where you are located. Typically you pay a yearly fee.

If you are the registered agent then you must be knowledgeable about the consequences of being served with legal documents. If you are served with a lawsuit you have a specific time to respond. You may not understand and wait until the deadline has passed meaning you could have a default judgment against you.

If you use your personal residence you could be served at your house when you have employees, family or others whom you do not want to know there is a lawsuit with your business. You may receive tax documents that require immediate action too. If you are hospitalized, die or move you may have the same issues. Having a professional as your registered agent has a cost but there are benefits.

Bylaws

Bylaws are the governing document for your corporation. They identify many items such as the details of each officer and their responsibilities, what’s a quorum for a meeting, how many directors are required for the corporation, date for annual meetings and many other items.

You should review any bylaws template to be certain you agree with these rules and regulations. If you just sign and consent to the template bylaws you receive you may discover that you missed a meeting, did not have sufficient number of directors, and were ineligible to be a President or other officer of the corporation.

Minutes

When you have a corporation you must write physical details of what transpires. Naming directors, officers, appointing an accountant, leasing premises, issuing shares, approving the S election, creating a medical benefit plan, stock option plan or retirement plan are just some of the items that must be kept if you are a corporation.

Physical Business Address

Many States require a physical address within the State in order to form a corporation, Limited Liability Company or other entity. P.O. Boxes or addresses from a private mail center like The UPS Store or Postal Annex are not acceptable as physical address.

The government believes that when people visit the location there will be an actual person present and that it’s false or misleading to just have a box.

You have questions, we have answers.

If you’d prefer to speak directly with a Bizness Growth Specialist, please give us a call at 1-424-222-9526. We love to help!

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