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FAQs
Frequently Asked Questions |
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Q. How long does the incorporation process
take?
Q. When will my corporation's
Articles of Incorporation be filed by the Secretary of State?
Q. How will I know when my corporation
is filed?
Q.
Will my Articles of Incorporation have language (an article) that both
limits the liability of directors and that allows the corporation to
indemnify the directors and officers to the fullest?
Q.
Will
I have the option or choice for my corporation to be either a "C"
corporation or an "S" corporation?
Q.
Will I have the
option to place share transfer restrictions on the stock of my new
corporation?
Q. When will I be able to get
a Federal / IRS Employer
Identification Number (EIN) for my new
corporation?
Q. What
about so-called DOUBLE TAXATION?
Q. How do I incorporate if I'm NOT in business
now?
Q. How do I incorporate if I ALREADY HAVE a
business?
Q. Is my
current or planned business TOO SMALL to form a corporation?
Q. If my California corporation elects Subchapter S status, is it subject to
California's minimum franchise tax?
Q. Does a corporation have the absolute right to use its
name?
Q. Is an LLC a type of
corporation?
Q. Is worker's compensation insurance
required for the
officers (like president, secretary, treasurer or vice president) and the
directors of the corporation?
Q. Does the
INDEPENDENT CONTRACTOR REPORTING LAW apply to payees that are incorporated?
Q. Are
BYLAWS and MINUTES filed with the California Secretary of State?
Q. In
the mail I received a letter / notice (so-called Annual Minutes Compliance
Notice or Annual Minutes Disclosure Statement) from a very official sounding
source, am I required to pay the fee they are asking for?
Q.
When will my corporation owe - FOR THE FIRST TIME - the $800 minimum
franchise tax?
Q.
Can my
corporation give me REGULAR DRAWS, LOANS OR DIVIDENDS to avoid State and Federal
employment taxes?
Q.
Must I be a UNITED STATES CITIZEN to form a new
California corporation or to buy an existing California shelf corporation?
A. Fourteen (14) days - for
everything.
Here's why:
First, while we hand-carry (by courier) your Articles of
Incorporation to the California Secretary of State
(SOS), the SOS holds Articles in its offices for between one (1) and
five (5) business days. The
SOS hold time is caused by normal processing, work backlog, personnel shortages, or system
failures that periodically
arise.
Second, your date of
incorporation and the corporation's name is custom imprinted on your share
certificates and manufactured into your official custom lead press-type seal. The
printing and manufacturing process take between one (1) and three (3) business days.
Third, your corporation kit will be sent to you by FedEx 2-Day
service.
In summary, while your Articles of Incorporation will be filed by
the SOS in 3 business days (or less), you'll receive your corporation minute book, stock, seal,
minutes, bylaws, tax applications, securities notices, officer statement, and more,
in about fourteen (14) days.
Can't wait? Need a corporation "yesterday"? Consider an off-the-shelf
corporation. It's already formed, it already has a Federal (IRS) employer
identification number. You can open your corporation bank account and be in
business within hours, not days or weeks.
A. Between one (1) and three
(3) business days after you give us your OK to file your Articles.
As a general rule, a corporation
legally exists when its Articles of Incorporation are filed by the Secretary
of State (SOS). Your Articles will be delivered by hand by messenger to
the SOS. This procedure means that your articles will be filed between one
and three business days after you
OK your Articles for filing.
For example, if you submit your Secure Online
Incorporation Form
by 12 Noon, then by 3 PM we will e-mail (Adobe PDF format) a pre-filing
draft of your Articles for your
approval. After you approve the draft Articles, they will be filed between
one and three business days. Although it often happens, we cannot
guarantee filing the next business day because we must wait for the SOS' office to
verify that the name is available and file the articles.
A. We'll notify you by
e-mail by Adobe PDF.
We will e-mail to you an Adobe PDF copy of your filed
Articles of Incorporation when the Articles are
released by the office of the Secretary of State (SOS). You'll be able to see the
official date of incorporation stamp and the official corporation number assigned
to the corporation by the SOS. A few days later you will receive, by Federal
Express, the
rest of your materials and your original filed Articles.
A. Yes
In our law office, this is a default clause -- it is automatic.
There is nothing for you to do. You do not have to check a box or
fill out a form.
The Articles of Incorporation we prepare ALWAYS contain
such language (unless you specifically decline). In the typical
closely held corporation, there is little or no reason to decline
such language.
More specifically, your Articles of Incorporation will provide
that the liability of the directors of the corporation for monetary
damages will be eliminated to the fullest extent permissible under
California law. The Articles will also provide that the corporation
is authorized to indemnify the directors and officers of the
corporation to the fullest extent permissible under California law.
Please recall that you will see an Adobe PDF draft of your
Articles before filing. You will, therefore, be able to confirm that
these provisions are present. The wording of the provisions is
substantially dictated by the California Corporations Code so your
choice will be to either accept or decline the provision.
A. Yes
By default, your corporation will be a "C" corporation. A
corporation does not need to make any tax election to achieve "C"
corporation status. This is the normal corporation tax status in the
US. Most corporation in the US are "C" corporations and not "S"
corporations.
If you want "S" corporation income tax status, you will be
offered that choice or option at no additional cost or fee. Simply
complete the Secure Online Incorporation Form.
The form will ask you whether or not you want us to prepare "S"
corporation election forms -- State (California) and Federal (IRS).
If you select "yes" or "maybe" we will prepare the State and Federal
election forms for the corporation down to signature ready
condition. It will be your responsibility, however, to file (fax or
mail) the election forms after you receive your corporation material
from us. Even if we prepare the election forms, you could change
your mind and not file the election forms in which case your
corporation would stay a "C" corporation.
Q. Will I have the option to place
share transfer restrictions on the stock of my new corporation?
A. Yes.
You will have that option offered to you in our
secure online incorporation form. If you
choose the option, it's free. We do not charge you more for this.
A share transfer restriction sets forth a mandatory procedure or
mechanism by which the corporation and the non-transferring shareholders
have the right to purchase the shares of the transferring shareholder BEFORE
he or she can transfer the shares to someone else. If you select the option
in our secure online form, the share transfer restriction will be stated in the corporation
bylaws with notice thereof placed in a legend on each share certificate. The
notice / share legend gives notice to each shareholder that his or her stock
is subject to a transfer restriction and is not freely transferable.
USE TIP: If you
will be the only shareholder, there is little or no need for such a
restriction on share transfer. It would be an unnecessary complication of
your bylaws and shares. If, on the other hand, the shares will be
owned by unrelated business partners, then you may want to consider this share
transfer restriction.
Q. When will I be able to get a Federal / IRS Employer
Identification Number (EIN) for my new corporation?
A. In short,
AFTER your Articles are filed.
You will be able to
obtain an EIN as soon as you get (from us) an Adobe PDF copy of your
filed Articles of Incorporation. The PDF copy will show the date of
incorporation. We will e-mail to you a PDF copy of your filed
Articles when we get them back from the California Secretary of
State. In general, this will be 2 or 3 business days after you OK
the filing of your Articles.
This is the
internet age. The IRS now has an online form where you can get your
EIN right away --- online. Here is the web address of the IRS online
form:
https://sa.www4.irs.gov/sa_vign/newFormSS4.do
To read information
about the online form first, go here:
http://www.irs.gov/businesses/small/article/0,,id=102767,00.html
The web addresses
were good (verified) as of September 25, 2005.
NOTE: We also prepare a signature ready
IRS EIN application (IRS Form SS-4). It will be in your corporation
kit that you will receive by FedEx. Of course, if you got your EIN
online, then you will not need the completed Form SS-4 that we put
in you corporation kit.
A. People that own closely held corporations rarely pay a double tax
(i.e., corporate income tax and individual income tax on the same income).
Owners of closely held corporations almost never pay double tax. This is
because double taxation is easy to avoid. Double taxation is avoided when
the corporation pays to shareholder / officers extra or additional wages or
salaries. Double taxation can also be avoided by using corporate earnings to
pay interest on debt owed to shareholders or rents or royalties on property leased
or licensed from shareholders. In these cases, the relevant shareholder /
officer has taxable income, however, the corporation receives a corresponding
tax deduction. See IRS Treasury Regulation section 1.162-7.
Want to get started? Complete and
submit the Secure Online Incorporation Form.
A. Form your corporation and open a corporation bank account.
The first step is to form a corporation. Than get a Federal employer
identification number (FEIN) for the corporation. Next, open a corporation
checking account using the corporation's new FEIN. With a corporation
checking account you and your new corporation are ready to start doing
business. When you incorporate through us, we take care of these matters for
you except opening your bank account.
Want to get started? Complete and submit the
Secure Online Incorporation Form .
A. Form your corporation and open a corporation bank account. Then
decide whether to sell, loan or contribute your existing business assets to
your new corporation.
Read the question and answer just above. It applies here too. If your
existing unincorporated business assets are not significant, you don't
really need to do anything after you incorporate.
Sell. If you decide to sell an asset to your corporation, make
sure your corporation pays, or agrees to pay, the fair market value of the
asset. If it pays too much, the IRS may say the excess was disguised
compensation or a disguised dividend.
Loan. If you loan money to your new corporation, make sure the
"loan" is not excessive relative to your contribution of capital.
If it is, the IRS may claim that the "loan" was actually a capital
contribution and thereby treat any attempted "loan repayment" as
taxable officer compensation or a taxable dividend.
Contribution. A contribution is what you give in exchange for your
stock. The new corporation gets to keep the contribution and you get to keep your
stock. As a rule of thumb, for every dollar of contribution, don't loan more
than three dollars to corporation.
A contribution of property for stock is a taxable event for the
contributing party unless the contribution is a tax-free exchange under
Internal Revenue Code section 351. That section concerns transfers to
controlled corporations.
A contribution of services to a corporation (including an S
corporation) for unrestricted shares of stock generally is taxed to
the contributing party as ordinary income to the extent of the fair market
value or worth (if any) of the stock received. Subjecting the stock to restrictions
may enable the shareholder to defer taxable income. See Internal Revenue
Code sections 61 and 83.
Want to get started? Complete and submit the
Secure Online Incorporation Form .
A. Probably not.
So long as you are actually engaged in a business (and not just a
hobby or pastime) just about anyone can enjoy the benefits of doing
business in the corporate form. It is not just for big business. One
person corporations, and husband and wife corporations, are common.
Some make only a few thousand dollars each year. Others make
millions.
For example, roughly 70 percent of the corporations formed by us
have overall revenue, or gross sales, less than $100,000 each year.
The first year is often even less because some businesses are just
starting operations.
A. Yes.
Sorry, but S corporations ARE subject to the
minimum franchise tax. The tax is due by the first quarter of each tax year
(normally a calendar year) whether the corporation is active, operates at a
loss, or does not do business. The current California minimum franchise tax is $800
For new corporations that incorporate after January 1,
2000, the minimum tax is zero for the first tax year, measured for the
second tax year, and $800 for subsequent years
Effective January 1, 2000, there is no advance payment
of franchise tax due on filing of the articles of incorporation. Under the
new law, a corporation (Subchapter S or not) will avoid paying the $800
minimum franchise tax during its first tax year, but not the second tax
year.
The trick is to understand that the minimum franchise tax for
the THIRD YEAR is due and payable at the end of the first quarter of SECOND
YEAR. It is a strange rule but that is presently the law in California.
A. Not always.
The filing of an Articles of Incorporation does not,
of itself, authorize the use of a
corporate name in violation of the rights of others. Others may have
acquired rights to the use of the name by reason of some other law, such as:
Federal Trademark Act (United States Code, title 15, Section 1051);
California Trademark Act (Business and Professions Code, Section 14200);
Fictitious Business Name Act (Business and Professions Code, Section 17900);
and common law rights, including rights to a trade name.
A. No.
An LLC is NOT a corporation. The acronym "LLC" means
Limited Liability Company not limited liability
corporation. The document (articles) filed with the Secretary of State to
form a corporation and an LLC are NOT the same.
A. No, so long as they are also the sole shareholders.
All officers, and members of boards of directors, of private corporations,
while rendering actual service for the corporations for pay, must be
covered. However, there is a major exception.
Where the officers and directors of the private
corporation are the sole shareholders thereof, the corporation and
the officers and directors shall come under the worker's compensation
provisions only "by election." In other words, insurance is not required
unless such officers or directors want (elect) to be covered.
Source: Section 3351(c) of the California Labor Code.
A. No. Corporate payees are exempt.
In September of 1999 a new law (California Senate Bill 542, Burton) was
enacted. The new law states that a business or government entity required to file a federal Form
1099-MISC for services received MAY have to report specific independent
contractor information to the California Employment Development Department (EDD).
The new law was effective January 1, 2001.
This new reporting law only calls for the reporting of payees who are individuals working as independent
contractors. Individual independent contractors doing business in the sole
proprietorship form are to be reported to the EDD. Payers are required to report independent contractors on
EDD Form DE 542, Report of
Independent Contractors. However, if the independent
contractor (payee) is a corporation, a DE 542 is not required.
According to section 1088.8(b)(2) of the California Unemployment Insurance
Code, "Service-provider" means an
individual who is not an employee of the service-recipient for
California purposes and who received compensation or executes a contract for
services performed for that service-recipient within or without the state.
For purposes of the section, the term individual does not include corporations.
The official California EDD newsletter California
Employer (Fourth Quarter 2000 at page 1) stated, "It is not
necessary for businesses to report the following types of entities: corporations,
general partnerships, or limited liability companies. In general, businesses
are required to report independent contractors that are sole-proprietors."
For more on the important independent contractor versus employee issue,
visit www.WorkerStatus.com. That
site is also operated by the Law Offices of James R. Urquhart III.
A. No.
Bylaws are rules adopted by an organization chiefly for
the regulation of its affairs. Corporate bylaws are not filed with the Secretary of State.
Bylaws and minutes are normally kept at the corporation's principal office in
the corporate record or minute book. Corporation bylaws and minutes are open to inspection by the shareholders.
They might be seen on audit by a government tax auditor, but they are
otherwise private, non-public documents.
Q. In the mail I received a letter / notice (so-called Annual
Minutes Compliance Notice or Annual
Minutes Disclosure Statement) from a very official sounding source, am I required to
pay the fee they are asking for?
A. No.
Every year, we get many, many calls from our
clients about this.
These letters (self described notices or
statements) are from
private companies and NOT government entities. These companies, and
others like them, are not affiliated in any way with the government
or the State of California. You are under NO OBLIGATION to deal with
them.
The letter you received does indeed LOOK very
official and governmental. That is the intent of the sender. They
made it look that way, on purpose. Do not be deceived. Read the envelope.
Most say "THIS IS NOT A GOVERNMENT DOCUMENT." Read the fine print in
the so-called notice. Most say, we are "NOT AFFILIATED WITH THE
OFFICE OF THE CALIFORNIA SECRETARY OF STATE."
If your corporation is one of our
Corporate Counsel Program clients,
we will do your minutes for you each year as an included benefit of
the program. Minutes are NOT filed with, or prepared by, any State
for Federal government agency. Minutes are kept in your private
business files.
Here's an actual sample received by one of our
clients. Note that the form looks very official or governmental.
Don't be tricked. If you read the fine print, it says that the
company "is not affiliated with the office of the California
Secretary of State." You are not obligated to use companies like
these.
Note that the envelope below says, "THIS IS NOT A
GOVERNMENT DOCUMENT."
A. As a general rule, the corporation must pay at least $800 to
the California Franchise Tax Board in its second year. Go to Why
California? for more detailed information.
Q. Can my corporation give me REGULAR
DRAWS, LOANS OR DIVIDENDS to avoid State and Federal employment taxes?
A.
No.
On February 12, 2001, the IRS issued a consumer alert regarding schemes in which employers seek to
avoid withholding federal income tax and employment taxes from wages paid to
their employees. Joe Kehoe, Commissioner of the IRS Small Business and Self-Employed Division stated,
“The law is crystal clear that income and employment taxes must be paid.
Evading employment taxes can have serious consequences. Employers may be
subject to criminal and civil sanctions for willfully failing to pay
employment taxes.”
One tactic appearing to grow in use to avoid payment of
employment taxes involves owners/shareholders of Subchapter S Corporations
who reduce or eliminate their salaries and replace the amounts with
dividends since distributions of profit are not subject to employment taxes.
Practitioners and Subchapter S shareholders need to be
aware that Revenue Ruling 74-44 states
that the IRS will re-characterize small-business corporation dividends paid
to shareholders as salary when such dividends were paid to the shareholders
in lieu of reasonable compensation for services.
The courts have backed up the IRS determination and
ruled that dividends can be re-characterized, regardless of the stated
intention of the S corporation, if the shareholders have performed services.
Corporations MUST consider the reasonable compensation to which the
shareholders are entitled.
You may ask, “How much is reasonable compensation?”
The courts have considered such factors as the nature and scope of the
shareholder’s work, the corporation’s compensation policy for all
employees, and the prevailing rate of compensation for comparable positions
in comparable companies.
Source:
SSA / IRS Reporter, A Newsletter for Employers,
Winter 2002, at page 7, article title: Subchapter S Corporations and
Employment Taxes: A Reminder About Reasonable Compensation Rules
Note:
The reasonable compensation rules apply to
regular "C" corporations too.
Multiple or systematic draws, loans or dividends to an officer / shareholder
to avoid State and Federal employment taxes will be challenged on audit by
the IRS and the California Employment Development Department (EDD).
A. No. You do NOT
need to be a UNITED STATES CITIZEN to do
either of those things; you can be a resident or non-resident alien
(non-citizen). An alien (non-citizen) can be a shareholder, director and /
or officer of a California corporation.
Example: Mary, a citizen of the United Kingdom,
may legally form a new California corporation and be its president,
secretary, treasurer, sole board member, and sole shareholder. She may also
buy a California shelf corporation and hold the same positions.
However, please note that before an alien (non-citizen)
can legally accept employment inside the United States, he or she must
comply with United States immigration laws.
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California
Incorporation