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Forming your business with IBSN Corporate Services is fast and easy. IBSN Corporate Services is a low cost service provider for forming your new business into a Corporation or Limited-Liability Company (LLC) or any other type of business entity in all the 50 states (and the District of Columbia). With IBSN Corporate Services you can utilize our experienced and knowledgeable team to assist you in forming your business structure from start to finish and help with mergers and joint ventures.
Kindly email us at ICS@mybizfiler.com for incorporating in Canada, Mexico, U.K. & Australia.
Following are some of the facts related to Incorporation:
Limited Liability Company (LLC)
A Limited Liability Company (LLC) combines the advantages of a corporation with the tax advantages and management flexibility of a partnership and hence is becoming a very popular business formation with the small business owners, especially those who are looking to incorporate to protect their personal assets and/or raise business loans in preference to the personal loans for business purpose.
It offers hybrid business structure, recognized in all 50 States including District of Columbia, providing the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.
Forming LLC is easier and not generally less expensive.
Advantages of forming an LLC: |
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Protection of Personal Assets - Owners have limited liability on business debts |
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No double taxation threat as LLC is a pass through entity |
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Even Foreign Citizens can form or own a Limited Liability Company in the United States |
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Allocation of profit or loss in an LLC need not be proportional to the ownership interests of members |
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There is no limitation on the number of members to form an LLC - A single member or unlimited numbers can own or organize a Limited Liability Company (LLC). |
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C-Corporation
A C-Corporation is a regular corporation business structure considered by law as an entity by itself, separate from those (Shareholders) that own it. As an individual entity, it can conduct business on its own, enter into contractual relations or agreements, be taxed and sued with limited liability on the Directors who govern the business of the corporation and the shareholders who own it.
Board of Directors, elected by the shareholders, oversees major business decisions and policies of the corporation.
A C-Corporation is a perpetual entity which means it does not dissolve even if ownership changes.
C-Corporation Merits
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Shareholders have limited personal liability on corporation business debts |
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Corporations may retain, subject to tax regulations, profits without payment of dividends or passing on lower dividend distributions to its shareholders |
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Easy Liquidity of Stock |
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Ability to raise additional monies by sale of stock or by borrowing from banks/institutions pledging stocks owned by major shareholders |
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Owner (Shareholder) Benefits can be treated as a business expense |
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No limit on the number of shareholders |
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You do not need to be a US Citizen to own or invest in a C Corporation |
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S-Corporation
A subchapter "S" Corporation, also called an S-Corporation, is a corporation that once incorporated, elects a special tax status. The Subchapter S tax election enables the shareholder to pass through earnings and profits directly into their personal tax returns. If the corporation earns profit, the shareholder, if working for the company, must pay themselves wages that meet the standards of "reasonable compensation."
Advantages of forming an S-Corp:
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Shareholders have limited personal liability on business debts |
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With an S Corporation, owners can use corporate losses to offset income from other states |
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Owners of an S Corporation can save on employment taxes by taking distributions instead of salary |
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S-Corp is a pass through entity and hence no double taxation threat |
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Up to 100 shareholders can together organize an S-Corp, and a very useful business formation for those who would want their business to enjoy corporate status, with partnership benefits |
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How to Form?
In order to form an S Corporation, proceed with the filing of a regular C Corporation since the articles of incorporation that are filed with the state are the same for both the C Corporation and the S Corporation. After you receive all the paperwork back from the state, we will help you fill out the IRS form 2553, Election by a Small Business Corporation, for submission to the IRS that grants S-Corporation status to your business structure.
Word of Caution: Foreign Citizens are not eligible to elect an S-Corporation
LLC or an S-Corp?
Owners of both S-Corp and LLC enjoy limited personal liability. By contrast, sole proprietors and partners have unlimited personal risk.
Traditionally, business owners who chose to form an entity to protect personal assets but allow income/losses to be reported on a personal tax return choose to form an S-Corporation. However, this can also be accomplished with an LLC.
Benefits of an LLC over an S Corporation:
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Simpler and easy to form - It may be formed in one step, while an S Corporation election can only be made after a General Corporation is formed first |
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An LLC is not required to hold annual meetings or to keep formal minutes, while an S-Corporation is required to do so |
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LLC members can split profits/losses in any way they choose. In an S Corporation, shareholders must receive dividends according to the number of shares that they own, regardless of the amount of effort put into the business |
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An LLC can be owned by any combination of individuals or business entities. Only United States citizens and resident aliens may own an S Corporation. Other entities generally may not own an S Corporation. |
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If your business will hold property, such as real estate, that's likely to increase in value, its better to form an LLC |
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While many business owners are enjoying the simplicity and flexibility of the LLC, it may not be the best choice in every case: |
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Licensed Professionals who live in California may not be able to form an LLC from that State |
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As an LLC, you will not be able to issue stock options, stock bonuses and stock purchase plan to entice or compensate your employees |
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S Corporation shareholders pay Payroll Taxes only on the money that they receive as wages or salary, but not on profits received as dividends or that stay within the company, whereas, LLC members may need to pay Social Security and Medicare taxes on the entire amount of LLC profits in certain circumstances. In particular, |
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LLC type of business structure may not especially suit to those who provide professional services such as health, law or engineering etc. |
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Entity Comparison |
| Governance |
LLC |
C Corporation |
S Corporation |
| Maximum Number of Owners / Shareholders |
Unlimited members |
No limit on shareholders |
Up to 100 shareholders |
| Stock Classes |
Interest in Profit or Loss |
No limit on stock classes |
Only One class of stock allowed |
| Capital Investment |
Members typically contribute money or services to the LLC and receive an interest in profits and losses |
Shareholders typically purchase stock in the corporation - Common or Preferred |
Shareholders typically purchase stock in the corporation, but only one class of stock is allowed |
| Owner(s) Liability |
Generally no personal liability on the members |
Generally no personal liability on the shareholders |
Generally no personal liability on the shareholders |
| Formation Documents (Basic) |
Articles of Organization / Certificate of Formation; Operating Agreement |
Articles of Incorporation; Bylaws; Board Resolutions; Stock Certificates; Stock Ledger |
Articles of Incorporation; Bylaws; Board Resolutions; Stock Certificates; Stock Ledger; IRS & State S Corporation election |
| Business Management |
The Operating Agreement sets forth how the business is to be managed; a Member (owner) or Manager can be designated to manage the business |
Board has overall management responsibility; Officers have day-to-day responsibility |
Board has overall management responsibility; Officers have day-to-day responsibility |
| Tax Implication |
The entity is not taxed (unless chosen to be taxed); profits and losses are passed through to the members |
Corporation taxed on its earnings at a corporate level and shareholders are taxed on any distributed dividends |
By filing IRS Form 2553, C-Corp becomes an S-Corp, where profits and losses are passed through to the shareholders |
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Where to Incorporate
Once you have decided to form business, your next step is to decide where to incorporate.
Typically, you can structure your business in any state or District of Columbia (Washington D.C.) and there is no limitation in the United States that the entity should be formed only in your Home State, though forming in your Home State is the least complicated and also less expensive. But, you should consider certain factors when evaluating the State that best suits you to form your business.
Issues to keep in mind |
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Cost of initial Formation and fees imposed by the chosen state(s) for ongoing filing requirements once the entity is formed |
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Physical Location of Business. Companies formed in one state may transact business in another state or states, which in case business must foreign qualify in such other state(s) |
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Corporate Laws governing the State(s) under consideration |
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Tax Implications |
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Business Licensing |
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Caution: Some business owners opine to form their business in a state that has LOW formation fees to save money, even if the business is not located and does not transact or operate in that state. But, as a word of caution to the promoter of an entity, many other factors of evaluation should be kept in mind to form and structure a business than saving few dollars initially. An entity should survive on a perpetual basis, unless it is meant for a specific purpose and dissolution after a specified period of time.
Also businesses must essentially remember that they should foreign qualify in every state in the US other than the state of formation, to do or transact business in such state or states. Foreign qualification registers a company to transact business in a state other than the home state. To foreign qualify, the proper paperwork, called a certificate of authority, must be completed and the necessary state filing fees must be paid. In addition to these initial filing fees, foreign-qualified businesses are subject to ongoing requirements and fees imposed by the state of qualification.
As an example, if you formed your company in Delaware, but your company was located in and transacted all of its business in the state of Florida, you would be required to foreign qualify your company in Florida.
What constitutes transacting business varies by state; however, factors often considered are whether the company has a physical facility, has employees or has a bank account in that state.
Having a basic understanding of the laws of each state under consideration may help you determine if a particular state is more beneficial. For example, corporate law is one reason why Delaware is so popular with large corporations, but those same laws may not be as beneficial to corporations with only one or few shareholders.
You should also understand how corporations and LLCs are taxed by each state under consideration and also the taxation requirements imposed on foreign-qualified businesses, if foreign qualification might be necessary for your company. Does a state impose an income tax on corporations and LLCs? Does it have a minimum tax or a franchise tax?
Keep in mind that foreign-qualified companies must comply with taxation requirements both in the state of formation and the state(s) of qualification. That is a reason why small businesses with few owners often determine home state formation is best for their business. The added costs of fulfilling the ongoing and taxation requirements imposed by the state of formation and qualification often outweigh the perceived benefits of incorporating outside of the home state.
One exercise that is beneficial in evaluating taxation of one state versus another is to calculate the company's projected revenue for its first few years of existence and then evaluate the states in terms of the amount of taxes the company would be required to pay. This will help you to see if formation in one state is clearly more beneficial from a tax perspective.
As always, for questions regarding the best state of formation for your particular business, or whether your business may need to foreign qualify in another state, it is best to seek professional advice.
Advantages to form business in Home State :
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Typically the least complicated, if you only plan to operate the business in your home state. |
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Avoid paying franchise taxes and filing annual reports in more than one state |
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Usually costs less to incorporate locally. |
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Disadvantages |
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May miss out of the advantages of forming a corporation or LLC in Delaware or Nevada. |
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Best States to Incorporate
Due to their unique incorporation laws and favorable tax policies, certain states are well known as favorable homes for corporations. If you'll be doing business in multiple states, you may want to consider incorporating in Nevada or Delaware.
Popular States for Incorporation:
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Doing Business in Multiple States?
Many companies conduct business throughout the U.S. and abroad. A corporation having business locations in multiple states may form a corporation or LLC in a single state, then "qualifies to do business" in other states. This means companies must formally register, file annual reports and pay annual fees to obtain authority to conduct business in those states; and benefit from the laws of the state.
Doing Business as a Sole Proprietor or in General Partnership Vs Incorporating
Achieving conclusion on this is the most important step before you start doing business and many factors weigh in. Most Small Business Owners (Beginners) or Self-Employed Consultants start their business or independent consulting as Sole Proprietors or as a group under General Partnership with a wrong notion that incorporation is too costly, time-consuming and adherence to additional regulatory due diligence
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Issues to consider |
Sole Proprietorship / Partnership |
Incorporation |
| 1 |
Perpetual Life |
Owners / Partners impact the perpetual continuity of a sole proprietorship or partnership firm. |
A business under corporation structure enjoys perpetual life. Even if the Owners or Partners (typically shareholders in a corporation) wish to sell their interest in the business or become incapable to conduct business or even if upon their death, corporation continues to keep its existence and does business in the normal course. A corporation's life is unlimited. |
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Business Liability |
Owners/Partners and their businesses are considered under one umbrella and hence their liability on business debt is Unlimited. Complete onus and responsibility to repay business liability falls upon the Owners/Partners. |
Shareholders (Owners/Partners/Private or Public Investors) are not personally responsible for business liabilities and debs to the corporation. Creditors cannot pursue personal assets of the shareholders to repay business liabilities/debts. |
| 3 |
Tax Benefits |
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1) No Double Taxation on Profits from Business. |
2) It will be very easy for Sole Proprietorships or Partnerships with few partners to subscribe to Defined Benefit Plans like 412(i)s |
Demerits : On the other hand |
1) Owners or Partners may not be able to deduct their Health or Life Insurance Premiums from business; |
2) They will be subject to Self-Employment taxes on profit derived from business. |
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| Benefits : |
1) Corporate Income is not subject to Social Security, Medicare and Workers Compensation Taxes. Shareholders (Owners) are taxed on Self-Employment Taxes only to the extent they draw any money from the corporation as compensation/self employment income; |
2) Owner Employee's Health Insurance and Life Insurance Premium (up to defined Limits) may be deductible. |
3) It will be easier for a corporation to set up Defined Contribution Plans like 401(k) etc. |
Demerits: |
1) Profits distributed as Dividends attract double taxation. However, by electing S-Corporation Status with the IRS, this problem gets mitigated. |
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Raising Capital |
Most of the times, Owners/Partners invest personal money into their business. Even if they borrow and raise any business debt, banks or lenders check Owners/Partners Personal Credit History, directly impacting their individual credit score, in case business doesn't do well. |
Capital can be raised more easily through the sale of stock. Additionally, many banks, when providing a small business loan, want the borrower to be an incorporated business. Business will have the opportunity to establish its own credibility and credit track. Further, if business doesn't do well, it doesn't impact the credit rating of its shareholders (Owners/Partners). |
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Business Formation and Continuity Expenses |
Formation of a Sole Proprietorship or General Partnership doesn't need to file any formation documents with the state and hence such business structure can be formed expending very minimum or little money and further there is no ongoing expense usually charged by the incorporating states until the business exists. |
To form a corporation structure, businesses have to pay articles of incorporation fees in most of the states of the U.S. Further, many states charge an ongoing fees on corporations, such as annual report and/or franchise tax fees. |
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Regulatory Framework |
Sole proprietorships, general partnerships are not required to adhere to the formalities generally imposed on corporations. |
Corporations are essentially required to maintain record-keeping; adopt bylaws; document minutes of Directors and Shareholders meetings, and issuing shares of stock to the owners. |
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Incorporate a company |
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