This article takes you through the different milestones of the incorporation process. You will learn what is the information required to start the process, what are the terms you need to familiarize yourself with, which entity type to choose, where to incorporate, how to open your corporate bank account and how to plan your taxes.
The best advice may be to form a corporation in the state where you plan to conduct business. It will be far less complicated and more cost-effective in the long run. Listed below are some of the reasons why Delaware attracts both large and small businesses:
Delaware maintains a separate court system for business, called the “Court of Chancery.” If legal matters arise involving a trial in Delaware, there is an established record of business decisions. No minimum capital is required to organize the corporation and there is no need to have a bank account in Delaware. Just one person can hold all the offices of the corporation: President, Vice President, Secretary and Treasurer. There is no state corporate income tax on Delaware corporations that do not operate within the state. Shares of stock owned by persons outside of Delaware are not subject to Delaware personal income tax. There is no Delaware inheritance tax levied on stock held by non-residents.
The most important benefit of a Corporation is that, legally, it’s a separate entity from the individuals who own or operate it and thus limits your personal liability. If a court judgment is entered against the Corporation, you stand to lose only the money that you have invested in the Corporation. Generally, as long as you have acted in your corporate capacity (as an employee, officer or director) and without the intent to defraud creditors, your assets can not be used creditor to satisfy a judgment against your Corporation.
As the Corporation is separate from its owners, the Corporation pays taxes on any net income (profits) that is left after all business expenses have been paid or accrued. Corporations file IRS Form 1120 to report their income, expenses and taxes.
Corporate Income Tax Rates–2008
over Not over Tax rate
$ 0 $ 50,000 15%
50,000 75,000 25%
75,000 100,000 34%
100,000 335,000 39%
35,000 10,000,000 34%
10,000,000 15,000,000 35%
15,000,000 18,333,333 38%
18,333,333 .......... 35%
In addition, if the income is distributed to shareholders in the form of dividends, the shareholders pay taxes on the dividends they receive, currently 15%.
Limited Liability Company (LLC)
LLC is the newest form of a business entity. As with a Corporation, the owners of a LLC benefit from limited liability. This means that being a member of a LLC doesn’t normally expose you to legal liability for business debts and court judgments against the business. Generally, if you become a LLC member, you risk only your share of capitol paid into the business. A LLC member may be an individual or a separate entity such as a Partnership or Corporation that has invested in the LLC. Operating agreement should be created (when forming the LLC) to detail how the business will operate. If the LLC has one member it is treated like a sole proprietor or for tax purposes, otherwise it is treated as a partnership with each member reporting and paying income tax on their share of income.
Taxable income: Tax:
Over But not over Tax +% On amount over
$ 0 $ 8,025 $ 0.00 10 $ 0
8,025 32,550 802.50 15 8,025
32,550 78,850 4,481.25 25 32,550
78,850 164,550 16,056.25 28 78,850
164,550 357,700 40,052.25 33 164,550
357,700 ....... 103,791.75 35 357,700
The main benefit of forming a Non-Profit Corporation is to get a tax-exempt status under the IRC (Internal Revenue Code), usually Section 501(c)(3). If a Non-Profit is tax-exempt, not only is it exempt from paying income tax on its income, but donors who contribute to the Non-Profit can take a tax deduction for their contributions. To apply for 501(c)(3) status, the Non-Profit must file IRS Form 1023. The legal standard for tax-exempt status is that the Corporation has been formed for religious, charitable, literary, scientific or educational purposes. Non-Profits are usually managed by a board of directors or trustees who are involved in the operation of the Non-Profit. Officers and employees are in charge of the day-to-day business of the Non-Profit.
Your entity’s name should contain a valid corporate indicator for the state in which you are incorporating (most state accept one of the following identifiers or a suitable abbreviation: Incorporated, Corporation, Company, or Limited), and must not match or be too similar to the name of an existing company registered in your desired state.
Officer is appointed by the board of directors and responsible for the daily operation of the corporation. The titles and duties of each officer are usually listed in the company’s bylaws. Common officer titles are president, vice president, secretary, and treasurer. An officer can be one of the shareholders, owners or employees of the entity. Officer is part of the entity’s management. SHAREHOLDERS / MEMBERS Shareholders: Owners of the issued stock of a corporation. Shareholders do not own specific corporate property; they merely own an interest in the corporation. Shareholder appoint the entity’s board of directors which oversight the entity’s management (officers) Members: The owners of an LLC. A member can be active in the management of the LLC and he / she will be a member-manager or just an owner and then he / she will be a member.
TAX ID NUMBER
Tax ID Number – For The Entity
Federal Tax ID Number also known as Employer Identification Number (EIN) is a number given to your entity by the federal government for taxation purposes. You can not hire employees or open a bank account in your company’s name without obtaining an Employer Identification Number.
Tax ID Number – For The Owners
By the IRS
What is an ITIN? An Individual Taxpayer Identification Number (ITIN) is a tax processing number issued by the Internal Revenue Service. It is a nine-digit number that always begins with the number 9 and has a 7 or 8 in the fourth digit, example 9XX-7X-XXXX. IRS issues ITINs to individuals who are required to have a U.S. taxpayer identification number but who do not have, and are not eligible to obtain a Social Security Number (SSN) from the Social Security Administration (SSA). ITINs are issued regardless of immigration status because both resident and nonresident aliens may have U.S. tax return and payment responsibilities under the Internal Revenue Code. Individuals must have a filing requirement and file a valid federal income tax return to receive an ITIN, unless they meet an exception.
What is an ITIN used for? ITINs are for federal tax reporting only, and are not intended to serve any other purpose. An ITIN does not authorize work in the U.S. or provide eligibility for Social Security benefits or the Earned Income Tax Credit. ITINs are not valid identification outside the tax system. IRS issues ITINs to help individuals comply with the U.S. tax laws, and to provide a means to efficiently process and account for tax returns and payments for those not eligible for Social Security Numbers. Who needs an ITIN? IRS issues ITINs to foreign nationals and others who have federal tax reporting or filing requirements and do not qualify for SSNs. A non-resident alien individual not eligible for an SSN, who is required to file a U.S. tax return only to claim a refund of tax under the provisions of a U.S. tax treaty, needs an ITIN. Examples of individuals who need ITINs include: Non-resident alien filing a U.S. tax return and not eligible for an SSN U.S. resident alien (based on days present in the United States) filing a U.S. tax return and not eligible for an SSN Dependent or spouse of a U.S. citizen/resident alien Dependent or spouse of a non-resident alien visa holder.
Once the incorporation process has been completed the entity can set up a bank account. There are two types of bank accounts in the US: Checking account: this is an operating account which allows you to deposit funds and then distribute these funds via checks and wire transfers. In most instances checking accounts do not carry interest. Some checking accounts could be designated to a special purpose such as payroll. Savings account: in this account the entity deposits excessive funds from the checking account. This account normally carries interest.
The information you need to collect from you as part of the federal government’s anti-money laundering effort includes:
Proper name of the business and the name of the person opening the account. Physical address of the business – a post office box is not acceptable. Taxpayer identification number of the business or Social Security number of the person opening the account. As for company information, a copy of your firm’s articles of incorporation, articles of partnership or comparable documents from your state government will establish the legitimacy of your business.
Finally, the documents obtained for the company must include the name of the individual opening the account. If they do not, the business must provide a resolution giving the individual opening the account the authority to transact business on behalf of the company.
The following is a sample list of documents you may be asked when opening a bank account:
– Corporate Papers (Certificate of formation or incorporation). – Copy of EIN (SS-4) and the number. – Minutes of the most recent board meeting showing the identities of the board members (Should be on Letterhead). – Copies of official identification such as passport or drivers license. Passport should be certified (notarized) by US consulate. Bank reference letter for company (If possible) and all individuals (Required). – Copy of individuals bank statement showing mailing address (This should be from the bank making the referral). – Copy of individuals utility bill at same address. – A letter on company letterhead requesting account opening and specifying authorized signers. – A letter from the company attorney confirming the state of incorporation and authorized individuals who can act on the corporation’s behalf (Should indicate ownership of the company as well as listing anyone who is 25% owner or more).
A Merchant Account is simply a relationship between a retailer and a merchant bank that enables retailers to accept web-based credit card payments from their customers. This is the account into which a Merchant Account Provider deposits payments into your business checking account from the transactions made online. To qualify for a merchant account, retailers must meet the bank’s requirements.
Once the incorporation process is complete, your business is ready to start doing business in the US. A major step in strategizing your business is planning to minimize your US and international taxes. To achieve this goal you have to structure transfer price between your US and international entities, set up income and expenses budget and maximize tax deductions and benefits. To comply with federal and state laws, the entity must file quarterly reports, pay estimated taxes and file annual tax returns to report the entity’s income, expenses, profits and taxes as well as the owners income from the entity’s profits.