In today's dynamic financial landscape, families are increasingly turning to innovative strategies to preserve and grow their wealth across generations. One such strategy gaining traction is the concept of the "Family Bank" – a limited liability limited partnership designed to serve as a powerful financial planning tool. Let's delve deeper into understanding how Your Family Bank operates and why it could revolutionize your family's approach to wealth management.

What Exactly is Your Family Bank?

Your Family Bank operates as a specialized entity within a limited liability limited partnership framework. Owned by the Trustees of your trust and your holding company, this structure offers unparalleled flexibility and liability protection. By leveraging this setup effectively, families can shield their assets from transfer taxes, ensuring that their wealth remains intact and accessible for future generations.

The Role of General Partners

Managed by appointed general partners, Your Family Bank assumes a multifaceted role beyond mere financial management. It becomes a platform for instilling financial literacy and promoting responsible money management practices within the family. Instead of simply distributing wealth, Your Family Bank offers loans to children and grandchildren, fostering independence and self-sufficiency while minimizing reliance on trust distributions.

Tailored Financing Solutions

One of the key features of Your Family Bank is its ability to provide tailored financing solutions to meet the diverse needs and aspirations of family members. Whether it's an investment loan to support entrepreneurial ventures, a loan for furthering education or professional development, or an enhancement loan to bolster intellectual capital, Your Family Bank offers customized financial assistance aligned with the family's long-term goals.

Adhering to Loan Administration Guidelines

To maintain transparency and accountability, Your Family Bank adheres to stringent loan administration guidelines. These include thorough project planning, feasibility assessments, comprehensive documentation, and regular investment reporting. Timely repayment of loans is paramount, and failure to do so may necessitate collection actions. By upholding these standards, Your Family Bank ensures prudent financial management and maximizes the benefits of its lending activities.

Conclusion: Empowering Generations for Financial Success

Your Family Bank represents more than just a financial tool – it embodies a legacy-building strategy aimed at empowering future generations for financial success. By harnessing the flexibility and protection offered by this unique structure, families can secure their wealth, impart valuable financial knowledge, and support the aspirations of their loved ones for years to come. It's time to unlock the full potential of Your Family Bank and pave the way for lasting generational wealth.

A Trust enables discreet management of your Estate, away from public scrutiny. With a Trust checking account, your Trustees can efficiently settle debts and distribute inheritances without depleting other assets or relying on external funds. Additionally, this account simplifies tracking of outgoing funds and their intended recipients.

Documents Needed to Open a Trust Checking Account:

To open a Trust checking account, you will need documentation proving the identity of the Trust. This may include the original Trust Agreement and IRS form SS-4, which grants the Trust a tax ID number. Because Trust checking accounts are in the same name as the Trustor, you will need a valid form of personal identification.

Some of the specific documents you will need:

1. Trust Agreement: A bank will require common information from the Trust Agreement, including the Trust name and notarized signature pages.

2. Trust Amendments: Required if anything from the original Trust Agreement has been amended.

3. Beneficiaries: A list of the Beneficiaries who will inherit the funds of the account after the Trustor's death.

How to Establish a Trust Checking Account:

A Trust checking account can be set up in one of two ways: either by the Trustor when creating an Estate Plan, or by the Trustees following the Trustor's passing.

For Trustors: 

The Trustor, responsible for establishing the Trust and designating Beneficiaries, Trustees, and the Account Appointor, can directly create and fund the Trust checking account before their passing. This can be done when initially creating the Trust, with funds contributed either all at once or gradually over time.

A designated Trustee gains access to the Trust checking account to distribute funds or replenish it as needed. Trustors setting up a Trust checking account should discuss their intentions and the Trustee's role with them to ensure alignment with their final wishes.

For Trustees: 

Trustees may establish a Trust checking account as part of the Estate settlement process while adhering to the original Trust agreement. The Trust delineates each Beneficiary and their designated inheritance amounts, necessitating the establishment of a Trust checking account to oversee payments and manage the Trust effectively.

Funding a Trust Checking Account:

A Trust checking account draws funds from various financial sources, including cash, savings, and insurance policies. Similar to standard Checking and Savings Accounts, Trust checking accounts are FDIC-insured up to $250,000, with the insured amount contingent on the number of Beneficiaries.

Choosing a Bank for Trust Checking Accounts:

While you likely have accounts with multiple financial institutions, you may prefer to consolidate your assets at a familiar bank. However, not all banks offer Trust checking accounts. Before proceeding with your Estate Plan, inquire with your bank about Trust checking account availability and the necessary procedures. Each institution has its own guidelines, and some private banks may offer specialized accounts not available elsewhere.

Utilizing a Trust Checking Account for Expenses:

A Trust checking account can cover various Estate-related expenses, including debts, utilities, insurance, real estate fees, taxes, funeral costs, and legal fees. Given the diversity of potential expenditures, meticulous record-keeping is essential to track payments and outstanding obligations.

Ensuring Future Preparedness:

Managing your Trust checking account is integral to a comprehensive Estate Plan, ensuring the fulfillment of your final wishes. With prudent management, you can rest assured that your legacy will be honored and carried forward as intended.

Combined approach

You could also have both a management company and a holding company (since they can serve different purposes). A management company arrangement for all your earned income from consulting and a holding company for all your rentals that you accumulated with your earned income.

Why should a business owner incorporate?

Incorporating your business is a pivotal step, but why do so many entrepreneurs choose this path? From safeguarding personal assets to attracting investors, incorporating provides several advantages that can set your business up for long-term success. Here’s a closer look at some compelling reasons.

Legal Protection

One of the most significant benefits of learning how to incorporate is the legal protection it offers. When you incorporate your business, there’s a clear divide between your personal assets and the business’s assets. This means if your corporation faces a lawsuit or incurs debt, your personal assets like your home, car, or personal savings generally aren’t at risk. This layer of protection is often called the “corporate veil,” and it helps ensure that business owners can pursue their entrepreneurial dreams without jeopardizing their personal wealth.

Enhanced Credibility

Want to make a strong impression? Incorporation can help. When a business becomes a corporation, it often gains an enhanced level of credibility among potential customers, clients, vendors, and partners. Seeing “Inc.” or “Corp.” after a business name can instill a sense of trust and professionalism. This perceived stability can make others more inclined to do business with you, potentially giving you a competitive edge in the marketplace.

Ability to Raise Capital

Corporations have the unique ability to raise capital by issuing shares of stock. Whether you’re eyeing expansion, looking to launch a new product, or aiming to invest in cutting-edge technology, selling stock can provide the funds you need.

This isn’t just about money — attracting shareholders also means bringing in individuals who believe in your vision and offer their support as you steer your business toward greater heights. Incorporating unlocks these opportunities, making it simpler to secure the resources your corporation needs to thrive

How to Incorporate: A Step-by-Step Guide

Now let’s discuss how to get incorporated. Follow these steps, and you’ll be well on your way to forming a corporation. 

Step 1: Choose a business name for your corporation

Decide what you’ll call your corporation. Picking the perfect name for your corporation often requires a blend of creativity and diligence. The business name you choose is crucial, as it not only establishes your brand identity but also helps you stand out in the business world. It’s essential that your corporation’s name is unique to prevent potential legal hurdles and avoid confusion among customers.

Before getting too attached to a name, check its availability in your state. Most states offer online databases where you can do this. Remember, each state has its guidelines for naming corporations — often, they require the inclusion of terms like “Incorporated,” “Corporation,” or their abbreviations. Beyond state considerations, it’s wise to search the U.S. Patent and Trademark Office’s (USPTO) online database to ensure your chosen name doesn’t infringe on federal trademarks. Finally, see if you can get a matching domain name for your business website. A matching name helps customers easily find you online. And, if you want any DBAs (“doing business as” names), you should look into registering those, too.

Step 2: Appoint a registered agent

Designate a registered agent. Every corporation needs a registered agent — no exceptions. A registered agent serves as the official contact for your corporation, responsible for receiving some crucial communications (particularly service of process). The agent can be an individual or a business entity, and they must be available during regular business hours and have a physical address in the state where the business is incorporated.If you’re concerned about privacy or won’t be consistently available at a single address, using a registered agent service like ours can be a smart move. A registered agent service offers reliability, helping ensure that all important documents are received and forwarded to you promptly. In addition, your registered agent receives service of process, so it’s best to outsource this role unless you’re okay with the risk of being served with a lawsuit in front of clients, partners, or employees.

Step 3: File the Articles of Incorporation with your Secretary of State

File your incorporation documents. Jumpstarting your corporation’s legal journey involves filing the Articles of Incorporation. Think of this document as your corporation’s birth certificate. It provides essential information about your business, including the corporation’s name, its purpose, details about shares of stock, and the name and address of your registered agent. Depending on your state, additional information might be required.

Once you’ve drafted your Articles of Incorporation, you’ll need to file it with your Secretary of State’s office, accompanied by a filing fee. While most states allow online submissions, others might require a hard copy. As you move forward, keep a copy of the filed Articles for your records, as it’s a cornerstone document for your corporation.

Step 4: Hold your first meeting and choose directors for your corporation

Set up your board of directors at your initial meeting. Once your corporation is officially recognized, it’s time for the inaugural organizational meeting — a significant step that sets the stage for your corporation’s operations. At this meeting, one of the first orders of business is selecting the board of directors. This group of initial directors will wield significant influence, making high-level decisions and setting the corporation’s course. The process of choosing directors varies, but it’s typically driven by the corporation’s initial investors. It’s crucial to document everything in this meeting, from the selection of the directors to other foundational decisions. These minutes serve as an official record — an essential part of your corporate records — and can be referenced in future meetings or decisions. Remember, once directors are chosen, their roles and responsibilities should be clearly outlined to help ensure a smooth operational transition for the corporation.

Step 5: Create corporate bylaws and a shareholder agreement

Write the governing documents for your corporation. Corporate bylaws are like your corporation’s rulebook. They lay the groundwork for how your corporation will operate, from defining the roles of officers to outlining meeting procedures and more. Bylaws cover the everyday inner workings of your corporation and can help resolve disputes or questions about protocols down the line.

While they’re internal documents and typically don’t need to be publicly filed, having them in place is crucial. They help ensure consistency and order as your business grows and evolves. In a way, they’re similar to an LLC’s operating agreement, but they’re even more detailed and vital.

A shareholder agreement, on the other hand, is like a prenuptial agreement for your corporation’s owners. It dictates the rights and responsibilities of the shareholders and provides clarity on matters like profit distribution, ownership transfers, and actions to take in the event of a shareholder’s death or exit. Crafting this document might require careful negotiation, but it’s a safety net. It helps ensure that all shareholders are on the same page and have a clear understanding of their roles and expectations within the corporation.

Step 6: Issue stock certificates

Set up your corporation’s stock certificates. Issuing stock certificates is a tangible way to represent ownership in your corporation. When someone invests in your corporation, whether they’re buying a share for the first time or acquiring more, they’re typically given a stock certificate.

This piece of paper symbolizes their slice of the corporation’s pie. It’s a historical practice, and in today’s digital age, many corporations also maintain electronic records of stock ownership. However, for some shareholders, having a physical certificate can feel like a genuine stamp of ownership.

The process of issuing stock differs between private and public companies. In private corporations, stock is often distributed among a small group of initial investors or founders, and the transfer of these stocks is typically more restricted.

Public companies, conversely, have their stock available to the general public on the stock market. For them, stock certificates might be more symbolic, with most trading and ownership records kept electronically. Regardless of your corporation’s type, maintaining meticulous records of stock ownership is paramount to help ensure clarity and transparency.

Step 7: Apply for an EIN for your corporation

Get an Employer Identification Number. Every corporation, just like an individual, needs a unique identifier when dealing with the U.S. federal government, especially for tax purposes. This identifier is known as an Employer Identification Number (EIN), often referred to as a federal tax ID. Think of it as your corporation’s Social Security number. Whether you’re planning to hire employees, open a business bank account, or simply file taxes, an EIN is indispensable and legally required. The Internal Revenue Service (IRS) allows you to apply for an EIN online, and in most cases, you’ll receive it almost instantly. If the digital realm isn’t your preference, you can also apply via mail or fax. If you’d rather avoid the hassle of getting your own number, use our convenient EIN service.

Step 8: Obtain necessary business licenses and permits

Get your required business licenses and permits. Starting a corporation goes beyond just paperwork — you also need the green light to operate legally within your industry and locality. This is where business licenses and permits come into play. Depending on your corporation’s nature and location, the required permits can vary. Some licenses you might need include a general business license, a sales tax permit, or health department permits for businesses dealing with food.

Then, there are lots of potential industry-specific licenses, such as those for real estate agents or barbers. To ensure you’re fully compliant, start by checking with your local city or county business office. They’ll guide you on local requirements. Simultaneously, consult your state’s official website for state-level licenses and permits.

While this step might feel cumbersome, it’s crucial. Operating without the necessary licenses can lead to financial penalties, or worse, having your business shut down. Remember, staying compliant is an ongoing process, as licenses and permits often have renewal dates.If you’re feeling overwhelmed by the prospect of researching your licenses and permits, let us help. Our business license report assembles a list of the licenses and permits that apply to your unique corporation, freeing you up to focus on running your company.

Post-Incorporation Steps

Getting your corporation off the ground is just the start. Continuous maintenance helps ensure its smooth operation and compliance with legal requirements.

Maintaining Corporate Compliance

Corporations have ongoing state requirements like filing annual reports and franchise tax payments, depending on your state. It’s essential to stay updated to avoid penalties, maintain good standing, and prevent the dissolution of your corporation. Set calendar reminders for all crucial annual report dates and periodically check for any changes in state regulations.

Holding Regular Corporate Meetings

Regular corporate meetings, usually annual, are often legally mandated. They inform shareholders, aid in decision-making, and help ensure the corporation’s alignment with its bylaws. It’s not only about holding these meetings but also diligently documenting their minutes to maintain transparency and a clear record of the corporation’s trajectory.

Keeping Accurate Corporate Records

Proper documentation is vital for a corporation. From financials to board decisions, up-to-date records support informed decisions and are invaluable during audits or potential business sales. Store all essential documents securely and review them periodically. Accurate records not only help fend off challenges but also provide a clear snapshot of your corporation’s health.

Pros and Cons of Incorporation

Corporations, like all business structures, come with strengths and weaknesses. While they offer several benefits, they also have certain complexities that might not suit every entrepreneur. Let’s examine the pros and cons to help you determine if incorporation is right for you.

Advantages

Corporations shine when it comes to benefits like legal protection. Incorporating a business creates a distinct legal entity, shielding the personal assets of owners from potential business debts or liabilities. This limited liability protection is quite different from the unlimited personal liability of a sole proprietorship or general partnership. Another standout advantage is the ability to raise capital by selling shares. This feature often makes it easier for corporations to secure investments or financing, propelling growth and expansion.

Disadvantages

However, the corporate structure isn’t without its challenges. To start, there’s the financial aspect — setting up and maintaining a corporation can be costlier than other business entities. There’s also the issue of double taxation for C corporations, where profits get taxed at the corporate level and again on shareholders’ personal tax returns.

Furthermore, corporations require adherence to numerous formalities, such as regular meetings and record-keeping. The management structure is also more rigid than an LLC, which can be a deterrent for those seeking flexibility. Lastly, the amount of paperwork and regulatory oversight can be daunting, adding an administrative burden that not all small business owners wish to shoulder.

Incorporating a business begins with selecting a unique name and appointing a registered agent. Essential steps include filing the Articles of Incorporation, setting bylaws, issuing stock, and obtaining an EIN. Once established, continuous maintenance involves compliance, regular meetings, and accurate record-keeping.

Forming a business can be complicated, but we’re here to make it as easy for you as possible.

When you’re ready to take the leap, we can help you form an LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward. Click the button below to get started.

file your ccorp for free with bizee

What is an S corp?

S corporation, commonly referred to as Scorp, refers to a tax status available to qualifying LLCs and corporations. It can have substantial tax benefits, depending on a variety of factors. First, you should understand that an S corporation is not a business structure like a sole proprietorship or a separate legal entity like a corporation or LLC. Rather, it’s a tax classification that either an LLC or a corporation can apply for with the Internal Revenue Service (IRS) if it meets the criteria. We’ll outline those criteria and the steps you would need to take to file as an S corporation if you decide that it’s right for your business.

For a limited liability company (LLC), filing as an S corporation may provide savings on self-employment taxes in some cases. For C corporations (the default form of corporation), it can be a way to avoid double taxation. While both S Corps and LLCs offer limited liability protection, there are other key differences in taxation and ownership structures that businesses should consider. 

Requirements and Considerations of S Corps

Before we go over how to form an S corporation, you should be aware of the requirements and limitations for filing as an S corporation. To qualify for S corporation status, the IRS says your business must:

• Be a domestic corporation or LLC

• Have no more than 100 shareholders or members  (“shareholders” is the term for owners of a corporation, while “members” is the term for owners of an LLC)

• Have only one class of stock

• Not be an ineligible corporation, such as certain financial institutions, insurance companies, and domestic international sales corporations

• Have only allowable shareholders or members, which includes individuals, certain trusts and tax-exempt organizations, and estates. The shareholders may not be partnerships, corporations, or non-resident aliens. A nonresident alien is an alien who has not passed the green card test or the substantial presence test.

Does your business fit these requirements? If so, keep reading and learn how to create an S corporation.

Filing Form 2553 to start an S-Corp - Form 2553

To apply for Scorp status, you’ll first need to create either an LLC or a corporation, if you haven’t already done so. Then, you’ll file an election Form 2553 with the Internal Revenue Service (IRS).

How to Set up an S Corp Election from an LLC

1. Choose a business name

2. Appoint a registered agent

3. File formation documents

4. Create an operating agreement

5. Acquire an EIN and acquire licenses and permits

How to Set up an S Corp Election from a Corporation

1. Choose a business name for your corporation

2. Appoint a registered agent

3. File the Articles of Incorporation with your Secretary of State

4. Hold your first meeting and choose directors for your corporation

5. Create corporate bylaws and a shareholder agreement

6. Issue stock certificates

7. Apply for an EIN for your corporation

8. Obtain necessary business licenses and permits

Final Step – File form 2553 to apply for S corporation status

Submit the form to apply for S corporation status. Once your LLC or C corporation formation is approved by the state, you need to file Form 2553, Election by a Small Business Corporation, to get S corporation status. 

The Internal Revenue Service requires that you complete and file your Form 2553 with the IRS: 

• Within 75 days of the formation of your LLC or C corporation, or no more than 75 days after the beginning of the tax year in which the election is to take effect

OR

• At any time during the tax year preceding the tax year the election is to take effect.

One note for LLCs wishing to file as an S corporation: If your LLC is past the 75-day election deadline, you’ll also need to file Form 8832, Entity Classification Election, to elect to be taxed as a corporation. Then you would file both Form 8832 and Form 2553 together via USPS-certified mail. 

The IRS has more information on when and how to file Form 2553 and other information about how to set up an S corporation on its website.

Additional Steps on Forming an S-Corp

Whether you’re forming an LLC or a corporation, it’s important to know that not every state follows the same process. For example, most states follow the five steps below for forming an LLC, but three states (New York, Arizona, and Nebraska) also have a publication requirement. California and West Virginia also have additional steps for LLC formation. Our instructions above for forming an LLC generally apply to most states, though.

Also, know that some states use different terms for essentially the same thing. For example, most states use the term “registered agent,” but others may refer to this as a “statutory agent,” “resident agent,” etc. “Articles of Organization” also goes by different names.

Pros and Cons of Filing

While S corporation classification does come with a number of benefits for some businesses, making this election might not be right for all business types. So, be sure to carefully weigh the various pros and cons before deciding how you want to move forward. Consult a tax professional about whether the S corporation election would be best for your business.

LLC with S Corp Election Advantages:

The advantages of filing as an S corporation for a limited liability company aren’t exactly the same as they are for C corporations. Let’s look at the advantages for LLCs first.

Self-Employment Taxes Explained

A traditional LLC already has pass-through taxation, so the benefits of Scorp election for an LLC have to do with self-employment tax. This requires some explaining, but for certain LLCs, it could save a lot in taxes.

The members of a standard LLC are considered self-employed. They’re compensated by receiving their share of profits from the LLC, but they can’t be employed by the LLC. Being self-employed means paying self-employment taxes (Social Security and Medicare, which adds up to about 15.3%) on all profits they receive from the LLC. This is more than the taxes they’d pay when working for someone else because their employer would pay part of them.

Dividing Salary and Profits

But when the members elect S corporation status, they can be compensated in two ways, by receiving their share of the profits and by being paid as an employee. Once they do that, they only pay Social Security and Medicare taxes on their salary and not the profits they receive.

Depending on factors such as how profitable your company is, the tax benefits could be substantial. (Of course, the members will still pay income tax and all other applicable taxes on their share of the profits; we’re only talking about the taxes that would go toward Social Security and Medicare here.) Money paid out as salary is a tax-deductible expense for the business. 

Reasonable Compensation

One caveat to this is that the IRS expects you to pay yourself a “reasonable salary” as an employee of the LLC. Otherwise, you could pay yourself an annual salary of $1 and avoid contributing anything to Social Security and Medicare. 

So, what is “reasonable compensation”? The instructions on Form 1120-S read, “Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.” Basically, the IRS considers “reasonable” to be something similar to what others in your field are earning.

If the IRS determines that your salary isn’t reasonable, it has the authority to reclassify your non-wage distributions (which aren’t subject to employment taxes) to wages (which are subject to employment taxes). Several court cases have supported the IRS’s right to do this.

LLC with S Corp Election Disadvantages:

Having an LLC with Scorp status can also have some drawbacks over a regular LLC:

Stricter Requirements 

As we listed above, S corps must adhere to more regulations than a standard LLC or C corporation. An S corp can have no more than 100 members, and none of them can be partnerships, corporations, or non-resident aliens. A traditional LLC doesn’t have these limitations.

More IRS Scrutiny

Because of the above restrictions and the requirements about paying yourself a “reasonable salary,” the IRS tends to monitor LLCs filing as S corps more closely. That could mean a greater chance of being audited, even if you follow the law to the letter. In fact, Scorp owners may want to observe many of the same formalities that C corporations do (such as regular meetings and extensive record keeping), even if they’re not legally required to.

Additional Accounting and Bookkeeping

Having an LLC that files as an S corporation generally means more paperwork. If you don’t already have to do payroll for your business, being an owner-employee means that you’ll have to do so. Your taxes will be more complex, as well.

With these added complications, you’re likely to have higher administrative costs. You may find that you need an accountant, bookkeeper, and/or a payroll service or software.

C Corporation with S Corp Election Advantages:

If you have a C corporation (the default form of corporation), filing as an Scorp does have its advantages:

Pass-Through Taxation

A big disadvantage for traditional corporations is “double taxation.” When the corporation makes money, the IRS taxes those profits on the corporate level. Then, when those profits are ‌distributed to the individual owners (shareholders) as dividends, they’re taxed a second time on the shareholders’ personal income tax returns.

But when a C corporation qualifies to be an S corp, those profits are only taxed at the individual level. The business itself isn’t taxed on them. This is called “pass-through taxation” because it allows you to pass corporate income through to the shareholders without first being taxed at the corporate level. This is how sole proprietorships and general partnerships are taxed. LLCs are also taxed this way unless they choose to be taxed as a corporation.

We need to add here that, since the 2017 Tax Cuts and Jobs Act, the corporate tax rate has been lowered to a flat 21%. So, the disadvantages of double taxation aren’t as severe now as they were. 

Writing Off Losses

Just as business profits pass through to the owners of an Scorp, so do the losses. Unlike the shareholders of a C corporation, S corp owners can write off the company’s losses on their personal income statements. 

This can help offset their income from other sources and can be helpful if the corporation loses money in the first couple of years. Still, make sure you’re aware of ​​the IRS’s shareholder loss limitations.

Qualified Business Income Deduction

Under the Tax Cuts and Jobs Act, some S corporation owners may be able to deduct up to 20% of their qualified business income. This deduction isn’t available to C corporation shareholders.

Qualified business income (QBI) is basically your share of the company’s profits, or, as the IRS puts it, “QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts.”

The IRS website has a detailed explanation as to what is and is not included in QBI. There’s an income threshold that, if exceeded, may reduce your QBI (see the IRS website for details).  

C Corporation with S Corp Election Disadvantages:

An S corporation status also has its downsides for C corporations:

Limited Number of Shareholders

As we said, an Scorp can’t have more than 100 shareholders, while a C corporation has no such restriction. That limitation could be an issue later if the corporation expands and goes public.

Limited Types of Shareholders

All Scorp shareholders must be U.S. citizens, or certain trusts or estates. That could limit your ability to expand internationally. You also can’t have partnerships or corporations as shareholders. C corporations don’t have these limitations.

One Class of Stock

One way corporations attract investors is to offer preferred stock. That’s fine for C corporations, but the IRS doesn’t allow it for S corporations.

More IRS Scrutiny

Because of the extra restrictions S corps have, the IRS watches them more closely to see if they’re in compliance. In other words, your corporation is more likely to get audited.

We can’t stress enough how important it is to have tax guidance about your specific situation from a qualified tax professional. An accountant with S corp experience should be able to make sure you stay in compliance with the Internal Revenue Code, but they may also be able to help you find additional tax savings.

How S Corporations Can Save Money on Self-Employment Taxes

Joe has an LLC without Scorp election.

Jill has an LLC with Scorp election.

Both LLCs make $200,000 in profits.

Joe takes all of his LLC’s earnings ($200,000) as a distribution.

With an S corp, Jill is able to split the $200,000 in profits into two groups, her salary ($100,000) and the distribution she receives as the LLC owner ($100,000).

Joe must pay self-employment taxes (Social Security and Medicare) on the full distribution at 15.3%. $200,000 x 15.3% adds up to $30,600.

Jill pays self-employment taxes on her $100,000 salary at 15.3%, adding up to $15,300. Because Jill’s LLC is an S corp, she pays no self-employment taxes on the $100,000 she receives as a distribution.

Final amount of self-employment taxes paid by Joe: $30,600.

Final amount of self-employment taxes paid by Jill: $15,300.

S Corps and State Taxes

An Scorp filing is done with the IRS for federal tax purposes, but what about state taxes? Does the pass-through taxation also apply to those, too?

Most states recognize the Scorp status for state tax purposes. In other words, if the business entity itself doesn’t pay federal corporate income tax, it usually wouldn’t pay state income taxes, either. The profits would only be taxed on the personal income tax returns of the shareholders or members. 

However, there are some states and jurisdictions that don’t recognize the Scorp status. In those areas, your Scorp would pay state taxes just as a C corporation would. Also, a few states have taxes that are applicable specifically to S corporations.

Most states don’t require you to make a separate Scorp election at the state level, but several do. For those states, you would need to complete a separate form to be taxed as an Scorp for state taxes.

Forming a business can be complicated, but we’re here to make it as easy for you as possible.

When you’re ready to take the leap, we can help you form an LLC with an S corporation designation and provide you with valuable support for all of your business needs moving forward. Click the button below to get started.

file your scorp for free with bizee

non-profit

It’s not terribly difficult to form a nonprofit corporation, as long as you have the right paperwork and your business has the appropriate aims.

Essentially, a nonprofit corporation is a business that’s incorporated at the state level and recognized as tax-exempt by the IRS. This is usually because the organization focuses on something that benefits an area of society without focusing on profit. Benefits could be educational, scientific, or humanitarian — but there are many other areas of focus that would qualify.

Incorporating a nonprofit is very similar to incorporating a for-profit corporation, and you’ll have many of the same protections a for-profit has. You’ll also have to keep meticulous records of all your paperwork and financial records and do regular checks to make sure you’re in compliance with the state and in good standing. Although a nonprofit corporation requires more formalities than a limited liability company (LLC), it offers many of the same protections that a standard for-profit corporation does.

The following will give you a breakdown of how to form a nonprofit corporation:

Nonprofit Corporations vs. Nonprofit Associations and Nonprofit Organizations

There are a few key differences between corporations, associations, and organizations.

• Nonprofit Corporations: These are primarily focused on a specific mission, usually of benefit to the wider community. They can only be formed by filing at the state level and usually apply for 501(c)(3) status from the IRS; however, they are not required to register with the IRS.

• Associations: These provide benefits to their members (often as business leagues), not to the wider community. They can be incorporated at the state level, but they usually apply for either 501(c)(4) or 501(c)(6) status from the IRS; however, the status they apply for depends on what IRS classification they fall under.

• Organizations: This is a much broader category that includes corporations and associations, among others. An organization can be unincorporated, or it can be arranged as an LLC (with major restrictions — in general, a nonprofit LLC’s members must be nonprofits themselves or part of the state to be eligible). Without formal registration, however, most nonprofit organizations are considered partnerships at the state level.

Nonprofit Corporations vs. Unincorporated Nonprofits

While it’s often simpler to not incorporate your nonprofit, incorporation offers major benefits:

• It protects board members from personal liability. This means that the only assets on the line are those owned by the business, not the personal property of each board member. While there are a few exceptions, mostly relating to the duty to conduct operations in the nonprofit’s best interest and avoiding illegal or irresponsible acts, board members and founders can’t be pursued in the courts.

• Incorporation provides significant tax benefits on income. That’s not to say that all net income is untaxed; profit has to be substantially related to the nonprofit’s mission, otherwise, it may be subject to an unrelated business income tax. Nonprofit associations and nonprofit organizations, on the other hand, are taxed as partnerships.

• Tax advantages. Incorporated nonprofits that have 501(c)(3) status are exempt from federal income taxes, as well as other types of taxes a for-profit would have to pay.

Unincorporated nonprofits cannot usually offer these benefits.

Other Benefits

It’s a lot easier to apply for grants and public funding if you’re set up as a nonprofit corporation. Many government agencies and foundations restrict grants to registered charities, and donations to 501(c)(3) charities are usually tax-deductible for those making them. These donations don’t have to be monetary donations; they can be anything from donations of artwork or goods to real estate. Different rules apply in different instances, so those looking to donate major capital assets should consult a tax attorney. IRS Publication 526 is usually a good starting point, although it’s quite a big read.

In addition, a nonprofit corporation can enter into agreements as an entity. This differs from an unincorporated nonprofit, where the individual partners must enter into agreements. The ability to enter into agreements as an entity is related to the liability shield benefit mentioned above.

Forming a Nonprofit Corporation at the State Level

The process of forming a nonprofit corporation always happens at the state level. That’s because each state has slightly different rules for incorporation, and registering businesses is not a federal task. The process varies from state to state, but it generally looks something like this:

Choose a name, domain, & phone number - See Lvl 3 Business Builder Step 1

No matter what state you incorporate in, you’ll need to choose a name for your nonprofit. The general rules are that the name may:

• Not be misleading

• Have limitations on certain words (often financial words such as bank, trust, and credit as well as profession-based words such as doctor, engineer, or chartered)

• Have to include a suffix (Corp., Inc., etc.)

• Not be profane or obscene

• Not be materially similar to another business registered in the state

Each state is slightly different, especially with what it defines as “materially similar.”

Choose the directors

The directors of a nonprofit provide oversight for the nonprofit. Typically, they help set the overall strategy and focus of it and ensure that the executive roles (CEO, CTO, CFO, and so on) are aligned. They set bylaws, vote in officers (president, secretary, and treasurer), and set policies to avoid conflicts of interest. In their role as a board member, they generally must be volunteers, although they can be reimbursed for expenses (travel, accommodation, etc.).

The minimum number of directors is three in most states. In the following 16 states, the minimum is one:

• Arizona, California, Colorado, Delaware, Georgia, Iowa, Kansas, Maryland, Massachusetts, Mississippi, Nebraska, North Carolina, Oklahoma, Pennsylvania, Virginia, Washington

In New Hampshire, the minimum is five. To qualify for 501(c)(3) status, the IRS recommends that all nonprofit corporations name three directors who are not related. This is something that those in one director states should look at before incorporating.

While the board can be completely separate from management (chief executive officer and so on), in many small nonprofits, board members also serve as part of the management team. In addition, directors must be over 18.

Choose a registered agent

Every corporation, including a nonprofit corporation, must appoint a registered agent when the business is formed. This registered agent becomes the main contact between the business and the Secretary of State (or whichever agency oversees business formation) for each state. A registered agent for a nonprofit receives correspondence from the state’s business entity formation agency and important legal notices, such as service of process for lawsuits.

As a result, a registered agent must:

• Have a physical address within the state of incorporation

• Be available during normal business hours

You can act as your own registered agent if you wish, although you would need to be available at the address registered during normal working hours. This can be a major disadvantage, particularly for those who wish to get involved in projects outside the office.

File Articles of Incorporation

The Articles of Incorporation is the filing that makes your nonprofit official under state law. They may be called Certificates of Incorporation or Articles of Association in some states, but they mostly follow similar formats:

Name of the corporation

Name and address of the registered agent

Corporate structure (usually a nonprofit corporation)

Names and addresses of the board of directors

How long the corporation will last for (in perpetuity is usually the default option)

Name, address, and signature of the incorporator

A lot of states ask for the purpose of the corporation; however, this purpose can be wide-ranging, so you can often be as vague as you like. This can be beneficial if you need to pivot your nonprofit to focus on a different mission at a later date.

The vast majority of states have a specific form that you need to fill in that covers these requirements, although Nebraska is a notable exception.

Create the corporation’s bylaws - SAMPLE BYLAW TEMPLATE

The bylaws of the nonprofit act as the internal manual for how the nonprofit operates. You should consider adding:

• How the nonprofit corporation is governed

• How often it holds board meetings

• How board members and officers are elected/appointed

• How voting works and what constitutes a quorum (the latter is sometimes determined by state law)

• The number of directors you need

• Rules on conflicts of interest (required for 501(c)(3) status)

• How bylaws can be amended

The bylaws, the conflict-of-interest document, and the confirmation of the officers are completed at the first meeting of the board of directors. In addition, you need to set up a corporate binder or another form of recordkeeping (such as using the cloud) to store and report major business documents, such as minutes from board meetings and annual reports. This is vital to maintaining both federal and state tax exemptions and other legal protections.

Get a tax ID number (ein) - gET STARTED

Federal taxes are assessed and collected by the IRS, so you need to get a federal tax ID. This is formally called an Employer Identification Number or EIN. You can apply online, via fax, by email, or by telephone, and you’ll need a taxpayer identification number, such as a Social Security Number or Individual Taxpayer Identification Number (ITIN). For anything other than online filing, you need to fill in Form SS-4.

Filing for Tax-Exempt Status

It’s now time for the part that separates nonprofits from for-profits: 501(c)(3) status.

As stated above, to apply for this status, you have to fall into a category that the IRS deems acceptable for a nonprofit: charitable, scientific, testing for public safety, literary, educational, fostering of national or international amateur sports, and prevention of cruelty to animals and children. The term charitable is broad, as it can encompass numerous activities.

Despite its name, a nonprofit corporation can make a profit from various activities, but that profit has to be funneled into its mission. As a result, your business cannot distribute excess capital to its management or board of directors (such as through a dividend). In addition, the IRS allows employees to be paid — including the management team — but the payments must be “reasonable.”

The next step is to file Form 1023 or Form 1023-EZ. To file the latter, you must:

• Be eligible for 501(c)(3) status

• Have yearly gross receipts of $50,000 or less

• Have total assets of less than $250,000

Otherwise, you would file the standard Form 1023.

This must be filed within 27 months of the approval by the state of the nonprofit’s Articles of Incorporation. The form itself must include a statement on the governing structure, the purpose, and the planned program of your nonprofit.

Once you have found this form, you must file an annual information return each year (some exceptions apply, normally involving 501(c)(3) religious organizations) to the IRS (usually Form 990, although smaller organizations may be eligible to file Form 990-EZ or Form 990-NV).

Compliance

Finally, you want to make sure that you maintain your nonprofit corporation’s good standing by staying compliant with all state and federal laws. This means paying any taxes you may owe (yes, on some occasions a nonprofit must pay taxes), obtaining and maintaining all necessary licenses and permits, keeping proper records, and filing state-mandated notices like annual or biennial reports. State laws can vary widely, so make sure you check what your particular state requires.

Ready to start your nonprofit business?

At BIZEE, they're proud to support small businesses through a variety of different tools and services. Whether you need a registered agent service, want to reserve a business name, or are looking to register a domain, they help you stay on the road to success. Although we don’t assist with nonprofit formations at this time, this guide provides a general overview of the requirements you need to meet when incorporating a nonprofit.

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