Frequently Asked questions about U.S. Incorporations

Many of our visitors ask us questions about setting up their new company. If you have questions and don't see it answered here please ask us.

 
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INCORPORATING IN THE U.S. - F.A.Q.

What do I need to know in order to set up a new US company?

  • What will the company do? There are some activities that require a license (such as medicine, dentistry or architecture) or special permission (banking, insurance, aviation) before it can be formed.
  • Who will own the company? These will be the shareholders of a corporation or members of an LLC.
  • Who will manage the company? These will be the directors and officers of a corporation or managers of an LLC
  • What will the company's name be? It must follow the rules of the state where the company is formed, and have a corporate indicator.
  • What type of entity will it be? Generally, it will be a corporation or an LLC.
  • What state will it be incorporated in? This will be either in the state where it is doing business, or in another state like Delaware where there are special legal benefits.
  • What state will it do business in? If this (or these) state(s) are not where the company is incorporated, it must register to do business there as a foreign corporation.
  • Who will act as registered agent? Almost every state requires its companies to maintain a legal address and agent within its borders to accept legal process and to which the state government can send annual reports, annual tax forms or other compliance matters.

Why do businesses incorporate?

Businesses incorporate primarily for protection: protection of the owners of the company from the liabilities of the business. Both corporations and limited liability companies legally separate the owners/investors of a company from their company's liabilities. Further, incorporation of either a corporation or an LLC may provide tax benefits, prestige and/or name protection, as well as possibly making it easier to set up health insurance, retirement plans and other benefits to owners and employees.

What are the main types of companies/entities?

Although there are several types of companies, the most commonly-used types are corporations and limited liability companies.

What is a Corporation?

A corporation is a legal entity that exists separately from its owners. Creation of a corporation occurs when properly completed articles of incorporation (called a charter or certificate of incorporation in some states) are filed with the proper state authority, and all fees are paid.

What does it mean that a corporation exists separately from its owners?

Suppose that all the shareholders of a corporation were on the Titanic when it sank, and sadly these shareholders didn't get to the lifeboats. Even though all the shareholders are lost, the corporation continue to exist uninterrupted: all its contracts, bank accounts, tax numbers, rental contracts, etc all continue without interruption. The heirs of the shareholders take over ownership, but the company itself would be unaffected.

What is a C corporation?

In the US tax code, a corporation is a C corporation by default. Because it is separate from its shareholders, it pays its own taxes based on its own income. No one is entitled to take money from the corporation unless it is a payment for services rendered, for salary or bonus, or as a dividend. Income remaining after deductions for expenses and depreciation are taxed by the federal government and perhaps also by state governments. What's left after this is available to build up capital in the corporation or to give to the shareholders as dividends.

What is an S Corporation?

If a corporation has 100 or less shareholders, all of whom are US residents for tax purposes and either human beings or qualified trusts, it can elect to be treated as an “S” corporation, and avoid corporate taxation. For many shareholders, this status let's them avoid double taxation.

What is a Limited Liability Company (LLC)?

An LLC is an entity that combines features of partnerships and corporations. It combines the advantages of limited liability (like a corporation) with the pass-through taxation and structural flexibility of partnerships.

Where should I incorporate?

You are not required to incorporate in the state where your business operates; you have the freedom to choose from any one of the 50 states or the District of Columbia

In making the decision of where to incorporate, there are two primary factors to weigh: your budget and your goals. The decision typically is between incorporating in the state of operations and incorporating in Delaware and registering the company in the state or states where the company will be doing business. If the corporation is a closely held company that does business primarily within a single state, local incorporation is typically the best decision. The cost of local incorporation will usually be less than incorporating in another state and qualifying to do business as a foreign company in that state.

A foreign company that qualifies to do business in another state is subject to taxes and annual report fees from both the state of incorporation and the qualifying state. Thus, the actual advantage of incorporating in a state with very low or no corporate income tax is not as great as it appears, if your business must still qualify to do business in its state of operations.

Why do so many companies want to incorporate in Delaware?

Delaware has a well-developed set of corporate laws and professional plus a consistent and predictable court system that makes it less risky to incorporate there. Companies with the intention to grow large, and who want to obtain outside investment generally prefer the Delaware corporate environment. If a company has limited objectives, and will likely only do business in one state, may not want to spend extra to incorporate in Delaware.

What is a registered agent?

Nearly all states require a company to have an agent within the state to accept service of process and to whom the state will send annual reports, tax notices and other compliance matters. If the company doesn't have its own address within the state, it can use a professional registered agent to fulfill this requirement. Failure to maintain an agent usually means the company will lose its legal right to do business.

What is par value and why would I want it?

“Par value” is an old concept of creating a minimum value for a share before it is issued to a shareholder. Once a shareholder has bought stock, the value of the shares is determined by the value of the company. Some states, like New York and Delaware, still use the par value of stock as part of the initial filing fee when forming a company. Using a low par value (say, $0.0001) can allow a corporation to have a low filing fee while having a large number of authorized shares.

What is an “authorized share?”

When a corporation is formed, most states require the corporation to declare how many shares it wants to have available to sell to potential shareholders. Once a share has been sold, it is considered to be an “issued” share. The remaining authorized shares are called “unissued” shares. If the corporation wants to issue more shares than are authorized, then it must file an amendment to its Certificate of Incorporation to increase the number of authorized shares. Naturally, there are filing fees to file the amendment, and usually an additional fee or tax to increase the number of shares.

What is a non-profit corporation?

A nonprofit corporation is a corporation that is formed pursuant to a different law than a standard for-profit corporation. The corporation must be formed for a religious, charitable, educational, literary, scientific or other non-business purpose. While a standard business corporation is designed to benefit and generate a profit for its shareholders, nonprofit do not have the profit motive. Nonprofit corporations are allowed to apply for tax-exempt status at both the federal and state level.

Which type of business entity is better?

Each entity has its advantages and disadvantages, so which entity to choose depends on what the company intends to do.

If I trademark a name, can someone still incorporate with that name?

Since trade- and service-marks are kept on separate databases, owning a mark does not stop someone from incorporating under that name. However, if someone does incorporate using a name that has been trademarked, then there may be a basis for legal action to compel an infringing company to change its name.

How long does it take to incorporate?

The length of time to incorporate, and afterward to receive your corporate package, depends on the State and the level of service requested. Many States do not provide for expedited service or make it prohibitively expensive, so there is no way of honestly knowing in those States how long it will take to process.

How do I get a Federal tax ID number?

In order to open a bank account, hire employees or otherwise do business, you will need a Federal Employer tax identification number. The tax number is obtained by filing a form SS-4 with the Internal Revenue Service center for your district. We can obtain a number on your behalf for an additional fee.

How much does it cost to set up a Corporation or LLC?

See our list of fees for our most popular packages. If your needs are different, call, email or fax to us for our fees.