The C-Corporation:

The label, "C-Corporation" merely refers to a standard, general-for-profit, state-formed corporation. Characteristics of the "C-Corporation" include the following:

Separate Legal and Tax Lif= e. A corporation which is properly formed and operated as a corporation assu= mes a separate legal and tax life distinct from its shareholders. A corporati= on pays taxes at its own corporate income tax rates and files its own corpor= ate tax forms each year on IRS Form 1120.

Management and Control. Normally, a corporation's management and control is vested in its board of directors who are elected by the shareholders of the corporation. Directo= rs generally make policy and major decisions regarding the corporation but do not individually represent the corporation in dealing with third persons.=

Thus, transactions with third persons and day-to-day activities are condu= cted through officers and employees of the corporation to whom authority is delegated by the directors of the corporation.

Shareholders. Shareholders are the owners of a corporation. Although shareholders have = no power over the corporation's daily activities, shareholders possess the ultimate power in that they can appoint or remove Directors of the corpor= ation.

Directors. The Board of Directors is responsible for the long-term management and po= licy decisions of the corporation. While the Directors are considered to have = the highest level of DIRECT control over the corporation, there are, however,= a few instances when the shareholders are required to approve Actions of the Bo= ard of Directors (e.g. amendment to the Articles of Incorporation, sale of substantially all of the corporate assets, the merger or dissolution of t= he corporation, etc...).

Corporate Officers.= Corporate officers are elected by the Board of Directors and are responsi= ble for conducting the day-to-day operational activities of the corporation. Corporate officers usually consist of the following: (President, Vice-President, Secretary, Treasurer).

Management & Staff. Management and Staff are DIRECTLY responsible for the daily activities of= the corporation.

One Person Required. In most states, one or more persons may form and operate a corporation. S= ome states, however, require that the number of persons required to manage a corporation be at least equal to the number of owners. For example, if th= ere are only two shareholders, there must also be a minimum of two directors serving on the board.

Fringe Benefits. Corporations may often offer their employees unique fringe benefits. For example, owner-employees may often deduct health insurance premiums paid = by the corporation from corporate income. In addition, Corporate-defined ben= efit plans often afford better retirement options and benefits than those offe= red by non-corporate plans.

Corporate Formalities. To retain the corporate existence and thus the benefits of limited liabil= ity and special tax treatment, those who run the corporation must observe corporate formalities. Thus, even a one-person corporation must wear different hats depending on the occasion.

For example, one person may be responsible for being the sole shareholder, Director, and Officer of the corporation; however, depending on the action taken, that person must observe certain formalities: Annual meetings must= be held, corporate minutes of the meetings must be taken= , Officers mu= st be appointed, and shares must be issued to shareholders.

Most importantly, however, the corporation should issue stock to its shar= eholders and keep adequate capitalization on hand to cover any "foreseeable&q= uot; business debts.

Shareholder Liability for Corporate Debts. Where corporate formalities are= not observed, shareholders may be held personally liable for corporate debts. thus, if a thinly capitalized corporation is created, funds are commingled with employees and officers, stock is never issued, meetings are never he= ld, or other corporate formalities required by your state of incorporation are not followed, a court or the IRS may "pierce the corporate veil" and hold the shareholders personally liable for corporate debts.

Avoiding Double Taxation.<= /span> Generally, the corporation is taxed for its own profits; then, any profits paid out in the form of dividends are taxed again to the recipient as dividend income and the individual shareholder's tax rate.

However, most small corporations rarely pay dividends. Rather, owner-employees are paid salaries and fringe benefits that are deductible= to the corporation. The result is that only the employee-owners end up paying any income taxes on this business income and double taxation rarely occur= s.

NOTE: See "The S-Corporation" below as a popular taxing alterna= tive for corporations.

Duration of a Corporation.= As a separate legal entity, a corporation is capable of continuing indefinitely. Its existence is not affected by death or incapacity of its shareholders, officers, or directors or by transfer of its shares from one person to another.

The S-Corporation:

An S Corporation begins its existence as a "C-Corporation" (discussed above) -- (i.e. as a general, for-profit corporation upon fili= ng the Articles of Incorporation with the appropriate STATE office. However, after the corporation has been formed, it may elect "S Corporation Status" by submitting IRS form 2553 to the Internal Revenue Service = (in some cases a state filing is required as well).

Once this filing is complete, the corporation is taxed like a partnership= or sole proprietorship rather than as a separate entity. Thus, the income is "passed-through" to the shareholders for purposes of computing = tax liability. Therefore, a shareholder's individual tax returns will report = the income or loss generated by an S corporation.

Qualifying for S Corporation Status. To qualify a= s an S corporation, a corporation must timely file IRS Form 2= 553 with the IRS. This election must be made by March 15 of the current year if the corporation is a calendar-year taxpayer in order for the election to take effect for the current tax year.

However, a "New" corporation may make the filing at anytime dur= ing its tax year so long as the filing is made no later than 75 days after the corporati= on has began conducting business as a corporation, = acquired assets, or has issued stock to shareholders (whichever is earlier).

To qualify for S corporation status, the corporation must:

· &nb= sp; = &nb= sp; = Be filed in one of the 50 Unit= ed States.

· &nb= sp; = &nb= sp; = Maintain only = one class of stock.

· &nb= sp; = &nb= sp; = Maintain a maximum of 75 shareholders.

· &nb= sp; = &nb= sp; = Be comprised SOLELY of shareholders who are individuals, estates or cer= tain

· &nb= sp; = &nb= sp; = qualified trusts, who consent in writing to the S corporat= ion election.

· &nb= sp; = &nb= sp; = NOT have a shareholder who is a non-resident alien.

Losing S-Corporation Status. Failure to observe ANY of the above requirements could revoke S-Corporation status at any time. An S-Corporat= ion that loses its status as such may not re-elect S-Corporation status for a minimum of five years.

Corporate Formalities. An S-Corporation follows the same state formalities as does a C-corporati= on (i.e. filing Articles of Incorporation and paying state fees).

IRS Filings.<= /span> The S-Corpor= ation must complete and file IRS Form 1120s to report its annual income to the = IRS each year.

General Shareholder Requirements. ALL shareholders of the corporation mus= t be U.S. Citizens or have U.S. Residency Status. If, for any reason, shares are somehow sold or transferred (even if by will, divorce, or other means) to= a shareholder who is a foreign national, the corporation will lose its S-Corporation status and be treated as a C-Corporation.

Who Should Elect S-Corpora= tion Status? Owners who want the limited liability of a corporation and the "pass-through" tax-treatment of a partnersh= ip will often make the S-Corporation election. In most cases, corporations t= hat would benefit from S-Corporation status are those who plan on distributing the majority of earnings to its shareholders in the year those earnings a= re realized.

Corporations who plan on retaining earnings for future investments in fut= ure tax years often choose the C-Corporation because, under the S-Corporation, earnings will be taxed as if they were distributed to shareholders regard= less of whether a distribution actually occurred or whether the corporation retained the earnings for future investment.

The Limited Liability Company (L.L.C.):

Rules governing the Limited Liability Company (L.L.C.) are usually distin= ct from the rules and laws governing corporations. In general, however, the L.L.C. is a state-created entity intended to provide its members / owners= with the limited liability afforded to corporate shareholders while minimizing many of the formalities corporations are required to observe.

If you are considering forming an L.L.C., you should be aware of the following facts:

IRS Treatment of the Two-M= ember LLC. If your LLC has two or more owners, The IRS will tax the LLC owners as if the owners were members of a partnership. A partnership files Form 1065 (U.S. Partnership Return of Income).

IRS Treatment of the One-M= ember LLC. An LLC with only one member / owner is taxed by the IRS as a sole proprietor= ship is taxed. Thus, the sole member of an LLC will file (Form 1040), (U.S. Individual Income Tax Return) and will in= clude (Form 1040, SCHEDULE C= ) (Profit or Loss from Business) with his/her tax returns.

"Tax My LLC as a Corporation!" Regardless of how many members the= LLC has, the LLC may file an Election to be Treated as a Corporation for Purp= oses of Taxation (IRS Form 8832). If an election is= made to be treated as a corporation, the LLC must file Form 1120 (U.S. Corpora= tion Income Tax Return).

Minimum Members Required by State Law. Traditionally, most states have required t= hat an LLC consist of two or more members (owners). Recently, however, the majority of states are allowing single-member LLCs.

Separate Legal Entity Stat= us. Similar to the corporation, an LLC is recognized as a separate legal enti= ty from its "members." Thus, an LLC can own property, commit itsel= f to contractual obligations, and even commit crimes.

Limited Liabi= lity for Members (owners). In most cases, only the LLC is responsible for the company's debts thus shielding its members from perso= nal liability. However, there are some exceptions where individual members ma= y be held liable:

1. Guarantor Liability. Where an LLC member has personally guarant= eed the obligations of the LLC, he or she will be liable. For example, where = an LLC is relatively new and has no credit history, a prospective landlord a= bout to lease office space to the LLC will most likely require a personal guarantee from the LLC members before executing such a lease.

2. Alter Ego Liability. Very similar to the judicial doctrine applied to corporations where a court may hold the individual shareholders liable where the business entity is mere= ly the "Alter Ego" of its shareholders, a member of an LLC may als= o be held liable for the LLC’s debts if the = court imposes its "alter ego liability" doctrine. This often ha= ppens when a corporation does not remain active by fulfilling its obligations of holding annual meetings, recording minutes, having bylaws, etc. This doct= rine may also be imposed on the members of an LLC.

Fewer Formalities than the Corporation. Although a corporation's failure to hold shareholder or director meetings may subject the corporation to alter ego liability, this is not the case for LLCs in m= ost states. An LLC's failure to hold meetings of members or managers is not usually considered grounds for imposing the al= ter ego doctrine where the LLC's Articles of Organization or Operating Agreement do not expressly require such meeting= s.

Shared Management and Cont= rol. Management and control of an LLC is vested with its members unless the articles of organization provide otherwise.

Voting Interest According = to Ownership. Ordinarily, voting interest directly corresponds to interest in profits which directly corresponds to share of ownership unless the articles of organization or operating agreement prov= ide otherwise.

Transfer Requires Majority Consent. No one can become a member of an LLC (either= by transfer of an existing membership or the issuance of a new one) without = the consent of members having a majority in interest (excluding the person acquiring the membership interest) unless the articles of organization provide otherwise.

Perpetual Duration.= Traditionally, most states did not allow an LLC to have a perpetual existence; LLCs were traditionally required to specify the date on which the LLC's existence= would terminate. Today, however, most states allow a perpetual duration for an = LLC if stated in its articles of organization.

Dissolution Upon Certain E= vents. Unless otherwise provided in the articles of organization or a written operating agreement, an LLC is dissolved at the death, withdrawal, resignation, expulsion, or bankruptcy of a member (unless within 90 days a majority in both the profits and capital interests vote to continue the L= LC).

Operating Agreement Requir= ed. To validly complete the formation of the LLC, members must enter into an Operating Agreement. This Operating Agreement may come into existence eit= her before or after the filing of the Articles of Organization and depending = on your particular state's laws, may be either oral or in writing.

Different Laws in Different States. While laws governing corporations have grown = to be quite uniform amongst the different states over time, LLC statutes can vary quite drastically from state to state. This is most likely due to the fact that the LLC is a VERY new form of business structure only recently recognized by most governments (e.g. Hawaii only recently began recognizi= ng the LLC as a legitimate form of business in 1997).