Operating a Corporation

The most important thing to know about operating a corporation is to leave a paper trail of the important business activities. Below are some of the most common issues to consider when maintaining your corporation.

1. Keep things separate
   
   As previously mentioned, it's important to keep the business and affairs of the corporation separate from the personal affairs of the stockholders, directors and officers. This means setting up a separate bank account, maintaining separate records, and keeping separate books for accounting purposes.
   
   
2. Meetings
   
   Directors need to hold periodic meetings, and shareholders must meet once per year to elect directors. Meetings can take place in person or by telephone. Either way, you need to make a written record of the items discussed and actions approved at the meetings. Alternatively, you can just get all the directors (or a majority of the stockholders) to sign a statement approving corporate actions. This is known as "written consent."
3. Transfer of ownership interests
   
   Generally, as long as all applicable laws are followed, a stockholder is free to sell or transfer shares to anyone. However, with small corporations in which the stockholders act more like partners and each is integral to the success of the company, you may wish to consider placing restrictions on the transfer of shares.
   
   Stockholders sometimes enter into a buy-sell agreement which sets the terms for when shares can be transferred or sold. A typical buy-sell agreement would state that if one stockholder seeks to sell shares to any third party, the other stockholders have a right of first refusal; that is, the other stockholders may purchase those shares at the same price. Only if the other stockholders do not purchase those shares can a stockholder sell to a third party.
   
   Additionally, certain professional corporations can only have shareholders that are licensed professionals, limiting the transferability of shares
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4. Tax forms and licenses
   
   Every corporation must obtain a federal tax identification number, which is similar to an individual's social security number. Some states also require a separate state tax number. In addition, state, county and city business licenses may be required. Please check with your city and county to see which types of licenses you need.
   

S Corporations

A traditional corporation, known as a C-corporation, is taxed as a separate entity, leading to double taxation of corporate income and dividends to shareholders. An S-corporation, on the other hand, is a corporation that elects to be treated as a pass-through entity (such as a sole proprietorship or partnership) for tax purposes. Since all corporate income is "passed through" directly to the shareholders who include the income on their individual tax returns, S-corporations are not subject to double taxation. Moreover, the accounting for an S-corporation is generally easier than for a C-corporation. There are, however, certain restrictions placed on S-corporations:

• The S-corporation must not have more than 100 stockholders, and each of them must consent. (A married couple is treated as one stockholder).
• Each stockholder must be an individual who is a citizen or resident of the United States, or an estate or qualifying trust of such person.
• The corporation must have only one class of stock. (However, voting differences within a class of stock are permissible). Preferred stock is not allowed.
• The corporation must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.

Corporations wishing to become an S-corporation must file Form 2553 with the IRS, and each stockholder of the corporation must sign the form. LegalZoom will prepare this form for you if you choose.

Tax Reporting

As a separate legal entity, a corporation must submit a tax return each year with the IRS. For corporations with a fiscal year ending December 31, tax returns are due on March 15. A corporation must file a tax return even if it does not have income or no tax is due. C-corporations file tax returns on Form 1120 or 1120A.

Although S-corporations do not pay federal taxes at the corporate level, they still must prepare a separate tax return. S-corporations file their returns on Form 1120S.

For 2005, the federal income tax rate for a C-corporation is as follows:

	Income:	Tax Rate:
	Up to $50,000:	15%
	From $50,000 to $75,000:	25%
	From $75,000 to $100,000:	34%
	From $100,000 to $335,000:	39%
	From $335,000 to $10,000,000:	34%
	From $10,000,000 to $15,000,000:	35%
	From $15,000,000 to $18,333,333:	38%
	Over $18,333,333:	35%

Some states, including California, also have a state corporate income tax. Corporations that anticipate a tax liability of $500 or more must estimate their taxes and make quarterly estimated tax payments. Corporations with employees are required to pay federal (and sometimes state) payroll and unemployment taxes.