Switzerland County

Before we begin the forms, here is basic information about how corporations work, corporate restrictions and taxes.

Board of Directors: In charge of corporate policy. All major corporate decisions should be approved by the Board of Directors.

Officers: People charged with important management functions (president, vice-president, chief financial officer, etc.) Usually the senior officers are members of the Board of Directors.

Employees: Anyone who works in the day-to-day operations of the corporation, under the control or supervision of the officers or the Board. Note: Officers must be treated as employees and are not independent contractors. See "Are you an Employer".

Limited legal liability: Creditors usually only have a claim on the corporation's assets - not the shareholders' personal assets. However, at times officers and shareholders can be held personally liable for their own wrongful acts and for unpaid taxes (such as employer taxes). In general, shareholders cannot be held personally liable for the actions of employees.

Warning: Limited legal liability is not guaranteed. The Corporations Code, the courts and the IRS require that certain formalities be observed in operating your business as a corporation if you are to protect the directors and shareholders from personal liability. These formalities are explained below.

Corporations have these restrictions:

Corporate formalities: All corporations must continually comply with corporate formalities or they will have wasted all their time in incorporating, because creditors and tax agencies might be able to "pierce" the corporate veil. If this happens, the shareholders will owe all sums due and taxes may be completely recalculated as if the corporation didn't exist. All corporations must follow these formalities:

• Keep finances completely separate from shareholder finances;
• Have annual shareholder meetings with written minutes;
• Have regular Board of Directors meetings with written minutes;
• Obtain approval from the Board of Directors for all major decisions;
• Conduct all business and sign documents in the corporation's name.

Handling money: the corporation's assets must be kept separate from shareholders' personal assets. This applies even if you are the sole shareholder. To get money from your corporation to you, you must write a check for a salary, pay yourself dividends, or in certain cases, obtain a loan from the corporation. All these have legal and tax complications.

• A salary must have employee taxes deducted and the corporation must pay additional employer taxes.
• If your corporation pays dividends, it must pay ALL shareholders in proportion to their number of shares.
• If shareholders take a loan from the corporation, an attorney should be consulted to provide the proper loan documents and to insure that the corporation's legal status is not invalidated.

Credit Guarantees: Because corporations have limited liability, companies are reluctant to grant credit to new corporations. They often ask that a primary shareholder "guarantee" payment. This means that if the corporation's assets cannot repay the debt, the shareholder agrees to use his personal assets to repay it (eliminating the major benefit from incorporation).

Double Taxation: A corporation's net income is taxed twice. First taxes are paid on net income (before dividends are paid). The corporation uses its after-tax profits to pay shareholders dividends. Shareholders must then pay taxes on this dividend income. thus, the same profits are taxed twice.

With IRS form 2553 your corporation can file for S-corporation status and avoid double taxation.

* C-corporations can deduct health insurance if the benefits are provided equally to all employees.