Incorporation Process: Administered at the state level by the Secretary of State.
Who Can Incorporate: Open to both foreign nationals and U.S. citizens.
Types of Entities:
- LLC (Limited Liability Company): Members-based.
- Inc (Incorporation): Shareholders-based.
Tax Classifications for LLCs:
Single Member LLC:
- Default tax classification: Disregarded entity.
- Tax return filed by the member; no separate LLC return.
Partnership:
- Default classification: Partnership.
- Partnership files tax returns; members pay taxes on their share of income.
S Corp Election:
- Available for LLCs via Form 2553.
- Taxes reported and payable by shareholders.
C Corp Election:
- Available via Form 8832.
- Corporation pays taxes; profit distributions taxed to shareholders.
Tax Classifications for Corporations (Inc)
C Corp (Default):
- Corporation files tax returns and pays taxes.
- Profit distributions taxed to shareholders.
S Corp Election:
- Eligibility: < 100 shareholders (U.S. citizens, estates, certain trusts).
- Taxes reported and payable by shareholders.
Conversion Processes
S Corp to C Corp:
- Steps:
- Revoke S Corp status.
- File Form 8832 to elect C Corp.
- Benefits:
- Growth opportunities via large investors/VCs.
- Corporate tax rate: 21%, instead of higher tax rate applicable to shareholders.
- Stock flexibility: Can issue multiple types of stock, which an S Corp can’t do.
- Retention of earnings: C Corp can retain the earning without distributing to the shareholders.
C Corp to S Corp:
- Steps:
- Obtain shareholder consent.
- File Form 2553 for S Corp election.
- Eligibility:
- Must be a domestic corporation with ≤ 100 eligible shareholders.
- Shareholders: Individuals, estates, certain trusts (no corporations, partnerships and non-resident aliens).
- Must have one class of stock.
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