FORMING AND OPERATING A CORPORATION

Initial formation: where should I file?
     Other considerations: tax rates and laws
Initial formation: the board of directors
Initial formation: the officers
Initial formation: the registered/resident agent
Initial formation: stock and stockholders
     Common stock
     Preferred stock
     Rights of perferred stockholders
Operating a corporation: introduction
Operating a corporation: meetings and minutes
Operating a corporation: bylaws
Operating a corporation: tax forms and licensesing
Operating a corporation: tax reporting

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THE BOARD OF DIRECTORS
A corporation is managed by the board of directors, which must approve major business decisions. A director can be, but is not required to be, either a shareholder or an officer. Like representatives in congress, directors are elected by the shareholders and typically serve for a limited term. Each corporation must have at least one director.

Examples of procedures which must be approved by the board of directors include:

Electing officers and setting the terms of their employment
Amending bylaws or the articles of incorporation
Any corporate merger, reorganization or other significant corporate transaction

Directors of a corporation owe loyalty to the corporation. Generally, that means directors must act in good faith and in the best interest of the corporation.

THE OFFICERS
Officers are appointed by the board of directors to run the day-to-day operations of the corporation. A corporation must have at least three officers:

a president
a treasurer or chief financial officer
a secretary

Officers do not have to be stockholders or directors, but they can be. There is no limit on the maximum number of officers, and no limit on the number of offices that a person may hold. In fact, the same person may hold all offices.

THE REGISTERED/RESIDENT AGENT
Each corporation must have a registered agent, the person designated to receive official state correspondence and notice if the corporation is "served" with a lawsuit. The registered agent must be either:

an adult living in the state of formation with a street address (P.O. boxes are not    acceptable)
or a corporation with a business office in the state of formation which provides    registered agent services

As previously mentioned, one of the advantages of forming a corporation in your home state is that any officer or director can act as the registered agent. However, there are some advantages to having another person or company act as your registered agent. First, this adds an extra layer of privacy, since the name and address of the registered agent is publicly available. Second, this ensures that if your corporation is named in a lawsuit, no one will surprise you at home on a Sunday night with court papers.

STOCK AND STOCKHOLDERS
Stockholders are the actual owners of a corporation. They have the right to elect directors, vote on major corporate actions (such as mergers) and share in the profits of the corporation. However, stockholders do not have the right to direct the day-to-day operations of the corporation.

Stock represents an ownership interest in a corporation, which is typically represented by the issuance of a certificate for shares of stock in exchange for capital from the investors. Money or property given to a corporation in exchange for an equity interest belongs to the corporation and typically does not have to be repaid on a certain date.

There are two common types of stock a corporation may issue: Common Stock and Preferred Stock.

COMMON STOCK
Common stock (the more popular stock) are the shares in a corporation with no preferences or priorities over other classes of stock. The rights in these shares, include voting rights; rights to distributions; liquidation rights; and other rights, are the same for all shareholders holding common stock.

PREFERRED STOCK
The preferred stock generally has greater rights over the common stock when it comes to receiving dividends and/or assets from the corporation (in case the corporation is liquidated). Preferred stock can also have special voting characteristics, conversion or redemption rights, and other features.

MEETINGS AND CORPORATE MINUTES
Meetings and Corporate Minutes:

Shareholders and directors must hold periodic meetings. The stockholders should meet annually to elect new board members or agree to re-elect the existing members. Meetings can take place in person or by telephone. Either way, be to make a written record of the items discussed and actions approved at the meetings, these documents are called minutes. An alternative to these meetings is to get all the directors (or a majority of the stockholders) to sign a statement approving corporate actions.

Incorporated businesses are required to keep minutes of the activities of the business. Minutes are the history of the corporate entity and can be used in court cases. Minutes also show that the officers/stockholders of the corporation are operating the corporation as an entity and not just an extension of themselves. If the corporation is not operated properly, the Officers and shareholders can lose the protection of the corporate entity.

It is recommended that the corporate minutes be typed and should include the following:

The date of the documented activity of the business
Names of participants and signatures of participants or corporate officers

The following are some examples of activities to be recorded:

The establishment of a business plan or corporate objective
Establishement of a bank or credit account
Major purchases of equipment, assets, other businesses
Summary of marketing or advertising campaigns
Summary of business growth initiatives, projections and goals
Major stock sales, purchases or transfers (almost every stock activity in a small    business will be "major")
List of stockholders, names, addresses, number of shares and percentage of total    shares issued (update once a quarter with quarterly financials if any changes)
Hiring, firing of corporate officers or contractors
Notes of board meetings and stockholders meetings (at least one official meeting   with minutes should be held each year)
Any other significant business events

TAX FORMS AND LICENSING
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, 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. 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. S-corporations are thus not subject to double taxation. Also, 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 75 stockholders (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 may issue only one class of stock
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
Not more than 25% of the corporation's income can come from passive activities,    such as annuities, dividends, rents, royalties, etc.

Corporations wishing to become an S-corporation must file Form 2553 with the IRS, and each stockholder of the corporation must sign the form. A C-corporation may elect to become an S-corporation, but may not do so until the beginning of the next fiscal year.

TAX REPORTING
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.