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How are Corporations managed?
- In smaller companies the owner tends to wear many hats and in Delaware this is perfectly legal.
- The owner may be a sole shareholder and Director as well as serving as the titular President, Secretary and Treasurer all at the same time.
- The organization of the Corporation is more rigid than that of the LLC.
- In the case of a new Corporation, the expected series of events would be as follows:
- A person representing a new company that wishes to incorporate contacts DBI. Upon purchasing DBI’s services, DBI becomes the Incorporator. DBI drafts, signs and files the Incorporation documents acting as an agent on behalf of the new Corporation. When the Incorporation is complete, DBI’s services as Incorporator are automatically terminated. The last thing DBI does in its role as Incorporator is officially appoint the Initial Director . The person who will serve as Initial Director will be indicated by the person placing the order for Incorporation services.
- The Initial Director is often the founder of the Corporation, although, the Initial Director does not have to be an owner or officer. The Initial Director could be a manager, CPA or attorney for example.
- It is the Initial Director’s duty to finish setting up the organization of the new Corporation after it has been Incorporated.
- The Initial Director has the authority issue stock certificates to the owners to record their ownership share and to call a meeting of the shareholders to elect the Board of Directors.
- The Initial Director may remain a Director or his services may end after other Directors are appointed.
- In many cases the Initial Director stays on and becomes the Chairman of the Board of Directors.
- Once the Board of Directors is appointed, the Board ratifies the By-Laws and appoints the Officers of the Corporation.
- Most routine operational oversight is delegated to the Officers, but major policy must be decided by a resolution of the Board which is either approved by a majority of the voting shareholders, or in the case of a Sole Owner/Sole Director by “Unanimous Decision”.
- A Close Corporation is exempt from formal Board Meeting and Resolution, as are LLC’s.
How is a Corporation Taxed?
- A Stock (General) Corporation, that is, a Corporation which does not elect “S-Corporation” status and is not a ”Not-For-Profit”, is taxed as its own “entity”.
- The Corporation is taxed separately from and in addition to the personal income of the Shareholders (owners), and is taxed at a Corporate rate.
- A C-Corporation must file its own income tax return every year on form 1120.
- In addition to the income tax the C-Corporation must pay, any distributions made to the stockholders (also known as dividends) are taxed on the personal income tax returns of the shareholders at the shareholders personal income tax rate.
- This is what is commonly known as “Double Taxation”. Because the Corporation may deduct reasonable salaries before calculating income tax, a large portion of the income paid to Owner-employees is not subject to double federal income tax, however, both the Corporation and the Employee must pay FICA tax on these wages earned.
- Another difference to bear in mind between Corporate taxation and “pass through” taxation is that undistributed profits of a Corporation may be accumulated untaxed if they are related to the reasonable needs of the business.
- If the IRS determines that retained earnings are not related to the reasonable needs of the business, those accumulated earnings will be taxed at 39.6%.
- If your Corporation is profitable, but pays no dividends and pays salaries significantly higher than industry standards, the IRS may determine that your Corporation is “disguising” dividends as salaries; and will consequently disallow a portion of eligible salary deductions and apply penalties with interest.
- Personal Service Corporations (those whose employees spend at least 95 percent of their time in the field of Accounting, Actuarial Science, Architecture, Consulting, Engineering, Health, Law or Performing Arts) are taxed at a flat rate of 35 percent of net profits.
What is the benefit of forming a Delaware Corporation for non-resident non-citizens?
- A Stock (General) Corporation with no employees, owners, property or operations in the United States, and no US-source income will pay no Federal US Corporate Income Tax.
How is a Corporation Taxed by the Secretary of State of Delaware?
- The annual tax due to the Secretary of State of Delaware for the purpose of maintaining a Delaware Charter is known as the Delaware Franchise Tax.
- The word “Franchise”, as used in this case, means “a special privilege granted to an individual or group; especially: the right to be and exercise the powers of a Corporation” and does not mean “a chain of businesses licensed by the original store and operated per the original store’s pattern under the original store’s trade name”.
- Delaware Corporations authorizing 5,000 shares or of stock or less may use the Authorized Shares method and will pay the minimum $125 franchise tax regardless of income or activity.
- The Franchise Tax rates for companies authorizing 5,001 shares or more are discussed below.
- It is also necessary for Corporations to file an Annual Report. There is a $50 Annual Report filing fee for Profit-Corporations and a $25 Annual Report Filing Fee for Non-Profits. The Delaware Annual Report is filed online at www.corp.delaware.gov. The following information must be included on the Annual Report:
- The physical location of the headquarters of the Corporation. This address may be anywhere in the US or in the world; it is not required to be a Delaware address. If your Corporation has no headquarters, you may give your home address. You are not permitted give a P.O. Box or the address of a mail forwarding service.
- The phone number of any company representative.
- The names and addresses of all Directors. All Corporations have at least one initial director, if that person has resigned and has not been replaced; a statement that there are no current directors may be given. It is permissible to give a business address or mail forwarding address.
- The name and address of the Officer who is authorizing the filing of the Annual Report. This is usually the President or CEO but other offices are acceptable. If there are no officers currently serving a Sole Director or the Chairman of the Board of Directors may sign. If there are no Officers or Directors please contact an Incorporation Specialist for assistance.
- The signature of the authorizing Officer. This is usually an electronic signature: if you are filing yourself online you will simply type the name, if DBI is filing for you the electronic signature will appear as “/s/FirstName LastName” for example “/s/John Doe”.
- The Franchise Tax and Annual Report are due every year before June 1st. This means payment must be received by the Secretary of State of Delaware no later than the last day of February of any given year. Late Annual Reports and Franchise Tax are penalized $100 and subject to 1.5% interest. DBI offers a tax preparation service for $55 per tax year and also offers an automatic renewal and tax payment program called Good Standing Protection Service.
Estimated Franchise Tax
- Corporations which pay franchise taxes in excess of $5,000 annually must make quarterly payments, due and payable June 1st, September 1st, December 1st and March 1st.
Foreign Corporations Franchise Tax
- Corporations Chartered in another state that are qualified in Delaware as Foreign Corporations must file an annual report before the 30th day of June each year.
- The annual report filing fee for Foreign Corporations is $125.
- If the annual report is not filed before the due date a penalty of $125 is assessed.
- Franchise tax is pro-rated ONLY in the case of I. An amendment being filed within that tax year which increases or decreases the number of Authorized Shares or II. A Corporation, which owes more than the minimum franchise tax, dissolves, transfers out of state or country, or converts to a different entity type. If your Corporation owes the minimum Franchise Tax, your annual tax will not be pro-rated for any reason.
- Franchise tax is due regardless of whether your company was actively transacting business.
- Your Delaware Franchise Tax and Annual Report are due every year before June 1st. Although DBI will send you a notice each year, like Federal Income tax, this tax is due every year at the same time and you are responsible for filing on time regardless of circumstances. We strongly suggest you mark your calendar accordingly. It is not necessary to have a copy of your tax notice to pay your Delaware Franchise Tax or to file your Delaware Annual report, but if you have not received your notice, or have lost your notice, you may contact DBI before June 1st for a replacement. It is very important that you notify DBI if your address or contact information changes.
- If your company fails to pay Delaware Franchise Tax for two consecutive years, your company Charter will be declared VOID for failure to pay taxes. This means that your company Charter is invalid and you do not have the right to transact business as a Corporation.
- Note that, under Delaware law, the shares of any person in any Corporation with all the rights thereto belonging or any person’s option to acquire the shares or his/her right or interest in the shares may be attached for debt or other demands. So many of the shares, or so much of the option, right or interest therein may be sold at public sale to the highest bidder as shall be sufficient to satisfy the debt or other demand, interest and costs, upon an order issued therefore by the court from which the attachment process issued, and after such notice as is required for sales upon execution process. While your personal liability is limited to your investment in the company; you can lose your investment in the company.
Other Delaware State Taxes
- Many entrepreneurs and Investors are already aware of the many tax benefits of a Delaware LLC or a Delaware Corporation.
- Following are some facts regarding taxes on Delaware C-Corporations:
Delaware State Taxes you will not owe:
- No Delaware State Personal Income Tax for shareholders who reside outside the state.
- No State Sales Tax on goods and services purchased inside the state
- No Delaware State Corporate Income Tax for Delaware Corporations headquarted and operating outside Delaware
Delaware State Taxes you may owe:
- If you have a physical office, store, factory or other center of operations located within Delaware, you may owe Delaware State Corporate Income Tax. As a rule of thumb, if your Corporation produces a product or service within the state of Delaware, you may owe Delaware Corporate Income Tax on those revenues, even if they are sold out of state. If you have operations in Delaware you may also owe Delaware Corporate Income Tax on revenue from products and servicessold within the state of Delaware, even if those products and services were produced outside the state.
- Delaware evaluates three types of activity in determining what portion of income tax will be subject to Delaware Corporate Income Tax:
- Corporate sales attributable to Delaware
- Property located in Delaware and
- Payroll incurred in Delaware
- Delaware State Taxes you will not owe:
What is the difference between “Par Value” and “No Par Value” stock?
- "Par Value” stock certificates carry a stated money value on their face. In Delaware, par value stock may be issued only in return for “considerations” such as money, property or services of value at least equal to the value of the shares issued.
- If par value shares are purchased with property, the value of the property must be established by an independent licensed appraiser and the value of the shares exchanged for the property may not exceed the amount of the appraisal.
- If the par value shares are exchanged in return for services, such services must already have been performed, and they must be valued at the going rate for such services.
- Such value must then be treated as service income by the service provider.
- “No Par Value” stock has no stated value.
- Such shares may be sold for whatever the investor is willing to pay.
- “No Par Value” may also be expressed as “Zero Par” ($0.00) and “Without Par Value”.
- The actual market value of an established Corporation that has been operating for some time has, of course, no relation to the face amount of the stock, whether it is par value or no par value stock.
- The more profitable the company and the more assets it accumulates and the better its prospects, the more each share of common stock tends to be worth in the marketplace.
Does one stock certificate equal one share of stock?
- No. One stock certificate can represent any number of shares up to the amount authorized, as stated on the Certificate of Incorporation.
- The Certificate has a blank space to be filled in with the number of shares it represents by the corporate officer issuing the stock. If you purchase one of our corporate kits you will receive Stock Certificates with the name of your company printed on them.
- The kit comes with a template so you can print the name of the shareholder and the number of shares on the Stock Certificate using your printer.
What are the By-Laws?
- The By-Laws are a document which sets forth the rules adopted by the Directors for the operation, organization and conduct of the Corporation.
- By-Laws specify how the Corporation will conduct its meetings, how Directors and Officers will be elected or appointed, how it will handle resignations, and will elaborate on the duties of officers and the voting rights of shareholders, amongst other information.
- The By-Laws of a Corporation are not registered or filed with the State of Delaware; they should be properly maintained by the Corporation and filed safely with the Corporation’s other private Corporate records such as the Shares Transfer Register.
- Your Corporation’s By-Laws may someday be crucial to resolving unforeseen problems such as absentee Officers or Directors; to resolving shareholder disputes; defending or applying for tax status ; and bringing, settling or defending lawsuits.
- DBI offers model By-Laws templates or fill-in-the-blank forms as part of the Corporate Kit available separately.
- The following topics are addressed in the By-Laws template available with the purchase of your new company registration:
- Meeting of Shareholders
- Board of Directors
- Shares of Stock
- Fiscal Year
- Corporate Seal
- Waiver of Notice
- Interested Directors
- Form of Records
- If you wish to include additional provisions please indicate that you want the Word .doc template.
- You are free to alter, add or delete any material you wish.
- Please contact a qualified tax professional and/or attorney if you have questions regarding these provisions.
- DBI does not alter, add or delete provisions from the standard template, if you wish to alter the template and you do not feel competent to do so without assistance, please consult an attorney.
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