Business Organizations FAQ

Q: What is the difference between a C Corporation and an S Corporation?

A: All corporations begin their lives as a C corporation. The owners can elect to become an S corporation by filing a form 2553. This new status allows the owners to be taxed like a partnership or a sole proprietorship. The income of the corporation "passes through" to the owners without the corporation being taxed. The S corporation does come with additional limitations, though, namely a shareholder limit of 75 and U.S. citizenship and residency requirement for shareholders.

Q: What is the difference between an S Corporation and a Limited Liability Company?

A: They are very similar in how they are taxed. The LLC has no restrictions on how many shareholders it may have and who they may be. An S corporation is restricted to 75 shareholders, and they all must be U.S. citizens and residents.

Q: What is "piercing the corporate veil?"

A: In some cases, courts have allowed plaintiffs to pursue the owners' assets of the corporation to satisfy a judgment against the corporation. This defeats the liability protection that owners typically have with the corporation. It is only in the most severe cases that courts allow plaintiffs to pierce the corporate veil. Some instances may include fraud or intermingling of an owner's and corporate funds and practices to the point where the corporation can no longer be viewed as a separate entity. This is also known as "alter ego liability."

Q: Can I convert my existing sole proprietorship or partnership into an LLC?

A: Yes. Most states have a form that allows you to convert your business over to an LLC. For states that do not have a conversion form, the business must file an application to become an LLC. Some states also require a partnership to run an ad in the newspaper announcing its dissolution. You must also remember to change all of your licenses and permits over to the name of your LLC.

Q: What is a "registered agent?"

A: A registered agent in Arizona called a statutory agent, provides a local address for the receipt of service of papers and for contact by the Arizona Corporation Commission, Secretary of State and other agencies. A corporation and LLC need registered agents because even though they are separate legal entities, they cannot receive paperwork, so they need someone to receive information on their behalf. The registered agent forwards service receipts, tax information, and other paperwork to the business.

Q: Do I need permission to conduct business in another state when I am already incorporated in my own state?

A: Yes. A foreign incorporation wishing to do business in another state must qualify to do so. It is typically a simple process. One need only contact the Secretary of State for the state that he or she wishes to conduct business in.

Q: Is there a benefit to incorporating in Delaware or Nevada?

A: Some will still say yes, but generally, the answer is no. There used to be significant reasons for a business to incorporate in Delaware or Nevada, but those reasons have disappeared with changes in state laws. It is now typically best for a company to incorporate in its own state. There are some special circumstances where Nevada or other foreign state corporations are advisable but these should be disguised with the law firm and the process is significant more complex then typically represented the burden usually out ways the benefit. This is a good question to rise to your lawyer.

Q: What is a non-profit corporation?

A: A non-profit corporation is a corporation that is carried out for a charitable, educational, religious, literary or scientific purpose. A non-profit corporation does not pay either state or federal taxes because the government deems the corporation's actions to be for the betterment of society.