Understanding Corporations

Corporations can be divided into two distinct classes: the "closely-held" corporation, (usually qualified under subchapter S of the Internal Revenue Code as an S corporation (files a Form 2553), but also could be a C corporation) and (2) the "publicly held" corporation (always a C corporation).

A "closely held corporation" is owned by a small group of shareholders, all of whom generally actively participate in the management of the corporation.

To that end, the shareholders comprise the board of directors and are also the officers of the corporation in most cases. With a closely-knit organization, management and taxes resembles that of the partnership. A significant majority of my clients are closely held businesses.

Formation of a New Business

The formation of a closely held business typically entails the following and can be a simple process:

Step 1 - Name of entity?

Application for Reservation of Corporate Name (see http://www.dos.state.pa.us/corps/lib/corps/20/7/311.pdf)

Step 2 - Incorporation?

Articles of Incorporation (see http://www.dos.state.pa.us/corps/lib/corps/20/7/1306-2102.pdf) (you also need to complete a docketing statement)

Step 3 - Tax Steps (SS-4)? Do you want to make an S election?

S-Corporation Tax Forms Checklist

IRS Form 2553: Election by a Small Business Corporation (see IRS Form 2553); remember your state "S" election form for Pennsylvania.

IRS Form SS-4: Application for Employer Identification Number. Must be filed by all S corporations who will hire employees. SS-4 https://sa.www4.irs.gov/sa_vign/newFormSS4.do

IRS Form 1040: Must be filed by all S corporation shareholders. Do not use IRS form 1040-A or IRS form 1040-EZ.

IRS Form 1120-S: U.S. Income Tax Return for an S-Corporation. Must be filed by all S corporations.

Schedule K-1: Shareholder’s Share of Income, Credit, Deductions, etc. Must be completed by all S corporations.

IRS Form 1040-ES: Estimated Tax for Individuals. Must be used by all S corporation shareholders who expect a profit requiring estimated taxes.

IRS Form W-2: Wage and Tax Statement. Must be filed by all S corporations who have one or more employees.

IRS Form W-3: Transmittal of Wage and Tax Statement. Must be filed by all S corporations who have one or more employees.

IRS Form W-4: Employee’s Withholding Allowance Certificate. Must be provided to employees of S corporations. It is not filed with the IRS.

IRS Form 940 or 940-EZ: Employer’s Annual Federal Unemployment (FUTA) Tax Return. Must be filed by all S corporation employers.

IRS Form 941: Employer’s Quarterly Federal Tax Return. Must be filed by all S corporations who have one or more employees.

IRS Form 8109: Federal Tax Deposit Coupon. Must be filed by all S corporations with a monthly tax liability over $500.00.

Any required State and Local Income and Sales Tax forms. Please check with the appropriate tax authority for more information.

Lecture Materials - Sample Leisure Life Corp (1120S Illustration)

Step 4 - Some Essential Corporate Documents (this list is not exhaustive)?

S Tax Schedule - Click here for important tax dates - new check list - 9/4/06

Form Bylaws - Bylaws - Yahn Properties, Inc.

Resolution - Officer Election - Yahn Properties, Inc.

Resolution - Director Consent to Serve - Yahn Properties, Inc.,

Resolution - Buy Real Estate - new form uploaded 01/03/07

Resolution - Sale of Real Estate - new form uploaded 10/03/06

See also the Pre-incorporation Checklist

Step 5 - Educate Yourself?

ACT 452 Class Materials - Corporate Tax Matters

Chapter II - Corporations: Introduction, Operating Rules, and Related Corporations.

Chapter III - Corporations: Organization and Capital Structure

Climbers, Inc (1120 Illustration)

The opposite of the close corporation is the "publicly held corporation" and while many of the features are the same, the complexities surrounding registering a company for over the counter trading is beyond this website; although many of the tax issues will be addressed in the same manner as some C Corporations are not taxed as S Corporations. A publicly held corporation is owned by a substantial number of shareholders, most of whom take no part in the active management of the corporation. Typical would be a large corporation whose stock is traded on a stock exchange or on the over-the-counter market.

Both are creatures of the Subchapter C of the Internal Revenue Code and to that end, the characteristics that are offered therein enable significant planning and attention to detail. Taxation of the classic C corporation is covered under Subchapter C of the income tax Chapter of the Code. Separate rules are provided for taxation of the S corporation under Subchapter S. Subchapter C also applies to S corporations to the extent it does not conflict with Subchapter S.

PICPA - 02 - Business Succession