See: IRS – Choosing a Business Structure FS-2008-22 7/22/08
Articles of incorporation
A corporation is formed by filing Articles of Incorporation with the Office of the Missouri Secretary of State [or respective state]. Your Articles of Incorporation are the public notice and record of the Corporation’s existence – in effect, its birth certificate and constitution. The Articles of Incorporation set forth the details the law requires, and govern directors’ and stockholders’ basic rights and powers. The Articles can be revised by filing amendments properly authorized by the board of directors and approved by the stockholders.
Board of Directors
The board of directors is the decision-making body of the corporation.
Corporate officers are responsible to run the corporation on a day to day basis.
Your By-Laws are subordinate to the Articles. They set forth matters affecting stockholders’ and directors’ rights, corporate officers’ powers, duties and authority, and establish the basic administrative rules and procedures for the day-to-day legal operation of the corporation. While the By-Laws may be viewed as merely implementing a number of corporate formalities, they are essential to resolving potential future problems and evidencing the corporation’s adherence to its Articles and other legal requirements. As a practical matter, the By-Laws do not impose any significant operational burdens so long as you continue to be in basic agreement on corporate directions. These matters include:
- altering the number of directors;
- the calling, convening, and conduct of, and voting at board of directors’ and stockholders’ meetings;
- election of the corporation’s officers and directors;
- issuance of certificates representing shares of the corporation’s stock;
- general financial authorizations; and
- By-Law amendments through board of directors’ action, either by formal meeting or by informal action.
The corporation must have a registered agent who must be a individual resident in the state or corporation or other entity organized in the state (e.g., Missouri). Residents of other states and foreign corporations and other entities are not qualified to serve. The initial registered agent is named in the Articles and can be changed by filing a form with the Missouri Secretary of State. The registered agent receives official notices and is typically served in the event of a lawsuit. While the registered agent generally does not have the responsibility to take actions on items they receive, they do need to be someone responsible who will pass the items on to the appropriate persons for action.
A corporation is a separate entity and must be treated as such
When you form a corporation, you need to act like a corporation. Your phone listing, stationery, signs, advertising and other items need to indicate the precise corporate name. Each and every time you sign any note, check or other document on behalf of the corporation, be sure to indicate your office or title so it is clear you are signing in a representative capacity and not individually.
One of your first considerations is selecting a qualified accountant to set up the books and prepare the necessary tax forms.
Employer identification number (EIN)
You or your accountant must apply for a federal tax identification number (“EIN”).
Sales tax license
A state sales tax license is required if you intend to sell tangible personal property or some services on a retail level or need an exemption certificate.
If you intend to pay salaries, a state withholding number is required, and Federal withholding, FICA, FUTA and state withholding taxes must be reported and paid on a regular basis.
Employment Security (unemployment compensation)
Division of Employment Security (unemployment) tax reports must be filed and taxes paid for employees. Officers and directors are employees for employment security taxes.
Missouri franchise tax is prospective and the franchise tax return must be filed with the Missouri Department of Revenue even if the corporation is not liable for franchise tax, and if applicable, the tax must be paid in advance at the first rather than at the end of the fiscal year. A franchise tax return is typically filed in connection with the prior year’s corporate income tax return (e.g., the 2003 franchise tax return is filed with the 2002 corporate income tax return). If the franchise tax is not paid the corporate charter will be revoked. Operation of the corporation’s business while the charter is revoked subjects the officers and directors to personal liability, and reinstating a corporation’s charter after revocation involves an extensive and time consuming process and significant expense.
Annual registration report
The corporation must file an annual registration report with the Missouri Secretary of State’s Office each year by the 15th day of the 4th month of its fiscal year (April 15 for a calendar year corporation). The annual registration form will be mailed to your registered agent, and if not filed after a grace period (during which penalty fees apply), the corporate charter will be revoked.
You should consider the need for liability, health, worker’s compensation and other insurance, and consult your insurance advisor for competitive quotes.
If you elect Subchapter S status under the Internal Revenue Code (“IRC”), you need to be aware of the requirements of S corporations, including initial eligibility and ongoing eligibility requirements. You must exercise great care to assure all losses are properly used, the Service does not revoke the S election for a variety of reasons, including unauthorized shareholders or subsidiary corporations. To utilize all losses, you must be sure you do not just guaranty the corporation’s loans as a shareholder, but instead make them your direct obligations, as either a capital contribution by you or corporation obligations to you evidenced by a promissory note. You also need to be careful to avoid direct corporate guarantees or scrutinizing of your outside loans. These rules are extremely complex, and anytime you have a question, and before you make any decisions or complete any transactions involving loans, the transfer of stock or an asset transaction, you should consult with your attorney or accountant to review the possible impact on the S status.
Deductions and expenses, and IRS audit
With increased frequency, the Internal Revenue Service is challenging the deductibility of certain expenses paid by corporations which may benefit shareholder-employees. At the initial meeting of shareholders and directors you should consider adopting a resolution to provide some degree of protection for this constructive dividend problem, but it is still very important that the corporation not pay personal expenses of shareholder-employees.
The organization meeting of organizers, board and shareholders
The organizational meeting or action by unanimous consent of the board of directors elects the corporation’s initial officers, approves the Articles, adopts By-Laws, designates the corporation’s bank, establishes the corporation as a Subchapter S corporation and authorizes filing the IRS form 2553 election (if applicable), authorizes issuing of and payments for capital stock, and ratifies prior actions on behalf of the corporation as authorized corporate acts. The corporate banking resolutions should also be properly approved and placed in the corporate book.
Annual director and shareholder meetings and minutes or actions
A brief set of minutes or action by unanimous consent should be prepared whenever the corporation issues additional stock or enters into a formal agreement, especially e.g., if the corporation employs other managerial persons, takes out a loan, acquires a major asset or lease, or adopts a retirement, pension, medical reimbursement, or stock option plan.
At least annually, shareholders’ and directors’ meetings must be held to elect directors and officers and approve the major activities of the corporation.
A corporate book containing printed stock certificates should be ordered. On receipt of the book the certificates for shares issued should be prepared, signed, registered and issued in the appropriate name(s) to evidence the issued shares of the corporation’s common stock. The certificates need to be executed by the president and secretary, and once signed, are valuable documents that should be kept in a safe place, often in the corporate book for closely held corporations. Missouri law requires payment before shares can be issued and delivered so you need to document the date contributions to the corporation for the purchase of stock are paid.
It is important each of the corporation’s principals understands all the contents of your minute book and keeps in mind the necessary administrative procedures. These documents and procedures are important to enable yourselves and your future employees and corporate advisors (attorney, accountant, and insurance advisor, etc.) to protect, strengthen and extend your corporate purposes, and maintain the corporation’s own distinct integrity separate and apart from its employees and stockholders. Adhering to these formalities requires time and some expense, but the ounce of prevention assures your keeping a proper business record.
Who the attorneys represent
As attorneys, a law firm is limited in its ability to represent the interest of the corporation and all of the shareholders. It would be a potential conflict of interest if the attorneys hold themselves out as representing both the corporation and the different shareholders. This is especially true if a dispute arises at a later time between the shareholders as to corporate level or management decisions. If you have any questions about the terms of buy-sell agreements, shareholders and directors meetings, or a dispute which you cannot work out between yourselves, you should consult or secure the services of an independent attorney.