Whether you are starting a business or reorganizing one, choosing the right incorporation is important to achieving your objectives. The North Carolina Secretary of State recognizes three incorporation methods: Business Corporations (Inc.); Limited Liability Companies (LLC), and Nonprofit Corporations. This article will help you better understand each method, and how it may affect your business.
CORPORATIONS & FOREIGN CORPORATIONS
A corporation is recognized in North Carolina as a separate legal entity from the individuals who form it and its owners, called the “shareholders.” The shareholders of a corporation are generally not personally liable for the debts of the business. A corporation is managed by its board of directors, which must approve major business decisions. Directors are elected by shareholders at the company’s annual shareholder meeting. Directors of a corporation owe a duty of loyalty and care to the corporation. Generally, this means the director must act in good faith, reasonably, and in the best interest of the company.
In North Carolina, a corporation is automatically classified as a C-Corporation unless otherwise indicated by its shareholders. C-Corporations are taxed as a separate business entity and are subject to their own tax forms and tax rates. A corporation may choose to retain its profit or may distribute earnings via dividends to the shareholders.
Forming a C-Corporation may result in higher taxes since shareholders are essentially taxed twice by the government, once at the corporate level and again at the personal level.
Forming an S-Corporation in North Carolina requires the consent of all shareholders, and provides special tax treatment (“pass-through taxation”) by the IRS. S-Corporations have between 1 and 100 shareholders and are generally not subject to corporate tax rates since the business’ profits are taxed at individual tax rates on each shareholder’s tax return.
A Foreign Corporation is an existing corporation that is registered to do business in another state other than North Carolina. A foreign corporation cannot do business in the State until it obtains a certificate of authority from the Secretary of State. One of the legal consequences of not registering for a certificate is that the business cannot file a civil suit in North Carolina as the plaintiff, but can still be sued in the State by another person or business.
A Nonprofit corporation is a special type of corporation that is organized to either benefit the public, a specific group of individuals, or the membership of the Nonprofit. The Nonprofit corporation is intended to have no income, meaning it does not provide distributions to its members, directors, or officers. Unlike the corporation, Nonprofit organizations are not organized to make a profit or financial gain for its owners. Nonprofits may be organized for charitable, civic, community welfare, religious and scientific purposes.
For federal tax purposes, not all Nonprofit corporations are tax exempt. Nonprofit corporations must apply to receive federal and state tax exempt status for all or some of its income.
LIMITED LIABILITY COMPANY
A Limited Liability Company (“LLC”), like a corporation, is recognized as a legally separate entity from its owners, also called “members.” There are two basic LLC structures: member-managed and manager managed. In a member-managed LLC, all members participate in the decision-making process and daily management of the company. In a manager-managed LLC, members relinquish their authority to the manager (or managers), who act as agents of the company. The manager in this context can be a member, but this is not necessary. Members of an LLC are not personally liable for the actions of the business and enjoy pass-through taxation meaning profits are only taxed at the individual taxpayer level.
Choosing the right incorporation method and management structure can be critical to your financial stability and the success of your business. If you are starting a business in North Carolina, please visit www.craineylaw.com or contact the Law Office of Cedric Rainey, PLLC, to schedule an initial phone consultation.
[This blog does not offer legal advice. If you need legal advice, contact the Law Offices of Cedric Rainey to speak with a licensed attorney.]