A corporation is a business entity where individuals, stockholders, and stakeholders are operating for a profit. These are the businesses likely to have a board of directors and officers such as CEO and CFO.
The requirements and operations are a bit different from LLCs, even though LLCs can elect to be taxed like corporations. There are two types of corporations your business could be structured. C corporations are the standard corporation under IRS guidelines where the business income and owner income is taxed, or some refer to this as double taxation. An S corporation has special tax advantages where the business is not taxed, only the personal income of the owner or employee.
Starting a Corporation in Louisiana
Requirements for Incorporation
When it comes to requirements, there are some for the business in general, the directors involved, and even the business name.
Business Names
One of the first steps after deciding to structure your business as a corporation, you’ll need to file an article of incorporation under a business name that meets requirements. And of course, the first thing you need to do is conduct a search to make sure the name you want to use is not already taken.
The business name must contain either corporation, limited, incorporated, or some abbreviation of one of them. Businesses have also been known to include company or co in their names as a different option.
There are also some words that are not permitted to use or may need approval, even though you may have seen them in the business name of an LLC. The following words would have to be approved by the Office of Financial Institutions if used in your business name:
- Guarantee
- Bank, banker, or banking
- Loan
- Mutual
- Cooperative
- Savings
- Trust or trustee
- Homestead
- Credit union
- Safe-deposit
- Insurance
- Casualty
Article of Incorporation
The requirements for filing an article of incorporation are different from state to state. Louisiana requires there must be at least one incorporator who can be a business entity or a person that’s at least 18 years of age.
There must be at least one director which can only be an individual at not a business entity. An appointed registered agent is also required to file for a corporation.
Louisiana law requires that directors and the registered agent do not use PO boxes as addresses. Addresses need to be included in the initial report for directors, officers, and the registered agent but do not need to be in the Article of Incorporation.
Corporations deal with stock and the number of shares should be included in the incorporation filing, along with the par value. If you decide to increase the number of shares or the par value, it will not affect filing fees.
Directors
In addition to there being at least one director, the physical addresses of the director(s) must be in the state of Louisiana. There is no age requirement for directors.
Registered Agent
The physical address of registered agents is important because they are elected to receive tax and legal documents for the corporation. The availability of an agent should always be during operating hours.
Other Requirements When Getting Started
Initial Report
You’ll have to file a report annually with the Louisianan Secretary of State but there will be an initial report you’ll have to file at the time of incorporation. It will consist of the names and addresses of officers and directors as well as the business name. The annual report thereafter will be to update the report for any changes and verify what information is still current.
County Corporation Filing
In addition to filing with the state, you’ll also have to file with the county of the corporation’s legal address, which could differ from the corporation’s physical address. However, if the legal address is not in Louisiana, it is permitted to use the registered agent’s physical address and file within that county.
Corporate Finances
Of course you know that you’ll have business expenses, payroll, and most importantly taxes. Taxes for corporations are different from how other businesses are taxed.
Taxes
How a corporation is taxed is based on their business structure as a c corporation or s corporation. C corporations have the most standard taxation for these types of businesses.
C Corporations
A c corporation undergoes double taxation, so separate tax returns will have to be filed. First a corporation is taxed on a business income level. Gross revenue minus business expenses equals the taxable income for the corporation.
Example:
$10,000,000 – $6,000,000 = $4,000,000
Gross Income – Business Expenses = Taxable Income
Then, all shareholders of the corporation are taxed on the income they receive (income from dividends). However, if there is a time period where dividends are not paid out to shareholders then double taxation does not happen. Sometimes dividends can be held for business re-investment.
S Corporations
S corporations are taxed a bit differently from the standard. The thing that businesses favor about s-corp taxation is that no income taxes are owed at a corporate level. Taxes are owed on shareholder income, but they do not have to pay a self-employment tax.
Shareholders double as employees and are to pay themselves a reasonable salary. Social security and medicare taxes are withheld from that. Any remaining profit after shareholder salaries is what isn’t subject to self-employment tax.
Payroll
C corporations are not required to pay owners a salary. Many hold out on salaries until the company grows. Some still take a salary in addition to dividend income and the IRS has what is known as the 60/40 rule.
The 60/40 rule is that 60 percent of business income will be subject to payroll taxes and 40 percent of business income will be dividend income. IRS will raise concern if compensation is unreasonable or excessive.
When it comes to the reasonable salary that shareholders from s-corps are paid, many question what classifies as reasonable. The IRS has no specific guidelines on this, but that doesn’t mean business owners haven’t been to court for giving themselves a low salary. There have been shareholders of s corporations that will pay themselves a low salary and it allows them to save on self-employment tax, because profits aren’t taxed.
Factors that play a role in determining a reasonable salary for a shareholder-employee:
- Duties and responsibilities
- Experience
- Time dedicated to business
- Average national salary
- Dividend amounts
Business Expenses
C corporations can deduct many expenses, even some that other business structures cannot. We all know the general business deductions that can be claimed such as equipment, rentals and real estate, and more.
Up to 10% of taxable income can be written off for any charitable contributions of the c-corp. Taxes can be pushed back and losses can be spread out over years. You can write off salaries and bonuses and deduct all medical premiums.
Money spent on s corporations can be deducted from business income. Any expenses paid by a shareholder can be reimbursed, as they can be claimed by the corporation. But they need to be submitted to the company prior to filing a tax return to be able to be reimbursed.
Corporate Records and Formalities
When running a corporation, you’ll find yourself having a three-ring binder filled with fancy paperwork. Some business owners make the mistake of allowing that binder to sit on a shelf and collect dust.
But the truth is that you’ll need to maintain these records diligently. Not only is record keeping required by Louisiana law, but the two best reasons you need a corporate book are business succession and litigation planning.
Business Succession
Business succession is the process of changing ownership. If you want to sell your business, the buyer will want to see:
- Bylaws
- Meeting minutes
- Information on bank accounts
- Insurance policies
- Leases
Any important decisions that were made need to be recorded and kept in the binder or corporate book. And of course, if anything happens to you, these corporate records will be an asset to who runs the business thereafter.
Litigation Planning
If your business is sued, Louisiana law will protect the owners from personal liability. But if corporate formalities are not followed, expect the plaintiff to attempt to reach through liability and seize personal assets.
The main formality is that you need to keep your corporate documents maintained and accurate. If not, the court could buy the argument of the plaintiff.
Corporate Minutes
To follow corporate formalities, you’ll have to keep an accurate record of all corporate meetings. It will be proof that shareholder meetings, board of director meetings, and board committee meetings took place.
Your corporate minutes records aren’t just transcripts with time stamps. They’re more of a brief narrative of each meeting describing actions taken. Ditch the unnecessary details as they can make the records more confusing and possibly create legal difficulties.
Decisions should be recorded as resolutions. In addition, a record needs to be kept on how everyone voted.
Things that should be included in the shareholder meeting minutes:
- Amendment to the Articles of Incorporation
- Merger or consolidation of the corporation
- Sale of all if not most of the corporation’s assets
- Closing of the corporation
Things that can be included in the board of directors meeting minutes:
- Appointing officers
- Appointment of committees
- Corporate credit arrangements
- Opening of bank accounts
- Policy decisions
- Decisions regarding leases, acquisitions, or agreement to perform services outside the ordinary course of business
- Decisions on pensions, profit-sharing, bonuses, and employee benefit plans
- Declarations of dividends
- Amendment of the bylaws
- Review of financial statements of the corporation
- Appointment of auditors
- Any action where shareholder votes are necessary
- The issuance or sale by the corporation of additional shares or granting options to purchase additional shares
Board of Directors
The board of directors are there to manage the corporation, trusted by the shareholders to do so. They consistently monitor the business and what it offers, in addition to their own performance. A chief executive officer is chosen by the board of directors known as the CEO. A CEO oversees all aspects of the corporation with a team of officers that report to them.
The remaining officers are known as C-level executives, or C-suite.. Here are the other board of director positions:
- Chief Financial Officer (CFO) – oversees the financial affairs
- Chief Operations Officer (COO) – oversees the day-to-day operations and administrative duties
- Chief Marketing Officer (CMO) – oversees marketing on a full scale
- Chief Information and Technology Officer (CITO) – oversee technology of the company to make sure it serves business purposes
- Chief Human Resources Officer (CHRO) – oversees the people of the corporation
Rights of the Board of Directors
The officers of the corporation have rights like shareholders do, but they differ from one another. You know that they manage the company and each other’s performance. Also that they have to communicate and conduct meetings on a consistent enough basis. They have more rights regarding subjects from company documents to liability.
Right to Dissent
Sometimes directors won’t fully agree on what they vote on, and that’s normal. As a director, the time could come where they feel the need to suggest a different method of action. As long as your bylaws allow, your suggested method has the right to be considered. Voting on decisions could be pushed back to better time to address the decision being made.
Your dissent will be documented in the corporate minutes that you disagreed with the course of action. However, anything that all directors must do in a decision made, you cannot refuse.
Unlimited Access to Corporate Books and Minutes
At any instance, a director has the right to review corporate documents and meeting minutes. The right is important because having access to corporate documents helps them make future decisions.
Liability Protection
If the corporation ever endures a lawsuit, the directors should have liability protection for personal assets. The company could have liability insurance, but sometimes the lawsuits can affect directors if they are personally sued.
Now who would personally sue a director for company actions? Normally the parties who could personally sue are:
- Employees
- Vendors
- Customers
- Investors (i.e. shareholders)
- Competitors
A director could be sued for any wrongful acts to do managing the corporation. Directors and officers liability insurance (D&O) covers wrongful acts the director made with managing the responsibilities. The insurance covers the corporations when it comes to fees and costs.
Illegal acts and profits are not covered, and that’s when personal assets of the director and even their spouse could be compromised. These illegal activities could be anything from fraud to misuse of company funding to non-compliance with workplace laws.
Directors have the right to this insurance and should be on a board without it.
Business Judgement Rule
Business judgement rule is also protection all directors have the right to on a federal level. It refers to the good faith of directors and their honest intentions in making decisions. Any of those decisions do not have to be addressed at a later date.
You cannot be legally addressed about past actions that are not illegal and do not go against corporate bylaws.
Directors have a big responsibility with the corporation. All directors should be compliant and very skillful at what they do to drive a corporation’s success.
Conclusion
After going through some basics about corporations, you may determine it’s a good choice for your business structure. Consult with a business attorney first, then make sure you have a trusted CPA.
