| |
| 8. |
Corporate organization.
|
| |
| 8.1 |
Generally, even after a corporation is legally in existence, it is still necessary to organize it to do business. "Organizing" a corporation usually means the election of officers, the
subscription and payment of the capital stock, the adoption of bylaws, and such other steps as are necessary to give the legal entity the capacity to transact the legitimate business for which it was created. Where nothing more was done than to file a charter in the proper office and no other steps are taken to complete the organization, there is no such organization as will enable the corporation to do business.
Statutes vary to the responsibility for organization. If the initial directors are named in the original articles they are the ones for primary responsibility for the organization. Again statutes vary to when the existence of the corporation begins, some statutes may require additional filing such as officer/directors filing which might require some additional organizational procedure. However, a corporation may acquire a de jure status, not with understanding a
failure to comply with organizational requirements, at least where the particular statutory provision is merely directory and not mandatory.
|
| 8.2 |
Checklist of organizational steps:
the following is a list of some of the key matters that should be dealt with in organizing a corporation.
|
| |
1. |
Hold organization meeting and elect initial directors if not named in articles.
|
2. |
Adopt bylaws.
|
3. |
Elect officers.
|
4. |
Issue stock.
|
| |
a. |
Determine consideration.
|
b. |
Allocate consideration between capital and paid in surplus.
|
c. |
Accept subscription.
|
|
5. |
Borrow money.
|
| |
a. |
Negotiate terms.
|
b. |
Authorize mortgage of corporate property, such as property received in consideration of stock.
|
c. |
Authorize designated officers to enter loan agreements.
|
|
6. |
Get necessary corporate book.
|
| |
a. |
Stock book.
|
b. |
Stock transfer ledger.
|
c. |
Minute book.
|
d. |
Books of account.
|
|
7. |
Bank resolutions.
|
| |
a. |
Open bank accounts.
|
b. |
Determine who is authorized to sign corporate checks.
|
|
8. |
Adopt corporate seal.
|
9. |
Qualify corporation to do
business in all states where it will be doing business.
|
|
| 8.3 |
Organization meeting. Generally, after the
issuance of the certificate of incorporation, an organization meeting should be called by the directors is designated by the articles or the incorporator (s). In many statues, the initial meeting will require an election of directors by the shareholders. Therefore, a general meeting of shareholders to confirm the election of directors and then an organizational meeting can be held. The statutes of the state where incorporated should be consulted before said meeting is called.
|
| 8.4 |
Location. In the absence of statutory provisions to the contrary, organization meetings must be held outside the state are void and may even be illegal. However, many states have adopted provision permitting the organization meeting of the board of directors to be held either within or outside the state.
|
| 8.5 |
Notice. Generally the directors calling the organization meeting are required to give at least three days notice of such meeting by mail to each director so named, said notice must state the time and place of the meeting. This notice can be waived by the directors name in the event they are all present. Some states require that notice be given to subscribers of the stock, again such a notice is subject to waiver, where all agree thereto, further, a failure to notify subscribers of the first meetings
cannot be urged by the notified subscriber in the event of proper notification a meeting is valid is a sufficient name of subscribers are present, such meeting could further be valid even though such notice was not given. State statutes vary widely with respect to matters of notice period, if notice by mail is necessary and if waiver notice is required.
|
| 8.6 |
Subscription,
issuance and payment for stock. Capital does not need to paid in order to commence business. However, some statutes require, for the formation of a corporation, that a certain
proportion of the stock be subscribed, and some require that a certain portion of stock subscribed for be actually paid in. Any attempt to acquire corporate life and functions by a pretentious or evasive
compliance with the statute, as to the issue of, or payment for, stock no matter what the papers say on their face, must be adjusted as a fraud upon the law. A substantial
compliance with the requirements, however, is sufficient. It has been held in different jurisdictions, subscription as a precedent to corporate existence. According to some jurisdictions it has been held that failure of
compliance does not prevent the corporation from coming into existence or render contracts made by prior to
compliance, while others have held that without authorization and capitalization shall be authorized to begin business, the failure to observe such statutes cannot be called in question
collaterally, but only by the state in a direct proceeding to forfeit the corporation charter. However, some statutory requirements of a certain amount of stock subscriptions on a corporate organization when a nominal subscription exist is not authorized to enter into binding contracts.
|
| 8.7 |
Election of tax and accounting methods. In organization to do business, a new corporation must decide who is to be taxable on its income, the taxable year to be used in determining its income, and method to be used in determining when receipts are includable in income and when, and if, expenditures may be claimed as deductions in computing taxable income. Careful consideration should be given to the various elections that are available to a new corporation. Elections, once mentioned, cannot be changed without IRS's
consent, tax and accounting checklist, the following elections should be concerned:
1. Election to be taxed as an S Corporation, which results incorporate income being taxed directly to stockholders. See S Corporation Yes or No.
2. Election of corporation's taxable years.
3. Election of overall accounting year.
4. Elections of special accounting methods for specific items.
5. Elections to memorize organizational and/or startup expanding.
|
| 8.8 |
Corporations taxable year. Both tax and non-tax factors should be considered before choosing a taxable year. Most newly formed corporations may adapt the calendar year or any acceptable fiscal year as their taxable year. A corporation's
first taxable year begins with the date it comes into existence even if it does no business
until a later date. When a corporation's legal existence begins to
depend on the law of the state which it is incorporated in. If a
corporation does not specifically adopt a taxable year for its first
year of existence it must use a calendar year. Further, IRS gives 60
days in which to designate the fiscal year. Corporations that are merged
or transferred foreign partnerships or S Sub corporation can adopt the fiscal year of the entity. A consolidated return must use the taxable year of the parents of the group. Normally IRS will not allow changes or other dates without a tax planning that should be considered with the corporation's accountants as errors or
omission or filing can have serious tax consequences.
|
| 8.9 |
Choosing accounting methods. The amount of taxable income realizing in any taxable year by a corporation will depend in part on the accounting methods adopted for reporting receipts and claiming deductions for expenditures. Accounting for reporting receipts and claiming deductions for expenditures. Accounting methods include the method and/or price used in claiming allowable cost recovery, depreciation and amortization deductions. Careful planning is necessary before deciding what methods should be adopted. The right decision can result reducing the corporations taxes, improving the cash flow, and lessening its need for additional capital. On the other hand, the adoption of a method that reduces a corporation's taxable income may give a
distorted view of corporation's operations and thus make it more difficult to raise needed capital. Since most accounting methods can be changed only with the consent of the IRS, considerable thought should be given to all
advantages and disadvantages of the different methods before a final decision is made.
|
| 8.10 |
Special accounting methods. Corporations are often
permitted to adopt a special accounting methods for certain items even if the special method is
inconsistent with the overall accounting method that is adopted. The specific method that is adopted will help determine whose gross income must be reported and when expenses may be deducted. Accordingly, it will affect when a corporation must pay taxes. To the extent that the method adopted will help the corporation postpone the payment of taxes, it will improve its cash flow, lessen its need for capital and/or increase its ability to pay dividends.
Special accounting checklist:
The following items are reason a newly formed corporation might select a special accounting method.
1. Inventories: Lower cost or market, LIFO, or methods for special industries.
2. Bad business debts: specific charge-off methods or reserve method.
3. Long term contracts: percentage of completion method or complete contact method.
4. Installment sales: installment method.
5. Vacation pay: vacation pay accrual account.
|
| 8.11 |
Transfer of Property to corporation. Corporations are often capitalized in whole or in part, by transferring property other than cash to the corporation in exchange for stock, debt securities, or some other considerations such as short term notes. The method used to transfer the property, the timing of the transfer, and the consideration received in exchange, will determine the tax consequences of the transfer to the transferors and the corporation. Careful planning is required, transferors who intend to transfer property to corporation must first decide whether they want to make a tax-free, partially taxable, or fully taxable transfer. To make a tax free transfer of property, the transferor must be in control of the corporation after the transfer and the only consideration given in exchange for the property must consist of stock and or securities of the corporation. To make a partially taxable transfer, the transferors must be in control of the corporation immediately after the transfer but part, but not all, of the consideration must consist of property other than stock and/or securities of the corporation. To make a fully taxable transfer, the transferors must either be in control of the corporation immediately after the transfer or the entire consideration must consist of property other than stock and/or securities of the corporation. In some situations, the transferors will benefit by making a tax free transfer because any gain realized on the transfer won't have to be recognized by them. On the other hand, a tax free transfer may be
detrimental to the corporation because it will have the same basis in the transferred property as the transferors had. If a taxable transfer had been made, it could have obtained a higher basis of deciding when to make property transfer, checklist. There are several factors in determining when property should be transferred to a corporation. Some of these factors apply only to an existing business and some to a new business.
|
| |
1. |
Leave sufficient time to wind up unincorporated business if unincorporated business is being transferred.
|
2. |
Leave sufficient time to prepare necessary documents such as articles of incorporation, bylaws, stockholders agreements if a new corporation is being formed.
|
3. |
Leave sufficient time to obtain consent to transfer of contractor and
governmental licenses.
|
4. |
Leave sufficient time to obtain advance ruling from IRS.
|
5. |
Consider transferring assets of incorporated business to corporation at the end of unincorporated business taxable year.
|
6. |
Consider making transfer at time income will be taxed at lower range to corporation than to owners of unincorporated business.
|
7. |
Consider transferring assets of fiscal year partnership midway between last day of partnership taxable year and last day of
partner's taxable year so as to avoid having all of "excess income" taxed in the same year.
|
8. |
If substantially all of the assets of an unincorporated business as not to be transferred to corporation, consider transferring assets that are to be transferred at the beginning or end of the calendar year so that combined social security tax doesn't exceed maximum payable by one employer.
|
9. |
If an unincorporated business has a high value-low assets, consider delaying transfer of assets until after death of aging or ill sole-partner.
|
|
| 8.12 |
Incorporating an existing business. Planning the transfer of the assets of an existing business to a corporation that will continue that business requires dealing with some problems that unusually do not arise when property is transferred to a corporation that is to start an entire new business.
Existing business transfer, checklist:
|
| |
1. |
Avoid recapture of investment credit.
|
2. |
Avoid recapture of the
bad debt reserve of the transferred unincorporated business.
|
3. |
Consider the various types of transfer.
|
4. |
Give the transferors of the business deferred shares when there is doubt as to the value of the transferred business.
|
5. |
Avoid or minimize the recognition of operating income as a result of the transfer.
|
| |
Partnership incorporate transfer. Planning is required to best be certain of the method to chose of assets when a tax-free
transfer is made the recapture of the investments credit by the partner and or a partial tax free, whether common stocks:
or common exchange for the assets "ordinary loss stock" under IRS 1244 and whether the corporation can qualify as an S
corporation.
Partnership to incorporation, checklist:
|
| |
1. |
Direct transfer of assets by a partnership to a corporation.
|
2. |
Transfer by parents of their interests in the partnership to the corporation.
|
3. |
Liquidate the partnership, distribute undivided interests in the partnership assets to the partners, and have the partners transfer the interest in the assets to the corporation.
|
|
| |
The three methods of transferring partnerships mentioned above will be further defined.
|
|
|
| 9. |
De Facto Corporations, A de jure corporation is one that has been regularly created in
compliance with all legal requirements and has a right to exercise a corporation franchise that is
invulnerable against attack by the state in quo warranto proceedings.
A De Facto corporation, is an association that may not be able to just itself when called on by the state to show by the authority it assumes to act as a corporation.
The above referenced will have additional information added at another time.
|
| |
|
|
