Choosing the Form of Organization
This information
is courtesy of the State of Alaska, so it includes some
of the state specific info. When you have chosen the
type of organization you want for your business, you
will want to go to your state's website to see what
fees and forms are needed there.
We will cover "starting your business" in
a separate training sequence.
Sole
Proprietorship
An individual
may start a business by obtaining a business license and
satisfying any necessary licensing requirements. Under
the individual proprietorship, the owner establishes the
business, secures all capital, assumes all risks, receives
all profits, and incurs all losses. To obtain a business
license, contact the Alaska Department of Commerce and
Economic Development, Division of Occupational Licensing.
Advantages
Few formalities and low organizational
costs
Decision making is concentrated
on one individual
Fewer reporting requirements
to government agencies
Avoidance of corporate “double
tax”
Business losses may be taken
as a personal tax deduction to offset income from other
sources
All profits taxed as income
to owner at the owner’s personal tax rate
Less able than corporation
or partnership to take advantage of certain fringe benefits
afforded by the Internal Revenue Code
Business terminates on death
of owner
Investment capital limited
to that of owner
Loans based on credit worthiness
of owner
Owner’s assets subject to
business liabilities
Partnership
A partnership
consists of two or more persons who are associated in
order to pursue a business for profit. The partners assume
full liability for the obligations of the firm. The personal
assets of the owners, in addition to the business, may
be attached by creditors. The partnership does not require
state sanction. A business license is necessary, and special
licensing requirements may apply.
Advantages
Easy to organize and few initial
costs
Draws financial resources
and business abilities of all partners
May be continued after death
or resignation of partner
Liability is shared by all
partners
Partners take business losses
as a potential tax deduction
Each partner is personally
liable for all obligations of the business, not just his
share
Each partner has the power
to act on behalf of the business
A partnership is dissolved
by the death of a partner unless the partners have agreed
otherwise in writing
All partners must pay tax
on their share of partnership profits, although profits
may be retained in the business
A partnership has more opportunity
than a sole proprietorship, but less than a corporation
to take advantage of certain fringe benefits afforded
by the Internal Revenue Code
Limited Partnerships
Two or more
persons may form a limited partnership by signing and
delivering to the Corporations Section, an original and
exact copy of a Certificate of Limited Partnership. Alaska
Statute 32.11.010 sets out the requirements for the Certificate
of Limited Partnership; forms are available upon request.
The filing fee is $150. See Schedule of Filing Fees
for other business costs.
Limited Liability
Companies (LLC)
The limited
liability company (LLC) is a new form of business organization.
Originally established by the State of Wyoming, LLCs are
now accepted in all 50 states. A LLC may be formed by
two or more persons by filing Articles of Organization
with the Division of Banking, Securities and Corporations.
The filing fee is $250.00. See Schedule of Filing Fees
for additional fees. See Corporations for contact information.
Advantages
Each member’s liability is
generally limited to their investment; their personal
assets are protected
Less restrictive than a Chapter
S Corporation, i.e., no limit on the number or type of
persons who can be members, or restrictions against nonresident
aliens participating
Flow through taxation (avoidance
of corporate “double tax”)
All members may participate
in the management of the business
Unlike a corporation, interest
(ownership) in the business is not freely transferable
A LLC requires more formality
and documentation than a partnership or sole proprietorship
Lack of perpetuity. Like a
limited partnership, LLC’s generally only exist to a specific
date, and certain restrictions may apply to the continuance
of the business
No centralized management;
members generally share management responsibilities
The IRS has not come out with
a blanket rule regarding LLC’s; each entity must apply
for a separate tax ruling
Corporations
One of the most
important decisions facing those entering business is
whether the business should be operated in the corporate
or non-corporate form. Unfortunately, this decision often
is made without the necessary legal and tax advice. Usually
incorporation is chosen on the widespread belief that
the corporate form is preferable. However, there is no
easy answer to this question. Both non-tax and tax considerations
must be carefully weighed. It is strongly suggested that
legal and/or business advice be sought before deciding
to incorporate.
If stock is
sold in any corporation, it must either be registered
or be exempt from registration as provided for by the
Alaska Securities Act of 1959 (AS 45.55). When money is
to be raised, the possible implications of state and federal
securities acts should be considered.
Below is a list
of advantages and disadvantages to consider before choosing
to incorporate.
Advantages
Exposure of each shareholder
to the liabilities of the business is limited to the amount
of his investment
Interest in the business may
readily be sold by the transfer and sale of shares in
the corporation
The ready transferability
of shares facilitates estate planning
If desired, the corporation
may be taxed as a partnership by complying with the S
Corporation section of the Internal Revenue Code
Shares of the company may
be sold to investors in order to obtain capital financing
Corporations, to a much greater
extent than sole proprietorships and partnerships, may
take advantage of pension plans, medical payment plans,
group life and other fringe benefits available under the
Internal Revenue Code
The corporate form provides
for a great deal of flexibility with respect to tax planning
Cost of organization is higher
than for the other forms of organizations
Control vested in a Board
of Directors, elected by shareholders rather than the
individual owners
Possibility of double taxation
The corporation must qualify
in each state in which it chooses to do business
Unlike sole proprietorships
and partnerships, losses of the corporation may not be
deducted by individual shareholders, unless the corporation
has elected to be taxed as a S Corporation
Types of Corporations
S Corporations
If you choose
to develop as an S Corporation, contact the Internal Revenue
Service for specific terms and regulations that refer
to:
Becoming an S Corporation
Corporations that qualify
Violating the Passive Income
Restriction
S Corporation termination
year
Filing Form 2553 which indicates
the choice of S Corporation
Terminating S Corporation
status
Pass-through income/losses
similar to partnership, but retains limited liability
of a corporation
Federal income taxes may be
less than corporation, since top individual rate is less
than top corporate rate
Income taxed only once (not
twice through dividend distributions)
Corporate Alternative Minimum
Tax is not applicable to S Corporations, although adjustment
preferences must still be calculated and passed through
stockholders
Losses pass through to stockholders.
To the extent current deductibility is limited by basis
and the amount “at risk” in the company they can be carried
forward
Avoids most problems with
“Excess Compensation”
Avoids potential problems
with “Accumulated Earnings”
No double taxation upon liquidation
of company; however, a “built-in gains” tax does apply
if corporation was formerly a C Corporation and converted
to S Corporation pursuant to an election made after December
31, 1986
Individual stockholders must
pay taxes on prorated share of company’s income even if
the income is not distributed
Benefit of graduated corporate
rates is lost
Fringe benefit limitations
to stockholders
Year-end must be calendar
year (in most cases)
A LIFO recapture tax may apply
to C Corporations upon conversion to S status
The S Corporation may be subject
to a corporate-level tax on excess net passive income
The S Corporation may be subject
to the built-in gains tax
Limited to one class of stock
Stockholders who are not “material
participants” are subject to passive activity loss limitations
Number of stockholders is
limited to 35
Venture capital financing
may result in loss of S Corporation status since corporations
cannot hold stock in an S Corporation
Stockholders must be individuals
(or some estates or trusts)
Differing state rules for
corporations may or may not recognize S Corporation status
Foreign Corporations
Doing Business in Alaska
Alaska Statute
10.06.705 requires that corporations outside of Alaska
obtain a Certificate of Authority before doing business
in Alaska. “Doing business” is not clearly defined in
the law, and each situation calls for a separate analysis
of whether the corporation or its local agents have insinuated
themselves into a “continuous course of business” inside
Alaska or with Alaskans sufficient to justify being governed
by Alaska laws.
The Corporations
Section does not provide legal counsel, and it is advisable
that private legal counsel be sought to determine whether
a corporation needs to qualify in Alaska.
Exceptions
to the Registration Requirement
The law sets
forth clear exceptions to the registration requirement.
Alaska Statute
10.06.718. Activities not constituting transacting business
in this state.
Without excluding
other activities that may not constitute transacting business
in this state, a foreign corporation is not considered
to be transacting business in this state, unless any one
or more of the following activities occur:
Maintaining, defending, or
settling an action, suit, or administrative or arbitration
proceeding, or the settlement of claims or disputes
Holding meetings of directors
or shareholders of the corporation, or carrying on other
activities concerning the internal affairs of the corporation
Maintaining bank accounts
Maintaining an office or agency
for the transfer, exchange, and registration of securities
of the corporation, or appointing and maintaining a trustee
or depository for the securities of the corporation
Making sales through independent
contractors
Soliciting or procuring orders
by mail, through employees, agents, or otherwise, if the
orders require acceptances outside the state before becoming
binding contracts
Creating, as borrower or lender,
or acquiring indebtedness or mortgages or other security
interests in real or personal property
Securing or collecting debts,
or enforcing rights in property securing debts
Transacting business in interstate
commerce
Conducting an isolated transaction
completed within a period of 30 days, and not in the course
of a number of repeated transactions of like nature
To apply for
a Certificate of Authority to do business in Alaska, an
original and an exact copy of the application and a form
appointing the Commissioner agent for service of process
with a fee of $15, together with a Certificate of Good
Standing from the state of domicile must be submitted.
The filing fee is $150 and there is a $200 biennial corporate
tax. You may request an application for Certificate of
Authority from the Corporations Section.
Nonprofit Corporations
Three or more
natural persons, at least 19 years of age, may act as
incorporates of a nonprofit corporation. AS 10.20.151
sets out the requirements of the Articles of Incorporatation,
and forms for incorporating are available upon request.
The filing fee is $50. Nonprofit corporations are required
to file a biennial corporation report before July 2nd
and pay a $15 filing fee. If the report is not filed before
August 1st, a $5 penalty fee is charged. Failure to file
the report results in involuntary dissolution of the corporation.
In order for
a nonprofit corporation to receive grants and receive
tax exempt donations, the corporation must meet qualifications
stipulated by the IRS. Contact the local office of
the IRS.
Cooperative
Corporations
Three or more
natural persons, at least 19 years of age, may act as
incorporators of a Cooperative Corporation. Alaska Statute
10.15.350 sets out the requirements of the Articles of
Incorporation. The filing fee is $250.
Cooperative
corporations are required to file a corporate report every
two years before July 2nd. If the report is filed after
August 15th, a $10 penalty is due. The fee for filing
the report is $100. Failure to file the report will result
in involuntary dissolution of the corporation.
Religious Corporations
A religious
corporation may be formed for acquiring, holding, or disposing
of church or religious society property, for the benefit
of religion, for works of charity, and education and for
public worship. Alaska Statute 10.40.020 sets out the
requirements for executing the Articles of Incorporation.
The filing fee is $50.
Religious corporations
are required to file a corporate report every two years
between January 1st and March 1st. The filing fee is $15.
Failure to file the report will result in involuntary
dissolution of the corporation.
Professional
Corporations
One or more
persons, each of whom is licensed to render a professional
service in Alaska, may incorporate a professional corporation.
The Articles must meet the
requirements for business corporations and must include
the following: The name of the profession to be practiced
by the corporation
The names and addresses of
all original shareholders, directors and officers
The address where the professional
corporation will have its offices
A certificate
from the regulatory board of the profession involved must
be filed with the Articles of Incorporation certifying
that each of the incorporators, directors, and shareholders
are licensed to practice the profession. The filing fee
is $150 and a biennial corporate tax of $100 is also payable.
Professional
corporations are required to file a corporate report and
to pay the biennial corporate tax every two years before
January 2nd. Late penalties apply if the report is postmarked
after February 1st.
Organization
Feasibility Worksheet
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