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 your business, you will want to go to
your state's website to see what the fees and forms are to
begin one where you live.
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.
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