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

1. Few formalities and low organizational costs
2. Decision making is concentrated on one individual
3. Fewer reporting requirements to government agencies
4. Avoidance of corporate “double tax”
5. Business losses may be taken as a personal tax deduction to offset income from other sources
6. All profits taxed as income to owner at the owner’s personal tax rate

Disadvantages

1. Less able than corporation or partnership to take advantage of certain fringe benefits afforded by the Internal Revenue Code
2. Business terminates on death of owner
3. Investment capital limited to that of owner
4. Loans based on credit worthiness of owner
5. 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

1. Easy to organize and few initial costs
2. Draws financial resources and business abilities of all partners
3. May be continued after death or resignation of partner
4. Liability is shared by all partners
5. Partners take business losses as a potential tax deduction

Disadvantages

1. Each partner is personally liable for all obligations of the business, not just his share
2. Each partner has the power to act on behalf of the business
3. A partnership is dissolved by the death of a partner unless the partners have agreed otherwise in writing
4. All partners must pay tax on their share of partnership profits, although profits may be retained in the business
5. 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

1. Each member’s liability is generally limited to their investment; their personal assets are protected
2. 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
3. Flow through taxation (avoidance of corporate “double tax”)
4. All members may participate in the management of the business

Disadvantages

1. Unlike a corporation, interest (ownership) in the business is not freely transferable
2. A LLC requires more formality and documentation than a partnership or sole proprietorship
3. 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
4. No centralized management; members generally share management responsibilities
5. 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

1. Exposure of each shareholder to the liabilities of the business is limited to the amount of his investment
2. Interest in the business may readily be sold by the transfer and sale of shares in the corporation
3. The ready transferability of shares facilitates estate planning
4. If desired, the corporation may be taxed as a partnership by complying with the S Corporation section of the Internal Revenue Code
5. Shares of the company may be sold to investors in order to obtain capital financing
6. 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
7. The corporate form provides for a great deal of flexibility with respect to tax planning

Disadvantages

1. Cost of organization is higher than for the other forms of organizations
2. Control vested in a Board of Directors, elected by shareholders rather than the individual owners
3. Possibility of double taxation
4. The corporation must qualify in each state in which it chooses to do business
5. 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
• Shareholder consents
• Violating the Passive Income Restriction
• S Corporation termination year
• Filing Form 2553 which indicates the choice of S Corporation
• status
• Terminating S Corporation status
• Revoking S Corporate
• status
• Ceasing to qualify
• Permitted tax year

Advantages

1. Pass-through income/losses similar to partnership, but retains limited liability of a corporation
2. Federal income taxes may be less than corporation, since top individual rate is less than top corporate rate
3. Income taxed only once (not twice through dividend distributions)
4. Corporate Alternative Minimum Tax is not applicable to S Corporations, although adjustment preferences must still be calculated and passed through stockholders
5. 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
6. Avoids most problems with “Excess Compensation”
7. Avoids potential problems with “Accumulated Earnings”
8. 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

Disadvantages

1. Individual stockholders must pay taxes on prorate share of company’s income even if the income is not distributed
2. Benefit of graduated corporate rates is lost
3. Fringe benefit limitations to stockholders
4. Year-end must be calendar year (in most cases)
5. A LIFO recapture tax may apply to C Corporations upon conversion to S status
6. The S Corporation may be subject to a corporate-level tax on excess net passive income
7. The S Corporation may be subject to the built-in gains tax
8. Limited to one class of stock
9. Stockholders who are not “material participants” are subject to passive activity loss limitations
10. Number of stockholders is limited to 35
11. Venture capital financing may result in loss of S Corporation status since corporations cannot hold stock in an S Corporation
12. Stockholders must be individuals (or some estates or trusts)
13. 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:

1. Maintaining, defending, or settling an action, suit, or administrative or arbitration proceeding, or the settlement of claims or disputes
2. Holding meetings of directors or shareholders of the corporation, or carrying on other activities concerning the internal affairs of the corporation
3. Maintaining bank accounts
4. 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
5. Making sales through independent contractors
6. Soliciting or procuring orders by mail, through employees, agents, or otherwise, if the orders require acceptances outside the state before becoming binding contracts
7. Creating, as borrower or lender, or acquiring indebtedness or mortgages or other security interests in real or personal property
8. Securing or collecting debts, or enforcing rights in property securing debts
9. Transacting business in interstate commerce
10. 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 incorporators of a nonprofit corporation. AS 10.20.151 sets out the requirements of the Articles of Incorporation, 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.