NOW THAT YOU HAVE INCORPORATED...

Now that you have incorporated, there are several items of business that need to be taken care of by you as the incorporating shareholder, by your attorney, and by your certified public accountants, Duban Sattler and Associates LLP.  The following is a general outline of these items.

A)  UPON FORMATION:

1)     Obtain the Articles of Incorporation from your attorney and forward a copy of them to Duban Accountancy LLP (your attorney will keep the originals in your minute book, usually at his office).  Upon receipt of the articles, we will then:

A) Apply for and obtain a Federal Employer Identification Number (FEIN) from the IRS in Fresno, California, if a California corporation, or from the appropriate IRS Service Center for other states’ corporations.  (Use Form SS-4.)

B) If in California, we will apply for and obtain a California Employment Development Department (EDD) Identification Number.  (Use Form EDD-1.)  This is your state payroll tax identification number.  For other states, we will apply with the appropriate state.

C)       Record your California Corporation Number from the Articles of Incorporation for use in preparing annual corporate tax returns and corresponding with the Secretary of State.  Please note that you must be sure to keep your copy of the Articles and all other important documents in a safe place.

D)      These identifying number steps are also required for limited liability companies (LLCs).

2)     Open a corporate checking account – the bank will require:

A)    Articles of Incorporation (a copy is acceptable)

B)    Federal Employer Identification Number

C)    Statement by Domestic Stock Corporation certificate of registration (attorney will provide your corporate documents)

3)     If operating in a city with a business license requirement or tax, obtain the necessary licenses.  In order to obtain a City Business License from either Los Angeles, West Hollywood, Beverly Hills, Culver City, Santa Monica, or the appropriate city – call the City Clerk’s office, or our office, for the telephone number, if you are in California.

4)     As you recall, the costs of incorporating included legal fees, various state taxes and filing fees.  Included in this amount (which was probably $1,500 to $2,000) may have been a minimum tax payable to the California Franchise Tax Board for $800.  However, see below.

REGARDING THE $800.00 ANNUAL FRANCHISE TAX BOARD MINIMUM TAX PAYMENTS FOR BUSINESS ENTITIES

FOR LLCs: the annual $800.00 is due on or before the 15^th day of the fourth month after the date of formation of the entity – and this $800.00 is the annual minimum tax due for the first year of doing business in California – it is prepaid in advance, and is NOT a deposit (it never comes back to the entity on dissolution).  Then, for each year after the first year, the $800.00 annual tax is due on or before the 15^th day of the fourth month of the entity’s taxable year (example – if December 31^st is the year end and the entity is still in business – the $800.00 is due on or before April 15^th of the following year.

FOR  CORPORATIONs: since 2000 any newly formed corporations have the $800.00 annual minimum tax for the first year waived – their annual tax is based on a measured tax rate for the 1^st year—if the Corporation “does no business” the first year, minimum tax will be ZERO—and if they operate at a loss or make money, the annual tax will be based on the first year tax rate—8.84 % for type C corporations, and 1.5 % for subchapter S corporations—and will be due on or before the 15^th day of the fourth month after the Corp’s year end.  THEN, for the second year and each following year, the annual minimum tax of $800.00 is due FOR ALL CORPS on or before the 15^th day of the fourth month following the beginning of the current year (example – for this year 2003, if the Corp is in its second or more year of existence in California, and its year begins on 01/01/03 then the FTB minimum tax of $800.00 is due on or before 4/15/03 – paid as an estimated tax).

FOR LLPs OR LPs: the annual minimum tax for each year (including the first year) is due on April 15^th of the following year – the same as personal income tax deadlines (However, keep in mind the tax is not the same as personal income tax -  LLP and LP have a MINIMUM of $800.00 due each year regardless of business/income/loss, etc.)  This is not prepaid or estimated in advance, it is due with the return.

FOR GENERAL PARTNERSHIPS:  there is no $800.00 annual minimum tax.

B)  TO OPERATE YOUR CORPORATION

1)   Have your attorney issue stock shares.  A value of $5,000 is usually acceptable for a service or professional corporation; capital intensive businesses may require more stock.  Be sure to ask your attorney’s advice and make sure the stock is issued upon incorporation.

2)      Deposit all corporate earnings into the newly opened corporate checking account.  Be sure to clearly note any deposits to the corporate checking account which are not earnings (your own contributed capital and loans, for example).

3)     Pay all corporate business expenses and only business expenses through the corporate checking account.  If the corporate account needs funds, you can make a loan to the corporation.  This is best accomplished by transferring money, via a check or an electronic funds transfer, from your personal account to the corporate account.  Be sure to note these transactions clearly in your corporate deposit records as loans.

4)  If certain business expenses are charged on a credit card, pay the business expense portion of the credit card charges with a corporate check, but only the business charges.  Highlight all the business charges on the credit card billing, even if you are only paying a portion of the balance due (expenses are deductible when the charge is incurred – you do not need to wait until the charges are paid).  If there are any personal charges on the credit card, pay these charges with a personal check.  You may pay one credit card bill with more than one check.

5)  Pay other expenses similarly.  If you have a personal phone line and a business line, pay the bills with separate checks from personal and corporate accounts, respectively.  For insurance expenses, you may be able to pay health, disability and auto insurance premiums out of the corporation.  Please contact us to discuss your individual situation. 

6)   Buy corporate assets with corporate checks and, when possible, register the assets to the corporation.  This is not always possible with automobiles, because of insurance – ask for our assistance when purchasing or leasing an automobile.

C)  TO PAY YOURSELF OR DRAW FUNDS FROM THE CORPORATION

There are several ways to pay yourself and also to borrow money from the corporation, but remember that by the corporation’s year end, taxes (employment and income tax withholding) will be due on these amounts.  You may withdraw funds periodically and call these loans, until they are declared salary, but several procedures (including preparation of promissory notes with arm’s length terms and, ultimately, payroll tax returns) must be followed.  We will assist you with these.  Outstanding shareholder loans are currently an area that is being scrutinized by the IRS during audits.  Therefore, we will advise you how much interest may be due on your advances from the corporation.

D)  SELECTING A YEAR-END

We will assist you in selecting a corporate year-end.  If you are in certain industries or professions, a December 31 year-end will be required.  Similar regulations apply to Subchapter S Corporations and limited liability companies (LLCs).  Other professions and industries are permitted to choose their own year-end (which could be the end of any month).  We will help you to choose the appropriate corporate year-end and will then notify the IRS of your decision on your Form SS-4.

E)  ELECTING SUBCHAPTER S STATUS

If you are required to select a calendar (December 31) year-end, we may file the appropriate federal (Form 2553) and state forms to elect Subchapter S status.  If this is the case, we will explain the benefits to you.

F)  FILING QUARTERLY PAYROLL TAX RETURNS

Typically, we will file all these forms for you, unless you have an experienced bookkeeper or office manager on your staff.  These returns report salaries paid and taxes withheld. 

G)  FILING THE ANNUAL CORPORATE OR LLC INCOME TAX RETURNS

We will prepare these (see your engagement letter with Duban, Sattler and Associates, LLP) shortly after your year-end.  Please be sure to provide us with your check stubs, deposit details, year-end bank balance and all bank statements and credit card bills as soon as possible after the close of your year-end.  If you use a computer program like Quicken, Quickbooks or MYOB, ask us for the names of the reports that we will need from you.  They will include a Balance Sheet, Profit and Loss Statement, and General Ledger.  We will also ask you during the year to send us this information to prepare your annual tax projections.  This will enable us to make sure that all taxes due before year end are, in fact, paid in time.  For the details of this process, see below.  We will also ask you during the year to send us this information to prepare your annual tax projections.  This will enable us to make sure that all taxes due before year end are, in fact, paid on time.  For the details of this process, see below

H)  TAX PLANNING AND PAYROLL TAX DEPOSITS

1)     FOR CALENDAR YEAR (DECEMBER 31) CORPORATIONS ONLY

In order to be sure that your employment (FICA, etc.) and income tax withholdings are paid prior to their December 31 due date, we will need to estimate (annually) what your tax liability will be.  To this extent, we ask that in September or October you forward us the following data, which will allow us to estimate your tax liabilities:

If you do not use Quicken, Quickbooks, or any other computer program, please provide us with your:

1) corporate canceled checks (or an expense breakdown) for the period from January 1 to the date prepared.

2) corporate bank statements.

3) income earned for the same period.

4) estimates of income and expenses to be earned and incurred through the end of the year, including any large anticipated purchases.

If you do use Quicken, Quickbooks, or another computer program, please provide us with:

1) the Balance Sheet, Profit & Loss Statement and Detailed Trial Balance.

2) an estimate of income and/or expenses to be earned and/or incurred until the end of the year, including any large anticipated purchases.

We will estimate the applicable tax liabilities. Then we will tell you how to forward your tax payments (via check, wire, etc.) to the authorities, and when each of these taxes are due.

2)     FOR FISCAL YEAR-ENDS (OTHER THAN DECEMBER 31)

When your corporate tax return is completed, we will have determined the officer compensation.  This will be your taxable W-2 income from the corporation for your calendar year-end during which your corporate income year ends.  We will then calculate all of your income tax, payroll tax and related tax liabilities and will forward to you instructions on how to remit these taxes and when they are due.

I)  BUSINESS LICENSE TAX

1)     General.  Naturally, whatever type of entity is chosen must be analyzed in light of all taxes, not just income taxes.  In Los Angeles, there is a business license tax which includes certain loan-out corporations, but does not apply to personal services rendered as an employee.

2)     Los Angeles City Business License Tax.  The Los Angeles Municipal Code (“LAMC”) imposes a business tax on every “person” engaged in certain specified businesses or corporations.  The amount of the tax varies depending on the business or occupation.  Also, the type of entity is irrelevant, as seen below:

Independent Contractors.  “For every person engaged in any trade, calling, occupation, vocation, profession or other means of livelihood, as an independent contractor and not as an employee of another, and not specifically taxed by any other provision of [the LAMC]”.  The tax is $106.43 for the first $18,000 of gross receipts and a fixed percentage for each additional $1,000 per year.

3)     General Provisions.  The provision dealing with independent contractors (LAMC Section 21,190) indicates that an individual who is an employee is exempt from the tax, while independent contractors are not.  Similarly, loan-out corporations will be subject to the tax, at a rate of approximately .6% of gross receipts.  Many loan-out corporations ignored the business license tax for years, but an aggressive campaign by the City of Los Angeles in the past few years has led to improved compliance.

Los Angeles City Business Tax:

All entities doing business in Los Angeles are required to register with the Cit and pay the minimum annual City Business Tax for their type of business activity (as classified by the City) within thirty days after beginning to do business in the City of Los Angeles.

If the registration IS DONE TIMELY (within thirty days of beginning to do business in the City of Los Angeles), then the first year City Business Tax on $500,000.00 OR LESS gross receipts is waived and NOT DUE.

If the registration IS NOT DONE TIMELY (within the first thirty days), then the company still has to, at some point, register, and taxes on ALL gross receipts (including the $500,000.00 that would have been waived) for the first year have to be paid NO LATER THAN February 28^th of the following year (i.e. 2003 taxes are due by February 28, 2004.)

Furthermore, at the end of the first year of doing business in the City of Los Angeles – when the taxes are paid for the first year of business, the same amount has to be paid for the second year as well (as an estimated tax payment due for the current year based on the previous year’s gross receipts).

Los Angeles City Business Tax rates vary depending on the business classification (type of business), which is determined by the City of Los Angeles, Office of Finance, C.A.R.E. Unit (the office that the business is registered with) after they receive your City Business Tax registration form with all the information on the activities of the company.

Finally, the definition of “beginning to do business”, for purposes of the Los Angeles City Business Tax, is “the date of incorporation or organization, depending on the type of entity”.

Hawaii General Excise Tax:

You will need to obtain a Hawaii G.E. (General Excise) Tax Account.  All businesses operating the State of Hawaii are required to obtain a General Excise Tax number.  This account is utilized to collect and pay over the General Excise Tax assessed on all goods and services, including rents.  For detailed instructions, please contact our office.  We can obtain the G.E. Tax number for you.

City Business Tax and Other Local Taxes, and Tax for the Greater Los Angeles Area:

Contact your local City or State agency to see what BUSINESS LICENSES may be REQUIRED in your particular district.  Even if you are not located in the City of Los Angeles, if you conduct any business within Los Angeles City you may be required to pay Los Angeles City Business Tax.  We are happy to assist you in any way possible to ensure your new corporate or partnership entity in complying with the local regulations. 

J)  OTHER MISCELLANEOUS ITEMS

1)     Annual property tax statements may be due by April 1, if you have significant investments in tangible personal property.

2)     Future City Business License Renewal Forms are due February 28 of each year.  If you use our address on the application, we will receive the blank forms and prepare them for you to assure timely filing.

3)     Annual Minutes – Ask your attorney to forward their annual corporate minutes questionnaire so that we can provide the information they require to do the annual minutes.

4)   Employment agreements, medical expense reimbursement plans, Buy-Sell, and other Corporate-Shareholder agreements may be advisable and/or necessary.  Please consult with your attorney and Duban, Sattler and Associates LLP about these.  Please note that special rules apply to Subchapter S Corporations concerning the payment of medical insurance premiums and medical expenses for employees and stockholders.

5)  Business Management of your corporate affairs – Often clients do not want to be burdened with the responsibilities of managing their corporation.  At Duban, Sattler and Associates LLP we offer a wide range of full business management and accounting services to assist you in managing your corporate affairs.

Business expenses listing – a detailed listing of the expenses generally payable out of the corporate account follows, with highlighted categories of expense deductions that are currently being disputed by the IRS.

Now that you have your own corporation, please know that all of these record keeping and transaction guidelines are important.  The ability of your corporation to withstand IRS scrutiny and provide limited liability requires that all of these procedures be followed.