Estate Planning
| What happens if I die without a will or other estate plan instrument? | A person who dies without a will is said to have died intestate. North Carolina provides a formula for the way the property of an individual who dies intestate is to be distributed. Generally, when one dies without a will, a surviving spouse will share in the estate with any children. In that case, the surviving spouse would receive the first $30,000.00 of the property of the estate and 1/3 of the remaining estate if there were two or more children (or 2 of the remaining estate if there is only one child). If there is no surviving spouse, then the property is split between the children. Parents and grandparents of an individual who dies without a will may take property of the estate in some situations. For example, the parents of a person who dies intestate will take the entire estate of that individual when there is no surviving spouse or any children. Please take note that there are many variables that could affect the way one's property is distributed under the intestate succession laws in North Carolina. The only way for an individual to plan for the specifics of his or her estate is to create a valid estate plan. |
| Does all property have to go through probate when a person dies? | Property whose disposition is not governed by the provisions contained within your will does not have to go through the probate process. For example, your interests in jointly owned property and/or bank accounts with rights of survivorship automatically shift to the living co-owner upon your death. Other non-probate assets include life insurance benefits, annuities, pension plans and employment benefits. |
| What types of property is involved in the probate process? | Any and all property titled in the name of the
person who died is subject to the probate process. Probate is the
process of orderly transferring title to these assets from the name of
the decedent into the name of the beneficiaries, and providing creditors
of the decedent an opportunity to assert their claims against the
estate in order to get paid. Titled property such as automobiles and
real estate pass through probate, as do non-titled assets such as
furniture and jewelry.
In North Carolina, the probate applicant must prove by affidavit: a) he/she is the executor, an heir or an interested party in the estate, b) the value and nature of the deceased’s property and c) the names and addresses of those entitled to receive assets under the will. If any of the beneficiaries under the will are minors, the applicant must advise the court of the names and addresses of the minors’ guardians as well.
After the applicant has followed this procedure, he may probate the will by providing testimony from at least two witnesses, establishing that the handwriting contained in the will is that of the deceased. If two witnesses are not available, North Carolina law provides a substitute procedure for establishing the validity of the testator’s handwriting.
Generally, the probate process involves collecting a decedent’s assets, paying liabilities and taxes, and distributing property to heirs. These activities are carried out by the executor of the estate, usually under the supervision of the clerk of superior court. |
| What does ‘probate’ mean? | "Probate" is the administration of the estate of a decedent through court proceedings. It is the method by which the rights of all parties are determined relative to the decedent's estate. These parties would include heirs (those entitled to inherit by state law in situations where no will exists or the will does not cover all assets governed by the probate court), will beneficiaries, creditors, and taxing authorities. The proceeding effectively passes title to assets of a decedent to those entitled to them. |
| Isn’t estate planning mostly about reducing taxes? | No. Even for those with estates large enough to be subject to estate tax, minimization of tax should be coordinated to fit with your other non-tax goals. |
| Can I change my will after it has been made? | In this day and age, it is easy to change your will, especially if an attorney has drafted it for you and saved it in computer form. Instead of changing your will completely, codicils can be created in order to make minor changes or additions. It may be advisable, though, to completely revoke the will you wish to change and have a new one drawn. Just as there are requirements for making a legal will, there are requirements that must be met in order to properly and fully revoke a will. Should you wish to revoke a will because you have had a new one drawn, you should destroy all signed copies of your old will (there should only be one) by tearing, shredding or burning each page. There is no need to keep a copy of an old will for your records. Doing so may just create confusion if several versions of your will are found upon your death. |
| Can I disinherit relatives that I don't like? | Usually you can dispose of your property in any way that you wish. Generally, though, you cannot completely disinherit a spouse. |
| Can I leave property to my children in my will? | In North Carolina, you may leave property to children who are under 18. In the event that happens, a guardian will need to be appointed to hold the property for the child until the child reaches the age of majority or until otherwise specified. |
| Can I revoke my will after it has been signed? | You can always revoke your will after it has been signed. Should you wish to revoke a will because you have had a new one drawn, you should destroy all signed copies of your old will (there should only be one) by tearing, shredding or burning each page. Please note that if you destroy your will with the intent to revoke it and die before you execute another will, your property will be distributed by the intestate laws of North Carolina. |
| Can I say whether I want pain medication, or food and water? | You can give full power and authority to a health care agent to make decisions for you, which you could make yourself if you had the capacity to make and communicate health care decisions. Authority can involve decisions regarding anatomical rights, autopsies and disposition of remains. The authority granted to the health care agent may contain whichever restrictions the principal deems appropriate. Therefore, a health care proxy may instruct the physicians on whether you would like artificial food and water as well as pain medication, because if you were able to communicate yourself, you could ask the physicians to withhold any of those items from your treatment. |
| Can I use my will to name somebody to care for my young children, in case my spouse and I both die suddenly? | Your will can specify the individuals who you wish to receive custody of your minor children should you and your spouse die suddenly. It is suggested that you also name alternate guardians in your will. By making these decisions and placing them in writing within your will, you assist the courts greatly in determining who will be the guardian for your children. |
| Can my attorney-in-fact make medical decisions on my behalf? | Only a health care power of attorney gives another person the legal ability to make health care decisions on your behalf. |
| Do I need a lawyer to make my will? | In order for a will to be valid in North Carolina, it must be drafted and executed in accordance with the requirements of North Carolina Law. An attorney who is familiar with wills and estate planning can help you make some of the important decisions and can also ensure that your will meets the requirements in order to be valid. A will should be drafted by an attorney for your protection and the protection of your family, but having an attorney draft your will is not a requirement. |
| Do I need to file my will at the courthouse or in the county where I reside? | In North Carolina, you need only comply with the proper procedures for making and executing your will. You do not need to present a copy of your will to the court or place it in public records. Once you have signed your will, it is advisable for you to place your will in a safe place such as in a safe-deposit box or with your other important papers. |
| Do I still need a general power of attorney if I have a living trust? | A living trust is not always a good substitute for a power of attorney. The trustee of a living trust will have the ability to manage the property of the living trust in the event that you become incapacitated. Generally, though, individuals do not transfer all of their property to a living trust. In the event that you have a living trust and become incapacitated, the trustee does not have the authority to manage the property not in the trust. |
| Does everyone need a will? | Yes. Some people think a will is unnecessary since state laws will divide and distribute your assets after your death. Others think that since they do not have large estates, they don’t need wills. But here is what will happen if you die without one: State laws will determine who gets your property. This is called “intestate succession”. Your property will first be divided among your spouse and children, or to your other closest relatives. If you are not married and have no children, then your property will be distributed to your next of kin. If the courts cannot find your next of kin, the property goes to the state. If you do have children and die without a will, a court will determine who will care for your young children and their property if the other parent is unavailable or unfit. |
| How can I be sure my health care documents are legal? | In North Carolina, health care documents must be signed by their maker and certified by a notary public. In addition, at least two witnesses are needed for some health care documents. These witnesses generally must neither be related to the person making the document nor be the attending physician or an employee of the attending physician of the signor. |
| How do I create a general power of attorney? | Generally, a general power of attorney can be created by signing a standard power of attorney form that can be obtained from an attorney. This document will need to be signed and notarized and in some cases may need to be witnessed and filed with the office of the register of deeds. |
| How does a general power of attorney work? | A general power of attorney allows its maker (principal) to appoint another (agent) to act in his name in ways which the maker could act for himself. This involves giving the agent the ability to make decisions or engage in transactions on the principal’s behalf (when he can’t engage in those dealings for himself). One may appoint an agent to take care of real and personal property transactions, banking transactions, business transactions, estate transactions, tax matters, etc…Further transactions which may be allowed are listed in the North Carolina General Statutes, however, the powers listed there are not exclusive. Note that all powers listed within the statute do not have to be granted. A principal can limit his agent’s authority in any manner he wishes. The principal may also limit the duration of the power of attorney, and hence the length of time the agent will be able to make decisions on the principal’s behalf. To do so, however, the power of attorney must expressly state the time for termination of the appointed powers. |
| How long is a will valid? | Wills are ambulatory in nature. As such their provisions are not effective until your death. Therefore, wills can be changed and/or revoked until right before your death. A will remains valid until it is revoked and it may be revoked ONLY by a subsequent written will or codicil or other revocatory writing executed according to the North Carolina statutes regarding will execution. A will may also be revoked by being burnt, torn, canceled, obliterated, or destroyed with the intent and for the purpose of revoking it, by the testator (person who wrote the will) or by another person in the testator’s presence and by his direction. After a will has been revoked, it is invalid to dispose of property unless it is revived. In order to revive a will, it must be re-executed or a separate will must be executed in which the revoked will or part of it is incorporated by reference. Wills are not revoked by a subsequent marriage of the testator, a subsequent conveyance of property, or by the birth of children after the will has been executed. A divorce, which occurs subsequent to will execution, does not revoke the testator’s entire will, but rather only those provisions that favor the former spouse. |
| I don't have much property, can I just hand write a will? | A holographic will is the name for a handwritten will. North Carolina recognizes holographic wills as valid, as long as they meet several requirements. First, a holographic will must be written entirely in the hand of the person making the will. Second, it should be signed by the person making the will. Third, it must be found after the death of the person who made the will, among that persons valuable papers, or in a safe-deposit box, or with someone who was designated to hold the will for safekeeping.
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| In North Carolina, anyone at least 18 years of age and of sound mind acting voluntarily and without undue influence may make a will. | A person who dies without a will is said to have died "intestate." North Carolina provides a formula for the way the property of an individual who dies intestate is to be distributed. Generally, when one dies without a will, a surviving spouse will share in the estate with any children. In that case, the surviving spouse would receive the first $30,000.00 of the property of the estate and 1/3 of the remaining estate if there were two or more children (or 2 of the remaining estate if there is only one child). If there is no surviving spouse, then the property is split between the children. Parents and grandparents of an individual who dies without a will may take property of the estate in some situations. For example, the parents of a person who dies intestate will take the entire estate of that individual when there is no surviving spouse or any children. Please take note that there are many variables that could affect the way one's property is distributed under the intestate succession laws in North Carolina. The only way for an individual to plan for the specifics of his or her estate is to create a valid will.
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| My spouse and I own our house jointly. What happens to property held jointly when one dies? | Generally property held jointly will pass to the surviving joint holder. This applies to joint bank accounts and the like as well as to real property. |
| What happens if I don't have a general power of attorney? | If you become incapacitated and do not have a power of attorney, your family will have to ask the court for permission to handle your affairs for you. Your spouse may have some control over property owned jointly with you should you become incapacitated. |
| What happens if I don't have any health care documents? Who will make health care decisions for me? | If the patient is comatose and there is no reasonable possibility that he will return to a cognitive state or is mentally incapacitated and 1) it is determined by the attending physician that the person’s present condition is terminal and incurable or diagnosed as a persistent vegetative state; and 2) there is confirmation of the person’s present condition in writing by a physician other than the attending physician; and 3) a vital function of the person could be restored by extraordinary means or a vital function of the person is being sustained by extraordinary means; or the life of the person could be or is being sustained by artificial nutrition or hydration, then extraordinary means or artificial nutrition/hydration may be withheld or discontinued upon the direction and under the supervision of the attending physician with the concurrence of (i) a health care agent appointed pursuant to a health care power of attorney, (ii) a guardian of the person, (iii) the person’s spouse, or (iv) a majority of the relatives to the first degree, in that order. If none of these people are available to make the decision, North Carolina law allows the withholding or discontinuing of extraordinary means or artificial nutrition/hydration at the discretion of the attending physician. |
| What if I change my mind about my health care documents? | The declarant, in any manner by which he is able to communicate his intent to revoke, without regard to his mental or physical condition, can revoke the declaration. The revocation becomes effective only upon communication to the attending physician by the declarant or by an individual acting on behalf of the declarant. If the revocation is made before the declarant enters into a health care facility, it is not effective until communication has been made to each health care proxy named in the revoked health care power of attorney and to the declarant’s attending physician. |
| What if I change my mind about who I want to be my attorney-in-fact? | You may revoke your power of attorney should you wish to change your attorney-in-fact and execute a new document naming a new attorney-in-fact. Obviously this must be accomplished while you are not mentally incapacitated. Furthermore, revocation must conform to the North Carolina statutory rules for revocation of a power of attorney and a subsequent power of attorney must conform to the North Carolina rules for the execution of a power of attorney document. |
| What if I don't know anyone I really trust to supervise my medical care? | If you do not appoint someone to make medical decisions for you, then decisions regarding your health care treatment will be made by certain persons, in the following order of priority: (1) your guardian, (2) your spouse, (3) a majority of your relatives to the first degree and (4) your attending physician. The alternative is to name a health care proxy with limited powers in a health care directive. By limiting the proxy’s authority, you can ensure he/she only has authority regarding certain types of health care decisions and not those involving life and death. |
| What if I only want to give my power of attorney for a specific transaction? | You may give someone your power of attorney for a limited transaction. These limitations must be set out in the power of attorney document and executed in the same way as a general power of attorney would be executed. |
| What if someone challenges my will after I die? | Under North Carolina law, any person interested in your estate or entitled to anything under your will can challenge it for three years after your death. These people, called caveators, can attack the validity of any part of or all of your will. If someone challenges your will, the clerk of superior court will direct the personal representative of your estate to suspend all future proceedings regarding the estate until the controversy is ended. The clerk does have discretionary authority to allow your personal representative to continue preserving property of the estate, collecting debts and paying taxes and debts which serve as liens on the estate while the controversy is pending. |
| What is a living will? | A living will is a document that gives you control over whether your life will be prolonged by certain medical procedures should you be unable to make those decisions yourself. It allows you to designate whether or not you wish to be kept alive by the use of extraordinary means in the event that you are diagnosed as terminally ill or you are in a permanent coma. |
| What is an executor and what are his or her duties? | An executor is an individual chosen by the person making the will. There are no legal requirements that an executor must meet, but that person should be someone who can be trusted to handle the affairs of the estate. The executor manages the property of the estate until all debts and taxes have been paid and then distributes the remainder of the estate to those legally entitled to it. The executor will also file the will in probate court if probate is required, terminate leases, credit cards and other accounts in the name of the deceased, and notify banks and government agencies of the death, among other things. |
| What is probate? | Probate is the process of establishing and proving that a document offered for official recognition and registration as the last will and testament of a deceased person is genuine and valid. In North Carolina, the probate applicant must prove by affidavit: a) he/she is the executor, an heir or an interested party in the estate, b) the value and nature of the deceased’s property and c) the names and addresses of those entitled to receive assets under the will. If any of the beneficiaries under the will are minors, the applicant must advise the court of the names and addresses of the minors’ guardians as well. After the applicant has followed this procedure, he may probate the will by providing testimony from at least two witnesses, establishing that the handwriting contained in the will is that of the deceased. If two witnesses are not available, North Carolina law provides a substitute procedure for establishing the validity of the testator’s handwriting. Generally, the probate process involves collecting a decedent’s assets, paying liabilities and taxes, and distributing property to heirs. These activities are carried out by the executor of the estate, usually under the supervision of the clerk of superior court. |
| What is the importance of estate planning? | Estate planning is the process of putting your affairs in order, with the goal of maximizing the benefits your assets can provide to you during your life, and to those you desire to benefit from it after your death. There are four objectives with estate planning: - To make sure that after your death, your assets pass to the people you designate, in a manner that will give them the maximum benefits - To reduce or eliminate the tax burden on your estate - To make sure your assets are passed to your beneficiaries without the necessity of probate - Communicating those estate plans to the proper people. |
| What makes a will legal? | In North Carolina, no will is legal unless it meets the requirements set out in the North Carolina General Statutes. If someone prepares a will for you, that will must be signed by you or by someone designated by you in your presence. It must be signed with the intent to sign and make the document your will. It must be witnessed by at least two competent, disinterested witnesses who also must sign the document in the presence of the individual making the will. The process of making a will legal is delicate and complicated. Most attorneys follow a strict will execution process to ensure that all of the requirements of a legal will are met. It is suggested that an attorney prepare your will and lead you through the execution process to make sure that your will is valid. |
| What should I do with my will after I sign it? | After your will is signed, you should place it somewhere for safekeeping, such as a safe deposit box or with your other important papers and effects. |
| What types of medical care should I consider when completing my health care documents? | You should consider what you would wish to happen if you were ever diagnosed with a terminal or incurable disease, or were to become a victim to a persistent vegetative state. Consider whether you would want extraordinary means and/or artificial nutrition and hydration to keep you alive under any of those circumstances. Extraordinary means is defined as any medical procedure or intervention, which in the judgment of the attending physician, would serve only to postpone artificially the moment of death by sustaining, restoring, or supplanting a vital function. Your health care directive can also specify your wishes regarding possible mental health care treatment. |
| When does a general power of attorney end? | A general power of attorney, unless otherwise specified, ends at your death. You may also revoke any power of attorney that you have previously created. Revocation can be accomplished in a few ways. Depending upon the facts of your particular situation, there are some requirements that must be met for a power of attorney to be deemed legally revoked. |
| When does a general power of attorney take effect? | Normally, a general power of attorney takes effect immediately when it is signed and recorded and ends upon the incapacitation of the principal. But the principal can create a durable power of attorney, whereby the agents powers either 1) are not affected by the principal’s subsequent incapacitation or 2) become effective upon incapacitation. In either case, the agent’s powers end upon the death of the principal. |
| When does my health care directive take effect? | A health care directive becomes effective when and if the physician or physicians determine in writing that the declarant lacks sufficient understanding or capacity to make or communicate decisions relating to the health care of the declarant and continues in effect during the incapacity of the principal. |
| Where can I get a health care directive? | Chapter 90, Section 321 of the North Carolina General Statutes provides a sample health care directive, which can be copied and used by anyone in the state of North Carolina. As long as the document is signed, proved, witnessed and dated, any doctor in the state of North Carolina can rely upon it, unless the patient revokes it during the time he is undergoing care. You may also draft your own health care directive. As long as it substantially complies with the example set forth in the statutes and the requirements therein, doctors in this state will honor it. Should you move out of state, after drafting a personal health care directive, please make certain that your directive complies with the requirements set forth by that state, as they may be different from those of North Carolina. |
| Where should I keep my general power of attorney? | A general power of attorney must be recorded at the Register of Deeds in order to be utilized. Also, you should keep a copy of your general power of attorney in a safe place with your other important papers. For example, you might keep it in a fire safe box inside your home or in your safety deposit box. You should also consider giving a copy of it to one of your children for safekeeping, or your attorney. |
| Where should I keep my health care documents once they have been signed? | The Secretary of State’s office maintains an Advance Health Care Directive Registry, where doctors may search for and obtain your personal care directive in the event it is needed. Therefore, you should file a copy with the Secretary of State’s office. In the event it is not filed with the Secretary of State’s registry, it should be kept in a safe place with other important papers, like a fire safe box kept in your home or a safety deposit box. You might also wish to keep a copy on file with your attorney. |
| Who makes sure that my will is carried out? | Any person you name as executor in your will to carry out the affairs of your estate may apply at any time after your death to the clerk of the superior court to have the will admitted to probate. If the person you name to be the executor does not attempt to admit the will to probate within 90 days after your death, any person named in your will to receive anything or any other person interested in your estate can apply to have the will probated, as long as the named executor has 10 days prior written notice. |
| Who may make a will? | In North Carolina, anyone at least 18 years of age and of sound mind acting voluntarily and without undue influence may make a will. |
| Who should I choose as a health care proxy? | You may choose anyone whom you trust to make decisions regarding your health, if you are unable to make them yourself. However, the person you choose must be at least 18 years old and can not be engaged in providing health care to you in exchange for money. |
Business & Corporate
| Can one individual hold all positions within the corporation? | Yes. Generally, a corporation must have a President, Treasurer, Secretary and at least one Director, but one person can serve in more than one role. |
| Am I Required to Hold LLC Meetings? | While meetings may frequently be necessary and proper to discuss a variety of LLC issues, they are not required by the state in order to maintain an LLC as they are with a corporation. |
| Are Non-U.S. Residents Allowed to Own a Corporation or LLC? | There are no citizenship or residence requirements for ownership of a C corporation or an LLC. The S corporation, however, cannot have nonresident alien shareholders, but any US citizen or resident alien may be a shareholder (owner). You would, of course, require an in-state street address for the state to forward official legal and tax correspondence including service of process, known as the registered agent address, but neither residency nor citizenship is required for ownership of a C corporation or an LLC. |
| Are there special rules for partnerships? | Generally, the affairs of a partnership are governed by Articles 2 and 3 of Chapter 59 of the North Carolina General Statutes (Revised Uniform Partnership Act - RUPA). These rules are only default provisions, however, and only apply if the partnership has not set out its own governing rules. Partners can dictate most aspects of their partnership through their partnership agreement. This agreement will then govern any disputes which arise during the tenure of the partnership. In the event that a specific situation arises which was not contemplated within the partnership agreement, the default rules of the RUPA will govern the situation.
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| Can I Form an LLC with just one Member? | There was a time when almost every state required the LLC to have two or more members, but that is no longer the case. This important change came in response to revised IRS regulations that clearly permitted single-member LLCs. |
| Do I have to register my business name? | Yes. Your business name must be registered with the office of the Secretary of State of North Carolina and it must be distinguishable from other existing business names. Once registered, the name is reserved for your exclusive use until the end of the year in which it became effective. After getting the name registered, an entity may renew it yearly. After your business name becomes effective, the entity becomes authorized to transact business or conduct affairs within the state of North Carolina. |
| Do I need to hold corporate meetings? | Yes. By state law, all corporations must have a meeting of the shareholders at least annually. These meetings should be recorded in the form of meeting minutes and all decisions should be documented through corporate resolutions and kept in a corporate record book. |
| Does my corporation need it’s own EIN (Employer Identification Number) or F.I.N (Federal ID Number) ? | Yes. Form SS-4 is included in your corporate record book to apply for a Employer Identification number. It includes instructions for completion. You should also check with your particular state and local taxing authority to see if any additional requirements are needed at either the state and/or local level. |
| How are corporations managed? | Corporations have organizational structure. The owners of the corporation, or shareholders, elect a board of directors to oversee corporate management. The day to day activities of the corporation are the responsibility of the corporate officers, who are selected by the board of directors. |
| How are special allocations handled with LLCs vs. Subchapter S corporations? | An LLC does not need to distribute income in proportion to ownership. The shareholders of a Subchapter S corporation must receive dividends according to the number of shares they own. LLC members may split profit and loss in any way they choose as long as they follow IRS guidelines for special allocations. |
| How do I choose a name for my business? | Generally, North Carolina law requires that the name of a business entity be distinguishable from other entities currently transacting business or conducting affairs within the state. You may apply, however, to use a name already existing within the records of the Secretary of State’s office if 1) the other party who has previously reserved or registered the name consents in writing to your using the name and submits a form to change its own name upon the Secretary’s records, or 2) you deliver a certified copy of the final judgment of a court which establishes your right to use the name to the Secretary of State’s office. Also, the type of structure you choose to run your business will affect the name of the business. For example, the name of a corporation must contain the word “incorporated” “corporation” or similar abbreviations, whereas a limited liability company’s name must include “limited liability company,” “LLC,” etc. |
| How do I choose a name for my business? | Generally, North Carolina law requires that the name of a business entity be distinguishable from other entities currently transacting business or conducting affairs within the state. You may apply, however, to use a name already existing within the records of the Secretary of State’s office if 1) the other party who has previously reserved or registered the name consents in writing to your using the name and submits a form to change its own name upon the Secretary’s records, or 2) you deliver a certified copy of the final judgment of a court which establishes your right to use the name to the Secretary of State’s office. Also, the type of structure you choose to run your business will affect the name of the business. For example, the name of a corporation must contain the word “incorporated” “corporation” or similar abbreviations, whereas a limited liability company’s name must include “limited liability company,” “LLC,” etc. |
| How do I determine whether my business will make money? | The first step is to do research to determine whether the existing market has a need for your service or product at the current time. If so, it is also important to consider whether and if consumers can support your business by spending money on your product or service. Lastly, consider whether you have enough money or financing to run your business effectively, without subjecting yourself and others to bankruptcy if the proposed business does not work out as planned. |
| How does my corporation get an EIN (Employer Identification Number)? | In order to open a business bank account, an EIN is required. In order to obtain your number from the IRS, a form must be completed, signed and mailed to the appropriate office. If applying on behalf of a new business, the process is straightforward. If you already have an EIN prior to incorporating, then there are some additional information requirements. You can apply online with the IRS and find more information here: http://www.irs.gov/businesses/small/article/0,,id=98350,00.html. |
| How does my corporation open a bank account? | Many banks provide their own forms that are required to open a corporate bank account. Most banks require a corporate resolution, which expressly authorizes the opening of an account, and specifying which individuals can sign checks and/or make withdrawals from the account. In addition an EIN (Employer Identification number) is typically required to open bank accounts. |
| How is a corporation taxed? | The C corporation is a taxable entity. It is taxed separately under special corporate rates on all net profits, after deductions, using the IRS form 1120. Other forms of business allow the profits and/or losses of the business structure to pass through to the owners who incur the tax liability on their personal tax reporting. |
| How is an LLC Taxed? | For federal income tax purposes the profits of an LLC (Limited Liability Company) “pass through” to the personal income of the members/owners. In the case of a single member LLC it is taxed the same as a sole proprietorship (i.e. typically filed on the schedule C of the owner’s personal income tax filing). In the case of a multi-member LLC,it is taxed the same as a partnership (i.e. a 1065 partnership return is filed with the IRS, with a schedule K-1 being supplied to each partner/member showing the proportional profit/loss allocated to them, with this being filed on the schedule C or E). NOTE: These are general tax explanations and may not apply to everyone. You should confer with the appropriate accounting/tax specialists to make sure you understand your personal tax liability. |
| How is an S corporation Taxed? | For purposes of federal taxation, an S corporation is taxed differently than a C corporation. Typically, the S corporation files its annual return using the Form 1120S, as opposed to the 1120 for a C corporation. The 1120S is an informational return; it simply informs the federal tax authorities the amount of net profit/loss made by the S corporation, the shareholders to whom the profit/loss will be distributed, and the proportion in which the profit/loss is distributed to the shareholders. There is no tax payment/refund associated with the 1120S tax return, as the S corporation does not have the independent tax status that a C corporation has. Instead, the profits/losses of the S corporation are considered distributed to the shareholders in proportion to the ownership interest of the shareholder. Typically, entrepreneurs will select the S-corporation as the entity of choice for the following reasons: * The S-corporation combines the advantages of the sole proprietorship, the partnership, the LLC and the corporation into one entity. * Unlike sole proprietors and the partners in a partnership the shareholders of the S-corporation are granted the same level of limited liability and personal asset protection as are the shareholders of a corporation. * The S-corporation allows shareholders to avoid the “double taxation” levied on shareholders of C-corporations because all the income and losses are reported only once, directly on the personal income tax returns of the S-corporation’s shareholders. |
| How many officers can my corporation have? | In general a corporation has 4 primary officer positions, a President, Vice President, Treasurer and Secretary. In any case, a corporate structure could be adopted to include many types of corporate officers. |
| How many shares can my corporation have? | Some states have limits to how many shares a corporation can have, and others have franchise tax rules based on the amount of shares and or the value of each share. You should consult with your legal or financial advisor in your state to decide how many shares your corporation should have. As a general guideline, for small corporations with one, or just a couple of shareholders where there is no intention to acquire investment capital, a small amount of authorized shares is recommended with a low par value, such as 1500 shares at $1. This amount is low enough not to impose any increased franchise tax. |
| How often do I need to hold a Board of Director’s Meeting? | It depends on your Bylaws, but typically the Board of Directors must meet at least annually. |
| How often do I need to hold a shareholder’s meeting? | The shareholder meeting needs to be held at least annually. |
| Is a written partnership agreement necessary for all partnerships? | It is not a legal requirement to have a written partnership agreement for a general partnership. It is wise, though, to create a written agreement that sets out the expectations for each of the partners. In the event that there is no written agreement, the statutory laws of the state will be used to govern the partnership. |
| Should my corporation be a “C” corporation or an “S” corporation? | You should consult with a good CPA or tax professional to make this decision. A “C” corporation is subject to double taxation whereas an “S” corporation is not. However, a “C” corporation has the ability to provide certain tax-deductible employee benefits that an “S” corporation cannot provide to any shareholders holding significant interests in the corporation. |
| Should my LLC elect corporate taxation? | In certain scenarios, this election may allow LLC members to save on taxes. With corporate taxation, the first $75,000.00 in income is taxed at corporate tax rates, which are generally lower than the individual tax rates assessed on LLC members. For specific guidance, LLC members should consult their accountant or tax advisor. |
| What about the registered agent in other states? | If your corporation is “qualified” to do business in other states, those states will generally require a registered agent in that state. For example, if your North Carolina corporation has filed the necessary paperwork in Georgia to conduct business in Georgia, the state of Georgia will require a Georgia registered agent. This may be an individual or another business entity that has a physical location in the state of Georgia. Please note that a Post Office Box or other “mail service” is usually not sufficient to qualify as a registered agent. |
| What are articles of incorporation? | Articles of Incorporation are the actual documents that are filed and recorded with the secretary of state branch office. This is your corporation's "birth certificate" and it is a legal document. |
| What are corporate bylaws? | Bylaws govern the corporation. It is an internal document that specifies the operational policies of the entity. All forms are included, even how the bylaws are changed, or amended. This will outline the powers and rights of the shareholders, directors and officers. Corporate Bylaws are not filed with any state or federal office. |
| What are corporate formalities? | Corporate formalities are important so that your corporation offers the most in liability protection. The primary reason to form a corporation is to separate your personal and business lives. In doing so, the corporation must be properly formed, operated and managed to maximize the protection. There are a number of "do's and dont's" where this comes into play. An example is commingling personal and business funds. When this occurs, should the corporation be challenged by a court, it could be found that the operations of the business were run so closely with personal affairs that the corporate shield could be disregarded. These types of formalities include taxes, property and its use, reporting and management. Other types of operating formalities include those mandated by state and federal law: * Corporate Record Keeping: By law, all 50 states require the shareholders of a corporation to hold an annual meeting, as well as a meeting during the organization, or forming of the corporation. At these meetings, minutes should be taken and kept in a corporate minutes binder or corporate record book. In these meetings, business items are discussed and decisions are made, and the board approves actions taken by the officers of the corporation who run the day to day activities of the business. This formality is often overlooked and comes into play when the corporate veil—the shield protecting shareholders from liability—is challenged. * Registered Agent: Every incorporated business entity needs to have an address for service of process listed in the public record. This cannot be a PO box, it must be a physical address within the state the corporation is based or conducts business. In many cases, small business owners do not want their home address on public record, so they select a designated registered agent whose address appears in the public record and satisfies this formality. * Annual Statement of Information: Every incorporated business structure, as well as many unincorporated entities, must file an annual statement of information, or annual report. This informs the state of any changes in the critical information of the business, such as addresses, change of officers, directors and shareholders, etc. This typically involves a nominal fee and can be performed electronically on most state's websites. * Paying Taxes: Of course, every corporation must report and pay taxes to both federal and state governments on time and according to the entity’s tax classification. |
| What are disadvantages of corporations? | When you incorporate there are several operating formalities that must be conducted. The business is required to perform actions by both state and federal laws. These involve paperwork, reporting and nominal expenses throughout the year. The primary disadvantage are the formalities involved, however these are far outweighed by the liability protection and advantages, in most cases. |
| What are professional corporations? | Professional corporations are filed as standard C corporations and can choose to elect S corporation status. The primary difference is the type of business and what professional service can, or has to, be a professional corporation. In general, doctors, dentists and attorneys will form professional corporations. NOTE: If you require us to provide a registered agent, the address cannot be used as a general business/mail forwarding address. Only official legal and tax correspondence from the state will be forwarded, and any other mailings to the registered agent may result in additional charges. |
| What are the benefits of starting my own business? | Starting your own business will give you a great amount of flexibility. Being your own boss allows you to structure your working hours as well as your workload however you see fit. Running your own business also grants you flexibility in structuring the way in which the entity will be taxed for federal income tax purposes. Corporations, sole proprietorships and partnerships receive different tax treatment under federal law. Depending on the type of tax treatment you wish to enjoy, your business can be structured accordingly. |
| What are the different types of business forms? | There are several business types to choose from, including the sole proprietorship, general partnership, limited liability partnership, professional association, limited liability company, corporation and non-profit corporation. Each of these forms is structured in different ways which provide a business owner with different benefits and obligations. It is important to work closely with someone who can help you choose the business form that will meet your specific needs. |
| What are the risks of starting my own business? | Along with the flexibility of starting your own business comes a great deal of responsibility. Operating a business requires money; therefore, you may be required to take out personal loans in order to capitalize your new business. Also, owning a business of your own can subject you to a great amount of liability. For example, you may be responsible for tortious acts committed by your employees while they are working within the course and scope of their employment for you. Also, running a sole proprietorship or being the general partner in a general partnership can subject you to an unlimited amount of liability for any business losses. |
| What are the types of corporations? | A C corporation, otherwise known as a standard business corporation, has several variants. Standing apart from these are nonprofit corporations which fall under completely different legal statutes and tax classifications. As far as general for-profit corporations, there are the “C,” “S” and professional corporation. By default a corporation is a “C” corporation, and is taxed under subsection C of the IRS code. C corporations can have an unlimited amount of shareholders that can be all forms of legal entities. The S corporation was created for smaller businesses to avoid double taxation and falls under the IRS code, chapter “S,” and has limitations on the amount of shareholders and cannot be owned by anything other than an individual. Professional corporations are essentially C corporations that are limited to purposes of professional services such as doctors, dentists and attorneys. These types of corporations are formed under state laws that dictate what kind of professionals have to incorporate this type of legal entity. |
| What do the Officers of the corporation do? | The officers are responsible for the day-to-day operations of the corporation. A corporation should have at least a President, Secretary and Treasurer as officers. |
| What do the shareholder’s do? | The shareholders own the corporation. At the annual meeting they elect the corporation’s Board of Directors.
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| What does “piercing the corporate (or LLC) veil” mean? | The “corporate veil” refers to the separate legal existence of a corporation, or an LLC, that usually insulates the owners of the entity from liability for the company's actions or obligations. Maintaining the “veil” will help to shield the company's owners from personal liability for claims or lawsuits against the company. “Piercing the corporate veil,” or “piercing the veil,” means that this liability protection is disregarded, and the personal assets of owners are at risk in a judgment against the business. |
| What does the Board of Directors do? | The Board of Directors is responsible for electing the officers of the corporation and for setting corporate policy. A corporation must have at least one Director. |
| What events could cause my LLC to fall into bad standing? | If an LLC fails to meet its annual state requirements like filing an annual report, paying franchise taxes or maintaining a Registered Agent, the Secretary of State may administratively dissolve the company. Depending upon the state, this status may go by other names like void, involuntarily dissolved or forfeited. When evaluating whether a corporate veil should be pierced, courts may also consider factors like whether LLC owners have properly maintained business records and refrained from co-mingling business and personal assets. |
| What factors should be considered in choosing the type of business form for my business? | Although there are many important things to think about when choosing a business form, some of the main considerations include your preference of tax treatment, your plan to capitalize the business, whether you plan to issue stock and trade it publicly, how you plan to structure the management of your business, and issues surrounding the liability of the business owners, among other things. It is very important to plan your business and to work closely with someone who can help you choose the business form that will meet your needs. |
| What IRS forms does a co-owned LLC file? | Unless members elect otherwise, a co-owned LLC is considered a partnership. Though the LLC itself does not pay taxes to the Internal Revenue Service, it files Form 1065, U.S. Partnership Return of Income, and issues each member a Schedule K-1 reporting their share of profit and loss. Members file their personal tax returns (usually Form 1040) and report their LLC distributions on Schedule E. |
| What IRS forms does a single-member LLC file? | Unless they elect otherwise, the single member of an LLC reports their share of profit and loss in the company on Schedule C of their personal tax return (usually Form 1040). |
| What is "double taxation" for corporations? | After a C corporation pays taxes, any after-tax profits can be distributed to the shareholders in the form of dividends, or left in the business for future investment. This can cause double taxation for the business owners, when the corporation pays taxes on the profits of the business and any remaining profits are paid out to the shareholders. The shareholders then pay taxes on the dividend return. The IRS Code sub chapter S addresses this issue for smaller corporations and allows the entity to be taxed as a partnership or a "pass through" tax entity. S corporations have much more limitations on who can be and how many shareholders there are. |
| What is "Par Value" and corporate stock? | Par value is the amount each share of corporate stock is worth, or its value. Each state is different with its par value parameters. Some states allow fractions of a cent in the par value, meaning your shares can be valued at $.001, while others do not. Some states calculate franchise tax by the shares and par value of the corporation. You should make this decision with a legal or financial professional working in the state in which you formed your corporation. In general, a low share amount and small par value will result in the same minimum franchise tax, if applicable. |
| What is a corporate resolution? | A resolution is nothing more than a record of action that the directors or shareholders took without holding an “official meeting.” |
| What is a corporate resolution? | A resolution is nothing more than a record of action that the directors or shareholders took without holding an “official meeting.” |
| What is a Limited Liability Company (“LLC”)? | A limited liability company, or LLC, is a form of business organization providing limited liability for an unlimited number of owners, which they might not have otherwise enjoyed had they formed as a simple partnership. At the same time, an LLC provides most of the taxation benefits afforded by a partnership. Because of these dual benefits, the owners (known as “members”), generally enjoy the same types of limited liability protection that a corporation offers, with very few exceptions. They enjoy pass-through taxation and partnership treatment by the IRS. These advantages make the LLC a very desirable entity for certain business dealings and ventures. After limiting individual member liability and thus providing for the protection of member assets, the advantage of “pass through taxation” can be one of the key benefits offered by an LLC. The profits or losses of the business, regardless of whether there is an actual distribution, pass directly through to the Member's personal income tax return (IRS Form 1040), bypassing the typical “business profit” tax at the company level. The LLC files a Form 1065, then lists each member's taxable profit on IRS Form K-1. This pass through taxation is one of the hallmarks of the tax advantages available to an LLC. Because of this tax treatment, the LLC is not subject to the double taxation pitfall that befalls standard corporations (where income is taxed at the corporate or company level as profit, and then taxed again at the individual shareholder level as earned income). The net profit of the LLC is not considered to be income earned by the Members, though portions distributed to the Managing Member (if the LLC is thusly structured) can be treated as such via the “fringe benefit” treatment called for by the IRS. Some LLC’s are managed by its members, or in the alternative, you may elect to assign managers to the LLC, similar in nature to corporate officers. When an LLC is run by managers, their power and control should be, and most often times is, managed explicitly by provisions outlined in the operating agreement. Other important things that should be properly and thoroughly outlined in the operating agreement include voting rights, distribution of interest, distribution of profits, etc. The management structure can be arranged so that the manager has 100% control and little to no ownership. This may be an ideal arrangement to maximize asset protection. The LLC has one major disadvantage: due to its pass-through profit designation, all income attributable to the individual members according to their membership interests is treated as member income, irrespective of any actual distributions. Therefore, a member could be taxed on company profits even though those profits were not distributed to the member. |
| What is a partnership and how do I form one? | A partnership is a business owned by two or more people that has not filed papers to become a corporation or a limited liability company (LLC). You do not have to complete any paperwork to create your partnership—the arrangement begins as soon as you start a business with another person. Although the law does not require it, many partners work out the details of how they will manage their business in a written partnership agreement. If you do not create a written agreement, the partnership laws of your state will govern your partnership. |
| What is a registered agent and why does my corporation need one? | A registered agent is someone who resides within the state of incorporation. The registered agent is responsible for accepting official notices from the Secretary of State and service of process in the event that the corporation is sued. The corporation also needs to have a registered office in the State, which may or may not be its principal place of business. |
| What is an Operating Agreement? | The operating agreement is akin to a partnership agreement for a General Partnership or Limited Liability Partnership (LLP). It is an internal contract amongst the members/owners of the LLC, and it lays out such things as ownership interest, member responsibilities, accounting method, adding or removing members, terms for concluding the LLC, etc. While an operating agreement may not be required by most states, creating one is highly recommended. |
| What is compliance and how does it protect my assets? | Compliance, a crucial part of asset protection, is the process by which an LLC remains in good standing by satisfying all federal, state and local requirements. In a properly structured and managed LLC that is compliant with all regulations, owners are only liable to the extent of their investment in the company. Their personal assets should be protected from a judgment or other action against the business. |
| What is pass-through taxation? | Pass-through taxation means that each member reports their share of profit or loss in the company on their individual tax returns, and the Internal Revenue Service does not tax the LLC itself. This avoids the "double taxation" of general corporations, where profit is taxed once at the corporate level and dividends are taxed again at the shareholder level. |
| What is the biggest benefit of forming an LLC? | For most customers, the LLC is an attractive option because it combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. Limited liability means that owners are only liable to the extent of their investment in a properly structured and managed LLC. Their personal assets should be protected from a judgment or other action against the business. |
| What is the corporate charter? | It is document issued by the secretary of state that indicates when the corporation began its existence. Think of it has the corporations “birth certificate.” |
| What is the Difference Between an LLC and a Limited Partnership? | A Limited Partnership consists of at least one general partner and one limited partner. The general partner is potentially liable for all the obligations of the partnership. The limited partner has limited liability. Limited partners may jeopardize their limited liability status if they actively participate in the business of the partnership.
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| What is the Form 2553? | The 2553 Form, known as the sub chapter S election, is required to be filed with the IRS to get S-corporation status for purposes of federal taxation. Filing this Form with the IRS is used to convert a C-corporation into an S-corporation. |
| What is the Management Structure of an LLC? | An LLC is typically managed by its members/owners (referred to as member-managed). In that respect an LLC is unlike a corporation, which has a much more rigid and defined management structure, including directors and officers. All owners of the LLC are typically referred to as members, and they can have control and voting interest proportional to their ownership interest, or in proportions different from their ownership interest. |
| Which entity has more restrictions regarding owners - an LLC or an S Corp? | There is no limit to the number of members who may own an LLC. Subchapter S corporations are limited to a total of 100 shareholders. Also, members of an LLC do not need to be U.S. citizens or residents like with a Subchapter S corporation. Additionally, all shareholders in a Subchapter S corporation must be individuals, so another entity may not own a Subchapter S corporation. |
| Who are corporate board of directors? | The board of directors is an assembled body, selected by the shareholders of the corporation. The board of directors oversees the management and policies of the corporation, meaning they elect officers and approve decisions made by them. |