FAQ: Advantages & Disadvantages of Online Business Incorporation Services

On a legal message board on which I respond to user's questions with user name Calif Business Lawyer from time to time, a question concerning online business incorporation was posted, to which I responded, and which I'm reprinting here, because I get frequent questions about the advantages and disadvantages of online incorporation services:

I am using an online service to create the S-corporation, and one question asked by the website is to check off a box if it is a "personal service corporation". Examples of such corporations are health and attorney industries, etc. I don't know if a beauty salon is classified as such.

It's probably not critical to classify the corporation as a personal service corporation except when filing taxes, right?

My reply:

Unfortunately, this illustrates one of the problems of using online incorporation services - if you don't know the answers to the question being asked (which in this case doesn't make a lot of sense anyway - only a C corporation need be concerned with personal service corporation [PSC] classification), you need to obtain legal and/or tax (accounting) advice prior to or in conjunction with - or instead of - incorporating online. Of course, by the time you pay to consult an attorney and/or accountant, then pay the document preparation services, most or all savings will have evaporated. Also, such services don't usually start from square one, and ask you, Are you forming in the right state? Have you considered an LLC instead of a corporation (or vice versa)? Why or why not?

Most of the online incorporation services include disclaimers like this one I found in small print at the bottom of one popular site:

"[Company] is not a law firm and is not a substitute for the advice of an attorney."

And this on another leading site: "[We] cannot provide information as to whether a person should incorporate or form a limited liability company or a partnership. If you are contemplating forming any of these entities you should consult with private counsel regarding your individual fact situation."

For those who know exactly what they want, and can explain it to someone else in plain English in a few sentences, the disadvantages of online incorporation services may be overcome by the one big advantage of cost savings. In my experience, however, this is a minority of those who are using such services. And savings up-front sometimes ends up in more expenses later, when I am hired to resolve business disputes the corporation bylaws and LLC operating agreements should have covered, or would have covered, had they ever been adopted, or to dissolve or merge entities, and replace them with better-suited ones.

You are correct that the personal service classification is largely tax-related. Some regulated professions are prohibited from forming certain types of business entities in some states (e.g., California does not permit professional LLCs - to test out your favorite online incorporation service, try starting the process of forming a California professional LLC online, and see if the system warns you or rejects it before you get to the submit order stage).

Don't forget state and local licensing and registration requirements.

Personal service corporation defined:

"A type of C-Corporation that is owned and operated by individuals performing personal services in such fields as health, law, engineering, architecture, accounting, actuarial science, performing arts and consulting.

The requirements for a PSC are:

The corporation is a C-Corporation.
The corporation's principal activity during the year is the performance of personal services.
The personal services are primarily performed by the employee-owners of the corporation.
Employee-owners own at least 10% of the corporation's stock.

PSC's must generally use a calendar year as their fiscal year and are taxed at a flat rate of 35% on all of their taxable income."

See also:

Zoom Past Legal Zoom and
LegalZoom - Why We Love It

FAQ: When can I obtain an EIN number for the corporation or LLC I'm forming?

Another frequently asked question:

When can I obtain an EIN number for the corporation or limited liability company I'm forming?

The definition of "EIN" is Employer Identification Number. An EIN, sometimes also called a Taxpayer Identification Number (TIN), Taxpayer ID number, or Federal Identification Number (FIN) is in essence the business entity equivalent of a social security number. Individuals have social security numbers, while corporations, LLCs, and some sole proprietorships, partnerships, and trusts, may obtain an EIN.

How do I obtain an EIN? EINs are issued by the IRS; apply with Form SS-4 by mail, fax, phone, or online. The name EIN is somewhat misleading, since an EIN is often needed regardless of whether a corp. or LLC will have any employees. For example, an EIN is generally required to open a business bank account in a corporate name, or to file corporate taxes.

Because they want to open a bank account as soon as possible, clients and potential clients often want to know how they can get an EIN as soon as possible. While it is not time-consuming to have an EIN issued once the corporation or LLC is formed (I obtain them same-day for clients), it is not possible to issue an EIN for an entity that does not yet exist. Anyone who claims they can get you one today is lying, misguided, or filing fraudulent paperwork on your behalf with the IRS - and probably with your name and social security number on it.

So if an EIN is needed yesterday, then the corporation or LLC itself is also needed yesterday, and the options that should be considered include expedited filing procedures to form the entity as soon as possible, or the purchase of an already-formed, ready-to-use shelf corporation or shelf LLC.

FAQ: California Corporate Seal

In this post, I will address the first of many frequently asked questions (FAQs) I receive from client and potential clients regarding California business law:

Do I need a corporate seal for my California corporation or LLC? Where do I get one?

Historically, a company's official seal was applied to documents to indicate that the contract was a corporate act. Wax and a stamp was used. In modern times, the wax was replaced by a stamp that made only an impression on the paper.

California Civil Code Section 1628 states:

"A corporate or official seal may be affixed to an instrument by a mere impression upon the paper or other material on which such instrument is written."

The term "may" in the statute indicates that the use of a seal is permissive, rather than mandatory. Lest anyone interpret this code section to mean only that a modern seal must be used, instead of an old-world wax seal, Section 1629 makes it clear:

"All distinctions between sealed and unsealed instruments are abolished."

This is consistent with the laws of most if not all U.S. states which have abolished the use of seals as a requirement for corporate contracts.

Thus, while a corporate seal may be applied to a document, its legal signifigance is zilch. If your company still desires to have one, or in the rare circumstance that a third party will not complete a transaction without one (occasionally encountered in lending situations), custom seals can be purchased at most office supply stores and from many online outlets. For our clients that prefer to have one, we can also arrange to have one made as part of a corporate kit at the time of incorporation or LLC formation.

2007: Time to Incorporate Your Sole Proprietorship?

IRS to Target Schedule C Filers:

In a recent telephone conference, IRS commissioner Mark Everson said that they will be conducting more audits on individuals running unincorporated businesses (i.e. self-employed individuals).

While Schedule C filers have long been audit targets for the IRS, they are now stepping up their audit efforts because they believe that self-employed individuals represent a large portion of those individual taxpayers underreporting their income.

IRS to Target Schedule C Filers, About.com U.S. Business Law / Taxes, 25 December 2006

Incorporating, while not a panacea by any means, nor appropriate for all small businesses, entrepreneurs, and those with side businesses in addition to W-2 income, can help reduce exposure to a time-consuming audit, as well as potentially offering tax, asset protection, and other benefits to business owners.

See also: January 2009 update

California Secretary of State Business Entity Processing Times for Corporations, LLCs, Etc.

The California Secretary of State generally takes 3-4 weeks to process regularly filed corporation and limited liability company (LLC) formation documents, but due to the holidays and the usual heavy end-of-year and beginning-of-year filing volume, is currently operating on a 6-week plus schedule.  The backlog will likely diminish by the end of February, after the wave of new corporations formed for the beginning of the year subsides.  One can check the updated business entity processing times (and those for other filings, as well), here.

If standard processing times are inadequate, rush filing options are available; however, these must be weighed against the slightly increased legal fees and costs and substantial additional state filing fees. When possible, filing over the counter for a small additional fee in a regional office can speed turnaround time substantially. The Law Office of Jonas M. Grant PC regularly utilizes this method to speed its incorporations for clients.