Archives for "F"

Franchise Tax

An annual fee that a business pays to the State to maintain its Good Standing to do business. Failure to pay this franchise tax (and the associated filing fee), regardless of business activity or non-activity will result in the corporate charter being forfeited. This tax is not typically paid by accountants. Additionally, the franchise tax is not dependent on business activity. In the case of an LLC, the fee is fixed at $300 per year. In the case of a corporation, the amount of the tax is based on the stock authorized. A corporation with 1500 authorized shares only owes $125 per year ($75 franchise tax and $50 filing fee). For corporations with much authorized stock and little in assets, they are entitled to “recalculate” the tax on the asset method which can reduce the tax significantly. In the case of a non-profit corporation in Delaware, only the filing fee is due, not the associated franchise tax.

Form 8832

Form 8832 is the one-page IRS tax election form required to elect that an LLC be taxed as a C-Corporation. The form must be filed with the IRS within 75 days of formation to take immediate effect. Otherwise, the election will apply to the following tax year. The LLC would also obtain an Employer Identification Number (EIN) to include on Form 8832 if it had not already done so.

What Is the Benefit of a C Corporation?

C-Corporation is the default tax status of all corporations, which requires filing the Form 1120 tax return to report its income on a calendar or fiscal year basis. An LLC may elect to be taxed as a C-Corporation by filing a Form 8832. A C-Corporation may carry its losses forward from one tax year to the next. People often think of the C-corporation as being subject to “double taxation” which is true. However, even with double taxation, there are many options to reduce one’s taxes.

For tax years beginning after December 31, 2017, a permanent change was made to a flat tax rate of 21% on all taxable income of C-Corporations.

Once the corporate election is made, the LLC will be subject corporate taxation for a minimum of five years before a new election can be made.

Form 2553

The one-page IRS tax election form which is filed to elect the S-Corporation status by a corporation or LLC within 75 days of the beginning of the calendar year or within 75 days of the business formation. Some states require a separate election. The company must have all individuals who are not existing as owners. It cannot have more than 100 owners. All owners must be U.S. citizens or permanent residents of the United States. S-Corporations file the 1120-S tax return for every year.

Form 1023

The IRS application form required to be filed by a non-profit corporation to obtain a tax-exempt determination (such as Section 501(c)(3)) letter from the IRS.

Foreign Qualification

The corporate filings of out-of-state corporations or LLCs that enable the company to do business in that particular state (i.e. a Delaware Corporation headquartered in California files a Certificate of Authority to qualify as a foreign company in California).

Fiscal Year

The 12 month period, elected by owners of a C-Corporation, to coincide with their company’s business cycle (often other than the calendar year, e.g. September 1st to August 31st).

Fiduciary Duty

A fiduciary duty is a duty that anyone acting on behalf of a business owes to the business, including the stockholders. Breaches of this duty can result in liability for monetary damages, including lawsuits by shareholders or derivative claims (where an individual sues the business to make the business sue the individual who breached his duty). In an LLC, fiduciary duties can be heightened, reduced, or eliminated, which is unusual since in corporations this is not the case. This is another reason to consider the LLC as a form of business entity. Reducing or eliminating the fiduciary duty of managers and majority owners can provide more flexibility to run the business how they see fit.