Q & A

Corporations

What is the difference between Shareholders, Directors, and Officers?
How Many Officers Do I Need?
How Many Shares Should I Authorize?
How Many Shares Should I Issue?
What Par Value Should I Choose?
What is a S Corporation?
What is a C Corporation?
What Is a Professional Corporation?
Is a Professional Corporation the same as a Personal Services Corporation?
What Is a Close Corporation?
Can I Take Advantage of the Reduced Formality of a Close Corporation and Still Have a Custom Shareholder Agreement?
If I Elect to be a Close Corporation, Can I Change My Mind Later?
How do I replace officers and directors?
If I Choose to Be a Corporation, and Later Decide I Should Have Been a Limited Liability Company What Do I Have to Do?

What is the difference between Shareholders, Directors, and Officers of a Corporation?

Shareholders own the Corporation. Shareholders elect Directors, who make corporate decisions. Directors appoint Officers (President, Vice President, Treasurer, and Secretary) who take care of day to day business and who carry out corporate decisions made by the Board of Directors.

How Many Officers Do I Need?

You are required to have a President, Treasurer and a Secretary. The office of Vice President is optional. One person can hold all three offices. The same person should not hold the offices of President and Vice President, as the primary job of the Vice President is to fill in for the President when the President is unable to perform his duties.

How Many Shares Should I Authorize?

It depends on the size and type of your business and whether you will be doing business in other states as well as Georgia. Generally, you should authorize more shares than you intend to issue. This is so you will have more shares available in the future to either (1) bring in more investors or (2) raise more capital by selling shares. If you are sure that you will only do business in Georgia, there is no upper limit on the number of authorized shares. Usually, 5,000 shares will be quite sufficient (10,000 to 100,000 for larger ventures). However, if you will be doing enough business in another state to require registering in that state as a foreign corporation, you should consider limiting authorized shares to 10,000. Many other states levy a tax on the authorized value of shares. By keeping the authorized shares relatively low, the minimum tax will be paid. For example, the State of Virginia charges annual fees as follows:

• 5,000 shares $ 50.00
• 10,000 shares 65.00
• 100,000 shares 335.00
• 1,000,000 shares 2,025.00

How Many Shares Should I Issue?

This question should really be answered by your CPA or other tax advisor. There are certain circumstances where you may be taxed when you take the money that you originally invested back out of your corporation. For this reason, we most often see issued shares of 100 to 1,000. The rest of the required capital is loaned to the corporation by its shareholders. Georgia previously had a law requiring a minimum total investment of $500.00. Although that law has long since been amended, old habits die hard. For this reason, many CPA's suggest issuing at least 500 shares at $1.00 per share.

What Par Value Should I Choose?

Par Value is the lowest amount the corporation will charge for issuing new shares of stock. The corporation can always issue shares at a higher amount. In Georgia, par value is largely an antiquated distinction. However, some states tax or charge fees based upon authorized capital, which is the number of authorized shares times the par value. The use of no par value stock also may be penalized or limited in other states.

• If you are only going to operate in Georgia and all shares will be purchased for cash, choose no par value or $1.00 par value. It really is a matter of personal preference.
• If you are only going to operate in Georgia and some shares will be issued for services rendered to the corporation, and not for cash, choose no par value.
• If you are going to operate in other states and know which states you will be operating in, check with the corporations department of that state and find out if they base fees or taxes on authorized capital. Keep your shares and par value low enough to avoid those fees if you can.
• If you are going to operate in other states and don't know which states you will be operating in, keep your authorized shares and par value low. From 1,000 to 10,000 authorized shares and a par value of $0.01 should be sufficient to avoid extra fees in other states.

What is a S Corporation?

A S Corporation is a corporation whose shareholders have elected to be treated as such by the Internal Revenue Service. All taxes and deductions flow through the S corporation to the individual shareholders. The prime advantage of a S corporation is avoiding the potential of double taxation inherent with a C corporation. A S corporation also can be used to reduce payroll taxes and social security contributions. The prime disadvantage of a S corporation is the lack of flexibility because of extensive IRS rules. The S-election is made by filing a Form 2553 with the Internal Revenue Service shortly after incorporating. We do not file for S corporation status for you. That is not a part of our service. Your CPA or other tax advisor can help you choose which type of corporation is best for you and assist you with filing Form 2553 in a timely fashion.

What is a C Corporation?

A "C" corporation is a corporation whose shareholders have not elected to be taxed as a S corporation. A C corporation is often used to provide the owners with benefits using "pre-tax" dollars. A C corporation can also be used to accumulate assets or wealth at lower corporate tax rates. The prime disadvantage of a C corporation is the double taxation that occurs when after tax profits are again taxed when later distributed to shareholders as dividends or salary. Your CPA or other tax advisor can help you choose which type of corporation is best for you.

What Is a Professional Corporation?

A Professional Corporation is a corporation that is formed to practice one of the following professions: certified public accountancy, architecture, chiropractic, dentistry, professional engineering, land surveying, law, pharmacy, psychology, medicine and surgery, optometry, osteopathy, podiatry, veterinary medicine, registered nursing, or harbor pilotry. A Professional Corporation may only be owned by members of the profession and do not protect the professional from malpractice liability. Except for engineers and land surveyors, one professional corporation can not practice multiple professions.

Is a Professional Corporation the Same as a Personal Services Corporation?

No. These are really different classifications. However, professional corporations are often personal services corporations and vice versa. A professional corporation is a category under state corporation law. A personal services corporation is a category under federal taxation. Personal services corporations that are also C corporations are taxed at the maximum individual tax rate, rather than the initially much lower corporate income tax rate. Professionals, especially, should consult with their CPA or other tax advisor prior to forming a business entity.

What Is a Close Corporation?

A "statutory close corporation" is a corporation with thirty-five (35) or fewer shareholders that has elected to be treated as such by adding a paragraph to the Articles of Incorporation. There are a number of features available in Georgia with this type of corporation. However, there are three major features that are most important.

• The first major feature is reduced formality. In this case less is better. When a corporation is involved in a lawsuit, it is common for the other side to challenge the validity of the corporation on account of the failure to follow corporate formalities, i.e. keeping complete, timely and up to date corporate minutes. The failure of a statutory close corporation to observe the usual corporate formalities or requirements relating to the exercise of its corporate powers or management of its business and affairs is not a ground for imposing personal liability on the shareholders for the liabilities of the corporation. There is very little Georgia case law on this subject. It is uncertain as to how far the courts will go in excusing corporate formality, but clearly, less required formality is better for most businesses.
• The second major feature is that the Georgia statute provides a simple "right of first refusal" requirement between shareholders. What this means is that if one shareholder wants to sell out and finds a buyer, the other shareholder(s) have the right to match the offer. The statute works relatively well if the ownership interest among shareholders is relatively balanced. It does not work well if one shareholder is the driving force behind the business and other shareholders are less important to the business. In that case, the powerful shareholder would want a custom shareholder buy-sell agreement that favors the powerful shareholder, and not a "one size fits all" statutory right of first refusal. All shareholders would be better off with a custom Shareholders Agreement covering buy outs and a number of other issues not addressed by the close corporation statute, but statistically, few enter into these valuable agreements. Please contact us if you would like more information on shareholder agreements.
• The third feature is the ability to not have a Board of Directors. This is really an extension of the first feature of less formality. Not having to have perfunctory board meetings is appealing for most businesses. There is one result of not having a Board of Directors that must be considered. When a corporation has three or fewer shareholders, it is typical that all three shareholders are on the Board of Directors and all such shareholders have an equal voice in running the corporation. This is "per capita" voting. If the board of directors is eliminated, voting is by percentage of ownership in the company. If all shareholders have an equal number of shares, there is no difference in the voting strength. However, if ownership is not equal, voting strength can be quite different. For example, a corporation has one 60% shareholder and two 20% shareholders. If there is a Board of Directors consisting of all three shareholders, the two 20's can outvote the 60. However, if there is no Board of Directors, the 60 can outvote the two 20's.

Assuming you do not wish to have a custom Shareholder Agreement, the following profiles should help you reach a decision.

Choose a Close Corporation Without Directors, If You Will Have:

• One shareholder with no plans to add another shareholder;
• More than one shareholder with each owning the same percentage; or
• More than one shareholder with each owning different percentages that want to vote by percentage interest.

Choose a Close Corporation With Directors, If You Will Have:

• More than one shareholder with each owning different percentages that want to vote per capita.
• The type of business that your business prospects will expect to have a Board of Directors (franchising, for example).

** If you are still not sure whether you should be a Close Corporation With or Without Directors, consider the following: There are a few narrow areas in the law where a director is subject to personal liability for making poor decisions. There is a very subtle distinction in Georgia law that may give "directors" more of a cushion from personal liability. Georgia law allows the Articles of Incorporation to provide for director exculpation for certain acts. The law does not expressly provide for exculpation of a shareholder of a statutory close corporation without a board of directors for the very same acts. Although this may never be an issue for your corporation, you may want to be a director just in case.

Choose a Standard Corporation Without Electing Close Corporation Status, If You Will Have:

• One powerful shareholder that rules the corporation with one or more junior shareholders. A custom Shareholders' Agreement is strongly advised in this situation; or
• One or more shareholders rule the corporation and want to give key employees stock ownership as an incentive. A custom Shareholders' Agreement is strongly advised in this situation.

Can I Take Advantage of the Reduced Formality of a Close Corporation and Still Have a Custom Shareholder Agreement?

Yes. However, it would require additional legal consultation.

If I Elect to be a Close Corporation, Can I Change My Mind Later?

Yes, if 2/3 of the shareholders agree. This is done by amending the Articles of Incorporation. The filing fee for this change is relatively inexpensive.

How Do I Replace Officers and Directors?

As long as officers and directors are not selling, transferring, or redeeming any of their shares in the corporation, making officer and director changes are pretty simple. If their shares are being sold, transferred, or redeemed, you need to contact our office or another attorney to handle the transaction.

Officers and directors are usually elected at your corporation's annual meeting. If changes will be made at some other time during the year, you will need to do the following:

1. Obtain a signed resignation from the officer/director.
2. Have a shareholders' meeting to elect a new director if the director is being replaced. (If everyone is in agreement, simple minutes will do.)
3. Have a directors' meeting to elect the new officer. (If everyone is in agreement, simple minutes will do)
4. If officers are being changed, you should update the information immediately with the Secretary of State online at www.sos.state.ga.us/corporations or by calling (404) 656-2185 and requesting an Annual Registration. The update will cost $30.00.

If I Choose to Be a Corporation, and Later Decide I Should Have Been a Limited Liability Company What Do I Have to Do?

If you decide to switch from a being corporation to being a LLC, there is a procedure under Georgia law to "elect" to become a LLC Corporation. The election procedure is a streamlined method of dissolving the corporation and simultaneously forming a LLC. The IRS treats this as a dissolution of the corporation for tax purposes. Talk to your CPA or other tax advisor before using this procedure.