Showdown: Fish Oil Vs Flax Seed Oil

Flax Seed Oil

Flax has one very beneficial characteristic: it contains a substance called ALA, from which the body can manufacture all necessary omega-3s. Just to review, omega-3 is a range of essential fatty acids which your body needs to ingest or manufacture from other nutrients in order to maintain basic functions of the cardiovascular and nervous system. You may already know that most people take flax seed oil because it contains ALA.

In the war of fish oil vs flax seed oil, there is one critical battle.

You may not be aware of the effect ALA has on many cellular enzymes. To put it simply, cells chemically prefer not to make their own omega because it is very energy inefficient.

In fact, almost 10% of your brain is actually composed of omega-3 fat, so it’s got to be important. Furthermore, omega-3 supplements have been linked to improved cardiovascular health and mental performance.

Unfortunately, vegetable oil is not the best place to find these fats, and you’ll soon see why.

Fish Oil

Fish oil already has large amounts of EPA and DHA, the fats that your body wants to manufacture in order to function at its peak.

So if flax seed oil has everything the body needs to manufacture these, then you don’t need to ingest them, right?

Wrong. In fact, it takes huge amounts of ALA to manufacture EPA and DHA. That’s why it’s better to just ingest a small amount of fish oil, unless you do all of your cooking with flax oil, everyday, for every meal.

For this reason, most studies indicate that taking a small amount of EPA and DHA will prevent the need for taking other kinds of oil which may actually throw off the body’s balance of other kinds of omega-3. For example, a person needs much more omega-3 than omega-6, and most vegetable oils contain too much omega-6.

Complicated? Not really. If you take a supplement high in EPA and DHA, then the body has everything it needs to be well supplied with essential fats. As long as you’re not exposing yourself to certain toxins, which I discuss extensively elsewhere, there’s no reason not to pursue a lifelong relationship with the benefits of fish oil.

Fish oil vs flax seed oil: I don’t know if we can declare a winner today, but remember that you’re getting different things from both of these sources. Ultimately, though, I have to admit that the similarities between flax seed oil and other commonly available vegetable oils cause me to lean toward fish oil. Of course there seems to be nothing wrong with taking these in tandem, as long as you’re keeping the balance as far as the types of omega. There are actually many different types, and it is possible to ingest toxic amounts of one in particular.

Communication of the Experience of Higher Awareness

Has a new kind of uplifting perception or intuition ever come to you? Perhaps a sense of wholeness or timelessness, or an encounter with a side to reality that goes beyond the world as we usually know it. A short moment when you sensed that something new has been revealed – something usually hidden? Communication of such illumination can be problematic.

Trying to remember this sort of deep experience can be difficult because ordinary language seems unable to capture the essence of the thing. Perhaps you would love to convey something of the positive nature of what you have gone through to your partner or close friend. But how do you do this? How does one communicate something which seems to be different from common life?

Verbal and non-verbal communication

You may talk about and show your feelings using tone of voice and facial expression. But this is only a communication about how you have reacted to the experience rather than saying anything about the experience itself. You may try to use the language of religion or mysticism to describe it but often the words used by these are off-putting, ambiguous or carry connotations that are not what you are trying to get at.

In communicating your experience one approach you might try is to write a poem. This isn’t quite as daft as it seems. A lot of the world’s mystical writing is couched in verse using poetic licence to convey impressions and ideas. You don’t even have to use poetry. Prose can also employ imagery to communicate something of a deeper side to existence.

In choosing imagery you might try using simile or metaphor as follows:

Using image of mountains for communication

For example perhaps your extraordinary consciousness showed you a higher and wider perspective on things, in which case you might refer to it as a ‘mountain-top’ experience e.g. glimpsing a higher aspiration in life for yourself which might become the summit of your achievement and worth all your effort to climb to the peak. We speak of ‘faith being able to move mountains’; and so if you believe in what you are doing, you can overcome any obstacle.

Using image of olive oil for communication

Alternatively, your moment of higher awareness may have been a sense of kindness and harmony. This perception might be conveyed in terms of olive oil. Don’t we speak of ‘pouring oil on troubled waters’. This image reflects a concern for resolving discord and conflict so that calm and agreement is restored. A small act of kindness can ‘oil the wheels’ of social interaction and make things run more smoothly.

Using image of lions for communication

Your special illumination may have been catching sight of that intangible thing we call courage – perhaps having a foretaste of the kind of confidence needed to turn round and face one’s personal difficulties. Using an image of the lion may express this positive feeling, for we speak of being ‘brave as a lion’ – a creature which has every reason to be a confident being, as it is, the top predator in its natural habitat. To ‘beard the lion’ would indeed be to confront danger using divine power within.

Using image of pearls for communication

Or perhaps you have had a deep experience of inner safety and stillness. The pearl comes to mind. The pearl is valued for its lustre. We speak of an important piece of advice as a pearl of wisdom. Protected by its oyster shell, it had laid quiet and still on the sea bed. You may come to value the perception about divine protection you gained in the quietness and stillness of your meditating mind.

Using image of the sun for communication

One of the most inspiring of all inner experiences is to feel in the presence of the source of all life – the love and light without which nothing that is good could exist. This is a consciousness of cosmic energy originating and sustaining not only our physical life but also our spiritual one. The light and warmth can go out of our life when we lose a loved one. We also feel in the dark and cold when we lose a sense of the spiritual light and heat which is the source of our soul. The sun with its heat and light is a wonderful emblem of this power house for all our creativity and growth.

Swedenborg on correspondence
The well known maxim ‘As above, so below‘ means that the elements of our higher consciousness correspond to the things of nature. In his exploration of this esoteric idea, the spiritual philosopher Emanuel Swedenborg shows in a lot of detail how our higher thoughts can be communicated in terms of the natural things of the world.

Furthermore he maintains that because natural things – such as in the mineral, plant and animal kingdoms – are created by God, they can reflect what is good that comes from God.

“The whole natural order is a theatre representative of the Lord’s kingdom.” (Emanuel Swedenborg)


However, one needs to bear in mind what he also says about some parts of nature which can represent a corruption of what comes from the Divine Source – hence the existence of what is noxious, poisonous, or otherwise harmful as well as that which is nourishing, delightful, and protective.

Communication of images from animal kingdom

Alive and moving, animals in a good sense such as the lion he says can represent human desires including higher feelings.

Communication of images from vegetable kingdom

Swedenborg maintains that plants, which have growth but not movement, like the olive tree, can represent what needs inwardly nourishing and enlivening in human beings and thus potential stages of their spiritual growth.

Communication of images from mineral kingdom

There are non-living natural things such as mountains and the sun which neither move nor grow. He says these can represent spiritual resources for human nurturing and growth and thus both the ends and beginning of human endeavour.

In other words images of natural things can convey to others our higher awareness of spiritual reality.

IRS Eyes S-Corporation Oversights – Top 10 Items to Be Concerned About

Many small businesses request to become an S-corporation for several reasons. These reasons vary from no double taxation on equity distributions (generally speaking, there are exceptions), taxed at the individual (owner) level instead using corporate tax rates and receiving income which is only subject to income tax and not self employment taxes.

However these tax advantages do come with costs. The costs range from filing an annual s-corporation tax return, filing quarterly and annual payroll tax returns, separating personal and corporate assets and behaving as a business. The IRS is finding out that small businesses are not behaving correctly and they are taking action to try to win an increase in taxes through lack of documentation and trying to invalid the s-corporation election. The IRS believes only 25% of s-corporations are compliant. Statements from the Kiplinger Letter (May 28, 2009) backs up the IRS’s non-compliant conclusion: 35,000 S-corporation did not pay compensation and over 40,000 S-corporation with profits of $50,000 or more did not pay compensation.

First, the largest issue is the small businesses who want to be s-corporation, but never make the request and file Form 2553. Form 2553, Election by a Small Business Corporation (Under section 1362 of the Internal Revenue Code), must be filed within 75 days of the business beginning or of the date the business would like to be treated as an s-corporation. The form must be signed by an officer of the corporation and all shareholders. Revenue Procedure 2007-62 does provide guidance for first year in business corporations which missed the original 75 day window to request to become an s-corporation. Generally speaking, S-corporation qualifications include the corporation must be domestic (US), owners must be individuals (although some estates and exempt organization do qualify), the number of owners is limited to 100 owners, the owners cannot be non-resident aliens, the corporation can only have one type of ownership, each shareholder must consent to the tax treatment as an s-corporation and certain business types do not qualify. Bottom line, file Form 2553 timely if you wish to be an s-corporation!

Second, be certain you are not commingling business and personal assets. All business assets must be titled in the business name, especially if you are depreciating them. This also includes the s-corporation paying personal bills or expenditures of the owners. The IRS’s position is when the s-corporation pays the personal expenses of the owner the owner is taking compensation and not taking a distribution. The difference is self-employment taxes (Social Security and Medicare) are added to compensation. Commingling personal and corporate assets might not be a good idea if you want the legal protection of your corporation too. Commingling assets makes tracing and proving deductions difficult, which makes it easier for the IRS to win audit positions. Therefore, be certain to have business bank and credit card accounts solely for business transactions and have personal bank and credit card accounts for personal transactions.

Third, speaking of distributions, one of the s-corporation tax attractions are distributions are generally not subject to a dividend tax and the income earned to generate the distribution is not subject to self employment tax. However, following most corporate governance rules equity distributions require authorization by the Board of Directors (Board). S-corporations distributions are usually random in nature and without a Board meeting. The IRS’s position is that equity distributions are approved by Board of Directors. Thus a distribution without being approved may be considered compensation. Compensation, of course, is subject to the self-employment tax which reduces the tax benefits for the owners. Be certain to have your corporate meetings and follow your corporate governance to avoid these costly mistakes and risky positions.

Fourth, keep up with corporate minutes. At a minimum have annual minutes, but you may want to meet throughout the year (monthly or quarterly) with your Board and management team. Your minutes will need to show that the Board approved to become an s-corporation, annual officer compensation and benefits, business strategy, changes to your business plan, etc. This will help to show you are following corporate governance guidelines. Additionally, one of the first items an IRS auditor will request is your annual corporate minutes. Yes, it is more paperwork, but it is the sacrifice you will need to do to avoid headaches with the IRS. It may also help you become a better business by discussing strategy on a more regular basis.

Fifth, pay your annual Secretary of State fee. Consequences of not doing so can terminate your corporation’s existence. The IRS’s position is that if your corporation does not legally exist your corporation cannot be treated as an s-corporation under the tax rules and regulations.

Sixth, basis must be tracked and reported on tax returns in order to claim losses from an s-corporation. Most s-corporation owners are probably asking “what’s basis?” Very generally speaking, basis is the money an s-corporation owner used to purchase stock, profits taxed but left in the corporation and loans directly from the owner. The IRS continues to stress that simply guaranteeing a debt of the s-corporation does not increase basis. If the owner does not have basis then distributions could be subject to the dividend tax and losses would not be currently deductible. The IRS is discovering in their audits that owners are not properly tracking basis, are taking distributions which should be subject to the dividend tax and are taking losses which should be suspended and carried forward until basis is restored. If you want the advantages of an s-corporation, be certain to track your basis to void surprises!

Seventh, loans to and from owners require documentation. Loan documentation usually includes the date, borrower, lender, amount, interest rate, collateral (including personal guarantee) and payment terms. Generally speaking management or the Board should approve all loans. If you think you will have an interest rate of 0% you can, but for tax purposes you must impute interest. Imputed interest rates are issued by the IRS and are the rates the IRS states you have to charge related parties with balances greater than $25,000. Not having loan documentation may allow the IRS to convert loans to shareholder into distributions subject to the dividend tax or compensation subject to Social Security and Medicare.

Eighth, compensation to officers must be adequate. S-corporation owners would like to have all distributions and no compensation. Be aware there is over 40 years of court cases to prove you must have compensation! The IRS wins these court cases by stating in court you rewarded only the owner and not the manager. So how much compensation should you pay? It all depends! Generally speaking officer compensation should be equal to or greater than the distributions taken. To determine reasonable officer compensation you will need to take into consideration the business performance, the role the owner is participating in, compensation of other key employees and the fair market value of the owner’s services (i.e. how much would you have to pay another employee for similar services?). We all want to get paid, so don’t forget to give yourself some compensation!

Ninth, employee benefits for greater than 2% owners must be reported on the owner’s W-2. For example health insurance and health savings account (HSA) amounts must be reported on Form W-2 subject to taxable income (sometimes subject to Social Security and Medicare taxes) and report in Box 14 (a description and amount). The S-corporation gets to deduct the items as compensation to owners. The owners have to claim the compensation as income, but then get to deduction the items as self-employed health insurance and HSA contributions, respectively. The IRS issued Notice 2008-1 in December 2007 which implies they would not allow the deduction of these types of benefits if they were not reported correctly. If you want the tax benefits you will need to follow the rules!

Tenth, unreimbursed expenses cannot be deducted on Schedule E directly against income or losses. This is only allowed for owner in which are taxed as partnerships. For s-corporations, any unreimbursed expenses must be filed on Form 2106. These expenses are then reported on Schedule A as Itemized Deductions subject to a 2% of Adjusted Gross Income limitation. Bottom line: you will not receive all the benefits of the deduction you could. A better way is to turn in an expense report every month and have the business reimburse the owner for the expenses. We don’t advise going longer than 60 days to turn in an expense report due to compensation rules (i.e. a reimbursement after 60 days is considered compensation subject to Social Security and Medicare from the IRS’s view point).

S-corporations have a lot of tax rules and regulations. The IRS is mandating owners of s-corporation to be aware of their legal responsibilities as well. Be certain the tax joys outweigh the documentation headaches of an s-corporation.

S Corporations

An S corporation is a regular corporation with an “S corporation” tax status. This means that this corporation enjoys the benefits of a limited-liability corporation, but can pay income taxes on the same basis as a sole proprietor or a partnership.

The other type of corporation is called a C corporation. The C corporation is also known as a regular corporation. C corporations get taxed on business profits, and its owner also has to pay an individual income tax. S corporations are exempt from this form of double taxation.

The profits of an S corporation are filed through the owner’s personal tax returns, just like sole proprietorships, partnerships and limited-liability corporations. Like regular corporations, the S corporation does not pay taxes on income. This is true for most states; however, some states may tax an S corporation the way it does regular corporations. Before making a move, you should consult the tax division of your state treasury department.

There are some advantages an S corporation has over other forms of corporations. Aside from exemption from double taxation, having an S corporation status will allow you to claim business losses through your personal income tax return, enabling you to offset any other income you may have earned. Another advantage an S corporation has is that the shareholders are not subject to self-employment taxes.

Having an S corporation status does not come without its disadvantages. One is the limited number of shareholders that an S corporation is allowed to have. This type of corporation is limited to 100 shareholders. Another disadvantage is the fact that an S corporation may not deduct the cost of fringe benefits provided to its employee-shareholders who own more than 2% of the corporation.

Making the decision to file for an S corporation status for your business is not a permanent decision. At any time, you may switch to regular corporation status if you feel that it would be more beneficial for you.

Incorporation 101: What Is S-Corporation?

What is an S-Corporation?

It is a regular corporation that has 100 shareholders or less and that passes-through net income or losses to its shareholders for tax purposes (similar to sole proprietorship or partnership). Since all corporate income is “passed through” directly to the shareholders who include the income on their individual tax returns, S-Corporation are not subject to double taxation.

An eligible domestic corporation (C-Corporation) can avoid double taxation (once to the shareholders and again to the corporation) by electing to be treated as an S-Corporation. Generally, an S-Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. On their tax returns, the S-Corporation’s shareholders include their share of the corporation’s income or loss.

S-Corporation vs. C-Corporation

  • Like C-Corporations, S-Corporations are separate legal entities from their shareholders and, under state laws, generally provide their shareholders with the same liability protection afforded to the shareholders of C-Corporations.
  • Unlike C-Corporations, for Federal income tax purposes taxation of S-Corporations resembles that of partnerships. Thus, income is taxed at the shareholder level and not at the corporate level.
  • Certain penalty taxes (e.g., accumulated earnings tax, personal holding company tax) and the alternative minimum tax do not apply to an S-Corporation.
  • Unlike a C-Corporation, an S-Corporation is not eligible for a dividends received deduction (a tax deduction received by a corporation on the dividends paid to it by other corporations in which it has an ownership stake).
  • Unlike a C-Corporation, an S-Corporation is not subject to the 10% of taxable income limitation applicable to charitable contribution deductions.

Who Can Form an S-Corporation?

S-Corporations are more suitable for small and family businesses, and for those who starts their business with small investment. Also, some existing businesses qualify for S-Corporation status.

To form S-Corporation or to change your existing C-Corporation into S-Corporation (also called “Election of S-Corporation Status”) certain conditions need to be met:

  • S-Corporation cannot have more than 100 shareholders.
  • All shareholders must be either U.S. citizens or residents, estates, or certain trusts.
  • Can only have one class of stock. Preferred stock is not allowed.
  • Profits and losses must be accorded to owners in proportion with their ownership stake.
  • Must use the calendar year as its fiscal year unless it can demonstrate to the IRS that another fiscal year satisfies a business purpose.
  • Shareholders cannot deduct losses in excess of their investment.
  • The corporation cannot deduct fringe benefits given to employees who own more than 2% of the entity.

S-Corporation Advantages

  • Forming S-Corporation generally allows you to pass business losses through to your personal income tax return, where you can use it to offset any income that you have from other sources.
  • Shareholders are not subject to self-employment taxes. These taxes, which add up to more than 15% of your income, are used to pay your Social Security and Medicare taxes.
  • When you sell your entity, your taxable gain on the sale of the business can be less than it would have been had you operated the business as a regular corporation.

Taxation of S-Corporations

As already mentioned above, S-Corporations are not subject to tax rates. Instead, S-Corporation passes-through profit (or net losses) to its shareholders and those profits are taxed at individual tax rates on each shareholder’s Form 1040. The pass-through (sometimes called “flow-through”) nature of the income means that the S-Corporation’s profits are only taxed once – at the shareholder level. The IRS explains it this way: “On their tax returns, the S-Corporation’s shareholders include their share of the corporation’s separately stated items of income, deduction, loss, and credit, and their share of non-separately stated income or loss”.

S-Corporations therefore avoid the so-called “double taxation” of dividends in most states. There are however two exceptions to this rule:

  • California: There is a franchise tax of 1.5% of net income of an S-Corporation (minimum $800). This is one factor to be taken into consideration when choosing between an LLC and an S-corporation in California. On highly profitable enterprises, the LLC franchise tax fees, which are based on gross revenues, may be lower than the 1.5% net income tax. Conversely, on high gross revenue, low profit-margin businesses, the LLC franchise tax fees may exceed the S-Corporation net income tax.
  • New York City: S-Corporations are subject to the full income tax at a 8.85% rate. However if the S-Corporation can demonstrate that a portion of its business was done outside the city, that portion will not be subject to the additional tax.

Retaining Profits of S-Corporation

S-Corporations are allowed to retain their net profits as operating capital. However, all profits are considered as if they were distributed to shareholders, and as a result shareholders might be taxed on income they never received (whereas a shareholder of C-corporation is taxed on dividends only when those dividends are actually paid out).

Converting S-Corp Back to C-Corp

S-Corporation status is not permanent and can be reversed back if so desired. For example, if the business becomes more profitable and there are tax advantages to being a regular C-Corporation, S-Corporation registration status can be dropped after a certain amount of time.

Business Legal Liability – How to Prevent Piercing the Corporate Veil

A corporation is a separate legal entity recognized by the national and state governments, and the Internal Revenue Service. In a properly run corporation, the shareholders, officers and directors (the company principles) are distinct and separate from the corporate entity, whether a “C,” “S,” or LLC. This provides a “corporate veil” that protects the principles from liability during a lawsuit against the corporation.

As a matter of course plaintiffs in a suit against the corporation also name the principles as defendants whenever possible. This allows the plaintiff to try and include the assets of these individuals in the settlement of the case. Thus the plaintiff will attempt to pierce the corporate veil to make sure there are enough assets to satisfy any judgments from the suit. Yet one of the reasons for forming a corporate entity (C, S or LLC) is to avoid this condition or liability to the principles.

If the principles of the company formally treat the corporation as a separate legal entity, the court will uphold the status of the corporate veil and limit the suit to the corporation, and not include the principles in any judgment. Federal or State Securities Exchange Commission (SEC) investigations typically follow the same approach. The determining factor is how well the principles maintained the separate entity status. If the various corporate formalities are not consistently followed then these are grounds for piercing the veil and holding the principles personally liable.

The smaller the company the more difficult it is to take the time to observe the following formalities, but it only takes one law suit, or the threat of one, to see the value. This can be especially hard if the entrepreneur has been operating as a small business or solo operator for some time, and has not developed the more formal, larger company practices. Once these processes get set in place they will become habits and are easier to maintain. As the company grows many of these best practices actually get easier to implement as the appropriate systems get put in place.

Annual Filings:

Maintain any annual corporate filings of the annual report and fees as required by your state.

Corporate Bylaws

The Corporation must adopt a set of bylaws, or operating agreement for an LLC, which provide a written statement of how the internal affairs of the corporation will be handled. Included in the bylaws are the set time and place of regular shareholder meetings and meetings of the board of directors. For an LLC, which can have a Board of Advisors, this can also be stipulated even though the Advisors do not have the same legal status as “C” corporation Directors. The more a LLC operates like a “C” corporation, the stronger the veil.

Corporate Minute Book

This book contains a written record of actions by the shareholders and directors and is the record that the Bylaws/Operating Agreement was followed. At a minimum, it must include annual minutes reflecting the election of directors by the shareholders. Any significant corporate activities, including corporate business plans, major contracts, borrowings, purchases, and the payment of compensation to officers, should be reflected in the minutes of the meetings.

Board of Director Meetings

Annual board meetings do not provide much oversight. For start-up companies it is highly recommended that monthly BOD meetings be used to manage per the business plan and approve major decisions which are then recorded in the Corporate Minute Book (File or Log). LLCs can do the same with the Board of Advisors or an Operating Committee.

Stock Ledger Book

The corporation must maintain an accurate and current stock ledger book (or membership units for a LLC). This book shows who has been issued stock/unit certificates, the number of shares/units issued, and the value received by the corporation for the issuance of its stock/units.

Conducting Business in Corporate Name

When doing business with third parties, the officers and directors must make it clear that they are acting on behalf of the corporation and not in their individual capacity. Correspondence should be sent out under the proper corporate letterhead or stationary, and contracts should be entered into only with the proper corporation as a signatory. That is the signature block should indicate both the principle’s formal title and the company name.

Bank Accounts

Avoid any appearance of co-mingling of funds. Corporate bank accounts and accounting records must be separate and distinct from the individual. A corporate bank account cannot be treated as if it was the account of an individual officer or director (as often happens with solo or small business owners). Corporate income and assets must be separately accounted for on the company books. One of the biggest mistakes made is to move money and property back and forth between themselves and their corporation without properly accounting for such movement in the corporate records/accounting system. This is a fatal mistake, and the corporate entity will be disregarded by the court.

CFO Check Signing

This is a hard one for many small business owners transitioning to a larger business structure. The Founder/CEO should no longer sign any checks, instead have the CFO or another officer plan ahead and sign all checks and use a system like QuickBooks to print the checks. A two-man rule for signing checks is valuable, but most banks will not enforce this rule so your CFO must be charged with this responsibility. This should also be at least a quarterly audit item.

Payroll Processing

Until you can afford your own payroll department, for any payroll checks use a payroll processor to issue the checks and calculate the appropriate withholding deductions and maintain the appropriate escrow accounts.

Corporate Credit Card

Get a business credit card, and/or debit card, to keep track of all non-check payments. Have your accountant/CFO reconcile them monthly.

Expense Reports

Use an expense report system for all payments to individuals other than compensation. This provides a written documentation for any audits. Be especially careful of all travel and business meeting expenses.

The formal procedures to maintain the corporate veil can be cumbersome to small companies, but are worth their weight in gold should there be any kind of law suit against the corporation or an SEC investigation against the principles. In any lawsuit the plaintiffs will typically name the company principles, and try to pierce the corporate veil to assess the liability directly to the officers and directors. Consistent use of formal procedures can provide the needed protection.

Disclaimer: This is not legal advice. Seek competent legal counsel for both general corporate and SEC related issues, which are far more extensive than these best practices.

Different Types of Corporations

In the balance of economics, the incorporation can not only be a beneficial decision, it can also be the demise. Certain aspects should be taken into consideration before even starting the process, including which direction to go. As the owner of a company you need to be willing to take sensible risks to continue your movement forward.

Let’s explore the five main types of corporations. On each, we will discuss their pros and cons. What liability risks each type offer, and where you fall in regards to taxes on each.

S Corporation

In the very basic of terms, an S Corporation is a company that has decided to use Sub-chapter S of the IRS Code as proposed in Chapter 1. This means the corporation does not pay income taxes. They in turn divide all profit and losses among their shareholders who in turn must report it on their income taxes.

From the stand point of taxes, you immediately limit the amount of taxation your company will receive. Unless you also classify yourself as a C Corporation, mixing both of these puts you into a double taxation bracket that will become costly for all parties involved. This is largely due to your profits being taxed and then your shareholders profits being taxed as well.

If an S Corporation has employees, as opposed to independent contractors, they are required to still pay FICA taxes on the employee’s payroll. The employee must still pay all required State, County and Federal taxes as required by law.

Since the S Corporation does not have to pay taxes on its profits, the burden remains on the shareholders of the company. The largest portion of which is the owner or co-owners of the company. So if you own 50% of the available shares, you will be required to pay 50% of the profit or loss tax on your company for the year.

Here are some key factors you must keep in mind if you are choosing to become an S Corporation:

You must be eligible to claim S Corporation Status. Which means you must be a domestic corporation or be a registered LLC. Only one stock class is allowed. The maximum number of shareholders your company can have is 100. (Spouses can be claimed as a single shareholder, as can direct family members that are descended from a common ancestor. They in turn have to agree to this classification however.) All shareholders must be U.S. Residents and must be natural people. You cannot have shares to corporations or other companies, with a few minor exceptions. Such as a 501(c) (3) corporation. Every profit or loss should be applied proportionately to each shareholder. For example, if you make a $500 profit, a person with 25% interest in the company would receive $125.00.

Outside of the tax benefits you should also remain aware of the liability that an S Corporation carries. Although it is classified as a company where Shareholders have limited legal liability, it doesn’t mean it is completely free from legal liability.

They are still responsible for the company based on their share percentage in the following circumstances, and have the potential to have their loss exceed if the following are found:

A Court determines the company is fraudulent. Corporate formalities have been neglected. Starting capital must have been enough for initial success. Personal assets have been added to cover expenses.

All officers, employees, agents and directors of the company are help personally responsible in the events that any liability arises as a result of their services. However, certain individuals in those categorizes can get indemnified for a cost. It will however only cover costs and expenses that arise from certain tasks. It does not remove legal responsibility.

Additionally, the company as whole can be protected from one person’s mistakes through insurance several companies offer in regards to liability. Any company dealing with potential bodily injury should register for insurance.

C Corporation

Next, we will look at C Corporations. In very basic terms, A C Corporation is a company that is designated to be taxed under Sub-chapter C of the IRS Code. A majority of companies act as C Corporations. If you miss the minimum requirements of an S Corporation by one qualification, it is typically where your company fits best.

The main difference between the C Corporation and the S Corporation is the number of individuals allowed to “own” the company. Meaning you can have more than 100 shareholders.

Additionally, other corporations can own shares in the C Corporation, as well as foreign and domestic shareholders. This is considered a universal shareholder account. But unlike an S Corporation, the C Corporation is taxed on its profits. In turn the Shareholders are taxed on their earnings after that.

However, before a C Corporation can be formed, the following steps must be done: A Corporation Name must be established based on State Rules. All Director Positions must be filled in advance. The Articles of Corporation must be completed with the fees posted. An approved corporate bylaw must be completed with a plan to follow. One initial meeting must have occurred with the board of directors. Stock Certificates must have been issued for the initial owners. License and Permits must be obtained and approved. You must keep records of annual reports and meetings on file at all times.

Liabilities for a C Corporation are similar to the S Corporation.

Limited Liability Company (LLC)

In the most basic of concepts, this is a company is a partnership company with corporate elements blended in. This type gives little liability to the actual owners of the company. In reality it is also not an actual Corporation, rather it is an unincorporated association. While you are protected from most liabilities that arise, any fraudulent or misrepresentations are not protected as determined by a court of law. This also means any individual hiding behind an alter ego.

Most LLC can operate with the tax rules of either an S Corporation or a C Corporation depending on how the owner(s) prefer to have their income handled. Ideally handling it as an S Corporation provides the best solution for most individuals considering a LLC when it to taxes. So a benefit is the pass-through taxation available.

The liability on a LLC is a little stricter than those of the corporations as well. While personal property cannot be seized for failure of the business to pay, the limited liability is only from a financial stand point. The following items are your biggest concerns of liability. The company results in bodily harm of any individual. You personally guarantee a loan for the company. Taxes for employees are not paid that you have withheld. Any illegal or fraudulent activity. Using the LLC as an extension of your personal affairs.

Sole Proprietor

This is the most simple of business structures. A sole proprietorship is an individual that is the business entity. This means there is no legal distinction between the individual and the company. Any profit or loss of the company is the tax responsibility of that individual, and they are responsible for all legal instances that arise as a result of their business.

A benefit to these types of business is they are very easy to start up. There are minimal regulations, and the owner has more of a say in how the company is run. However, it can be a financial burden for anyone attempting to run the company.

Most banks tend to shy away from loaning to sole proprietors, as they don’t tend to be as successful as major corporations. Since the owner has the financial backing for the company they are legally responsible for all financial loans associated with the business.

Limited Liability Partnership (LLP)

Simply put this is a partnership where each of the partners has a limited responsibility in the company. Depending on what State you are opening one of these companies will determine the maximum number of partners you may have.

None of the partners in a LLP are responsible for the actions of the other partners, thus liability remains on a single partner for their business. However, as a whole they must elect one individual who maintains unlimited liability for the Corporation as a whole. At the same time, each of the partners runs the business together as a whole.

All profits in a LLP are divided among the partners evenly, and they are responsible for income tax depending on the amount of income.

As a result of Limited Liability Partnerships in the United States, the Uniform Partnership Act was created to help govern the LLP as it moved across States.

Nevada Corporation

Nevada is different from other States in several ways when it comes to a corporation. The legal system here offers you the ability to allow the board of directors to run your company while protecting you without piercing the corporate veil. There are numerous laws protecting businesses in Nevada that aren’t seen in other States.

No matter where in the country you operate, if you are incorporated in Nevada you are protected by Nevada laws if anyone attempts to pursue legal action against your company. Nevada’s law is very directly beneficial to the corporation, which has many safeguards in place to prevent costly unwarranted lawsuits to occur.

Outside of the $200 Business License Fee in Nevada you will not be charged franchise tax, corporate income tax or personal income tax by the State. This means outside of federal tax obligations you will have no additional tax liability.

However, crime especially theft is higher statistically in Nevada. As a result cases of employee theft and fraud are among the highest of anywhere else in the United States.

Delaware Corporation

Forming a Corporation in Delaware is a wise decision. As over 60% of the major Fortune 500 were incorporated here, you can imagine the stable economic situation available. This is a place to thrive and build your company.

With that in mind the legal system is also setup to understand the Corporation laws more than any other state. This will provide fair and quick trials if anything goes before a judge in regards to your corporation. In fact, Delaware has created a Delaware Court of Chancery to handle all of these issues. They handle all the proceedings that occur as a result of business practices.

Another benefit, Delaware has many of the major credit card banks that relax on the interest rates provided here for corporations. You will of course have to use banks that are created under Delaware Law and not Federal Law to receive these benefits.

You also receive the internal affairs doctrine protection. If your business is created in Delaware you are protected by the laws of Delaware even as you expand across the country. Thus making any company especially a credit repair company even more protected in this State.

Best of all there is no income tax in Delaware. While you still have Federal Taxes, Delaware does not tax on income. So you end up with more profit from your income.

On the flip side of all this, Delaware does tax heavily on bank items. Interest on bank accounts and banking items are taxed higher here than anywhere else in the country. Another negative item is you are taxed heavily on any unclaimed services or property in regard to your business. This includes unused gift cards and other items.

If your company becomes a franchise, you are taxed a heavy franchise tax. This is to discourage existing corporations from trying to pull into the economy to catch a break.

With the information provided, you should be able to make a reasonable and sound decision on the best area to start your new business. Backed with information, both in the realms of pros and cons, you should be able to decide which business is right for you to begin. An attorney that specializes in business law will also be able to offer you fine tuned details on what route would be best for you as well. As all factors of a business have different items to consider.

Insider Secrets about Corporations: Or, Why Should I Incorporate?

-“Why should I incorporate? I can just do this business as a sole proprietor, right?”

-“Isn’t it complicated and expensive to form a corporation?”

-“I run my business with my spouse, and we have a partnership. Why would we need to have a corporation?”

These have to be the most frequently asked questions that I–and my own financial and legal advisors–get from our clients. The vast majority of people who operate small business or home-based business are sole proprietors or mom-and-pop shop-type partners. Yet, leading authorities on small business estimate that at least 90% of all small business and home business entrepreneurs would benefit from incorporating and using a corporation as an essential component of their overall business structure.

If this is true, why do so many entrepreneurs elect to operate as sole proprietors and general partners anyway? And why would you be better off incorporating?

The answer to the first question is usually either (1)ignorance of the tremendous risks of operating in this manner or (2) lack of familiarity with corporations and other legal entities and the ease with which they can be established. I should add that if the sole proprietorship is perilous, the partnership is more than twice as bad. This is because the partnership is by default a general partnership, in which each partner is responsible for all actions of the company, including decisions made by the other partner in which she did not participate. Now that’s frightening!

To answer the second question, we must first establish what a corporation is precisely. A corporation is an artificial legal entity that is separate from its owner/shareholders in the eyes of the law. The wealthy have learned that there are at least three major advantages that make the corporation an
essential component of your business structure.

1. Asset Protection.

The single most important benefit of the corporation is protection it affords for your personal assets.

The corporation is created when you file appropriate documents–“Articles of Incorporation” in the United States–to the appropriate state legal authorities. A corporation cannot be formed through some private agreement between the parties who elect to form it. It can only come into being by the state in which it is formed creating it, and it has the rights and obligations established by the laws of that state.

Most important here is the notion of the corporate veil–this is the shield that separates your business assets and activities from the private person and assets of the owner/shareholder(s). Because the corporation is a separate legal person, if you are a consultant or translator, for example–or own a small store–and someone claims that that they have suffered injury from your business (say, from a poor translation or a slip on your wet floor), and files a lawsuit, only the assets of your business are in jeopardy. The claimant cannot touch your personal residence or your automobile if these are owned by you and not your corporation.

There are significant differences among individual states and the degree of protection that they afford to the corporate veil. In California, for instance, there are a number of occasions–too many for comfort–in which the corporate veil has been pierced, thus allowing financial predators to seize the personal assets of an entrepreneur. This is almost never happened in Nevada, making it the state of choice for entrepreneurs seeking asset protection.

We will be devoting a separate article to the Nevada corporation in depth in a future issue of this eNewsletter. It is important to note for now that an additional advantage of the Nevada corporation for many is that Nevada has no state income tax. If you use a Nevada corporation to conduct business in your own home state outside Nevada (such as California, our own home state), you may still be subject to state income tax. Because of the superior asset protection afforded by the Nevada corporation, however, it may still be worth while for you to establish a Nevada corporation. Large numbers of entrepreneurs from other countries as well as other states establish Nevada corporations for precisely this reason.

2. The S Corporation versus the C Corporation: Know Which is Right for You

The issue of the personal service corporation only comes up with respect to the C corporation. The other type of corporation is an S corporation, which, like the limited liability company and the limited partnership is a pass-through entity. That is to say that the corporation is itself not taxed as an entity–instead the net income passes through to the shareholders (such as a husband and wife), and is taxed on the individual tax returns of the shareholders/owners.

There are situations in which establishing an S corporation would be preferable to using a C Corporation. If you have significant income from a job, for example, and you anticipate significant losses in early years and you don’t anticipate that your business will earn over $150,000, an S corporation will be your best choice. However, there are limitations on who can be members of an S corporation, and there are limits on employee benefits in an S corporation.

A sophisticated business structure will probably make use of both the C and the S corporation. On the other hand, because of the nature of corporations, you will never want to use either type of corporation to hold real estate. Instead you will want to use a limited liability company or a limited partnership. However, if you are a real estate investor, there might still be room for an S- or C-Corporation in your overall business structure. For example, a corporation could be used to manage your properties held in another entity.

Or–and this is a strategy that could be used for conducting various sorts of business-the corporation could be part of another business entity. For example, if you wish to operate a limited partnership, you will need to have a general partner. But the general partner is responsible for all decisions made and all liability resulting therefrom–the general partner, in short, has unlimited liability. Thus, an intelligent option is to use an S- or C-corporation to be the general partner. This way you have a general partner with the limited liability associated with the corporation.

3. Know How to Manage Your Corporation Properly to Keep the Corporate Veil Intact

Regardless of where you establish your corporation, you will need to make sure that you observe appropriate formalities–otherwise your corporate veil can be pierced very easily, thereby defeating the entire purpose of setting it up. Even if you have an accountant who handles your bookkeeping and tax returns, it remains your responsibility to assure that you are doing this correctly.

This involves holding regular meetings and maintaining minutes in your record book, issuing stock certificates, and other formalities.

The Personal Service Corporation

A final issue that may arise, particularly for independent consultants, translators, and other professionals, concerns the “Personal Service Corporation.” There are two separate categories of professionals who may be affected by this problem: Those, such as lawyers, accountants, psychologists, and health care professionals, who are required by their state laws to incorporate as professional corporations. These corporations are automatically classified by the IRS as personal service corporations.

In addition, the IRS has broadened the definition of “personal service” to include any work, such as translation or consulting, that is personally rendered by the owner/shareholder. This is of particular concern if you are operating on your own as an individual or as a couple. If 95% or more of your earnings come from work in that personal service activity, the corporation becomes qualified as a personal service corporation.

The reason that this is of concern is that a personal service corporation incorporated as a C corporation is subject to a flat 35 percent tax rate and to a lower ceiling ($150,000) for application of the accumulated earnings tax (normally $250,000). However, this is not an insurmountable obstacle to enjoying the benefits of incorporating:

1. First, the other advantages of incorporating still render the C corporation preferable to operating using another structure, such as the sole proprietor. It may be especially attractive if otherwise a high earning couple might be subject to a higher tax bracket.

2. Secondly, it is possible to structure your activities so that more than 5% of the activity is derived from work that falls outside the scope of personal services rendered by the owner/shareholder. For example, a translator or consultant might have a branch of the business involved in network marketing–as a medical professional might have a health food store or other income producing activity–so that the corporation is no longer qualified as a personal service corporation.

As you can see, the corporation is an extremely valuable tool, one that the wealthy have used extremely effectively. If you are operating as an independent entrepreneur and are not using a corporation or the popular alternative of the limited liability company, you are most likely handicapping yourself, limiting your profitability and paying excessive taxes. With the resources that we have available today, especially over the internet, there is no reason that the average individual cannot easily begin to take advantage of this valuable tool. We currently have 3 entities that we formed ourselves and that cost us just the cost of the various resources that we purchased plus the filing fees required by the State of California and postage to get these set up. And we have made sure to obtain the proper forms through the sources we list on our Resources page so that we can maintain the legality of these entities.

“Can’t I wait and start out as a sole proprietor or partner and incorporate later?” we are often asked.

Certainly, if you don’t mind exposing all your personal assets to risk, paying higher taxes, and finding yourself more likely to be subject to an IRS audit. Some people prefer to do things the hard way–but, armed with the right information and resources, there’s no reason why you should have to.

Even if you decide to allow a tax attorney to help you with the formalities, it is better to do so armed with the knowledge you need to judge whether the recommendations she makes are in fact in your best interest.

At the very least, you’ll know enough to head immediately for the nearest exit if any “expert” you consult tells you that you “don’t need” to establish a legal entity to run your business.

Copyright 2006 Azur Pacific Associates

Corporate Law Adviser – Justification of Criminal Sanctions For Violations of Corporate Governance


1. Corporate governance is concerned with the separation of ownership and control that results when a company is publicly listed and, therefore, has too many owners who cannot all control the company at once, and as such, they hire professional managers to do so. It has been defined, thus:
“The system through which those involved in the company’s management are held accountable for their performance, with the aim of ensuring that they adhere to the company’s proper objectives”.

It is generally accepted that the law plays a key role in corporate governance particularly in the provision of shareholder protection and the reduction of expropriation that is the result of the separation of ownership and control. However, on the importance of role of criminal law in enforcing good corporate governance there are more than one view. Effectiveness of criminal sanctions in deterring corporate governance violations.

2. In order to deter certain undesirable conduct, the criminal law has traditionally employed such sanctions as imprisonment, fines, and the stigma of criminality. While the effectiveness of these sanctions in criminal law generally has been debated, it has been persuasively argued that they can effectively deter corporate crime. Since corporations are primarily profit seeking institutions, they choose to violate the law only if it appears profitable. Profit maximising decisions are carefully based upon the probability and amount of potential profit, so a corporate decision to violate the criminal law would generally include a calculation of the likelihood of prosecution and the probable severity of any punishment. Making these costs sufficiently high should eliminate the potential benefit of illegal corporate activity and, hence, any incentive to undertake such activity.

2.1 Improper corporate conduct could be deterred by applying criminal sanctions either to the corporation itself or to its officers and employees. A corporation cannot, of course, be imprisoned but there may be stigma of criminal label attached to it. Such stigma could influence corporate behaviour if it led to diminished profits.

2.2 A system of fines imposed on corporations should also adequately deter illegal corporate activity as long as the fines are large enough to force the corporation to disgorge all benefit gained from illicit conduct.

2.3 It is possible to deter corporate misbehaviour by applying criminal sanctions to individuals in the organisation. Since businessmen fear the stigma of criminality for both personal and economic reasons, such penalties might be effective deterrents. Indeed, the fear of criminal indictment or investigation, even in the absence of conviction, may effectively deter corporate officials.

2.4 Corporate civil sanctions and even individual civil fines will be inadequate when an individual is motivated to violate the law by reasons other than corporate benefit. He may seek, for example, to enhance his position within the corporation or even to use his position to violate a law which he believes is unjust. Thus, any additional deterrence which is needed to supplement a system of civil fines could only be obtained by imposing criminal sanctions on such blameworthy behaviour by individuals.

2.5 Criminal law also empowers other law abiding individuals – whether the Board of directors, senior management, or other professionals – to stand up to less well intentioned colleagues or, at a minimum, to resist going along with misconduct.

2.6 The survival and long-term profitability of corporations is no longer a private interest which merely affects those who deal with the corporation at a primary level, for instance investors, but also a public interest affecting the welfare of stakeholders such as employees to whom it provides jobs and pensions. The Government, therefore, has a responsibility to ensure that employees as well as other stakeholders of the corporation are protected from the fraudulent acts of managers who do not act in the best interests of the company. The success of the corporation is, therefore, a public interest that, to a certain degree, ought to be protected through State regulation.

2.7 Research has confirmed that criminal sanctions are the only mechanism that can protect investors from large scale fraud or theft. Every country uses harsh criminal punishments to deal with cases like Enron and Parmalat. This suggests that criminal punishment is a generally accepted way of protecting shareholders from expropriation and risk-taking in corporate governance.
Dangers in the application of criminal sanctions

3. Some commentators have expressed doubts about the effectiveness of criminal sanctions for violation of good corporate governance. They believe that the criminal sanctions to corporations and individuals are ineffective deterrents to violations of good corporate governance norms.

3.1 The use of criminal sanctions to regulate business activities is generally perceived as being an over-reaction that is likely to discourage directors from taking the risk that is necessary to run a business, thereby slowing down economic growth and interfering with profitability.

3.2 The use of criminal sanctions is an expensive way of enforcing regulation, which has a high burden of proof and as such is prohibitive to those seeking remedies for expropriation, as shareholders are required to demonstrate the director’s culpability.

3.3 Criminal sanctions cannot provide restitution to shareholders and employees who have lost their jobs.

3.4 The difficulty in pinpointing responsible persons in the corporate structure lessens the likelihood that a businessman will in fact be convicted of criminal activity. Thus, corporate crime may not be adequately deterred by criminal sanctions designed for individuals.

3.5 The criminal law is being used to regulate behaviour that is not in and of itself morally blameworthy and in some cases imposes sanctions in the absence of fault. The use of criminal sanctions for purely regulatory purposes represents a severe departure from the traditional aims of the criminal law-deterrence and retribution.

3.6 The type of activity which results in criminal liability in the corporate setting is different from other criminal activity; the primary concern is often with the supervisors and managers rather than with the direct actors. Thus, corporate officials may be held liable for acquiescing in, or for recklessly or negligently tolerating, the illegal activity of subordinates.

3.7 Criminal sanctions are imposed on a corporation, an artificial entity which can possess no state of mind, in the absence of some theory which ascribes fault to the corporation itself, rather than only to its officers, directors, and employees, the concept of mens area in criminal law is itself challenged.

4. Given the range of policy issues raised by corporate governance, and variety of industries and firms involved, government decision makers will need to understand thoroughly the effects that different regulatory actions can have. There are arguments both in favour and against the use of criminal sanctions to be imposed against the violators of corporate governance norms. As per the existing laws of our country there are various provisions fixing the criminal liability of the wrongdoers in cases of fraud and misconduct, etc. Indian Penal Code affixes penal liability for any fraud or breach of trust committed by the companies and even various individual sections of the Companies Act impose penalties for violations of certain norms which are part of good corporate governance.

But these provisions have merely remained on paper and their implementation has often remained a big headache for the government. However, scandals and scams such as Satyam’s case have been a reality even in the present times. Even though section 23E of the Securities Contracts (Regulation) Act, 1956 imposes penal liability on the company for any violation of the condition of listing agreement, which includes clause 49 of the Listing Agreement and relates to corporate governance, but the fact remains that such liability is imposed on the company itself which directly affects the stakeholders in the company and are in fact the real victims of violation of good governance.

Corporate Bankruptcy – Protecting the Owners Or the Business?

For purposes of this article, usage of the word corporation also includes partnerships and LLCs.

Many times, corporate owners looking into bankruptcy aren’t actually concerned with the effect on the corporation, but on themselves personally. This article examines the fallacies and misconceptions held by many such corporate owners.

There are two bankruptcy choices for a corporation: Chapter 11 or Chapter 7.

Chapter 11 allows the business of the corporation to continue and reorganize the debts by proposing a repayment plan to creditors. Creditors get to vote for or against the plan. A full treatment of Chapter 11is beyond the scope of this article.

Chapter 7 is a liquidation of the corporation’s assets. When a Chapter 7 case is filed a corporation must stop doing business, if it is still operating. A Trustee is appointed to sell the corporate assets and disburse the proceeds in accordance with statute to creditors. It is very important to understand that corporations do NOT receive a discharge of debts in a Chapter 7 case.

Many corporate owners are confused about this basic truth. The confusion apparently stems from the fact that many business owners do not understand that a corporation is a separate legal entity (which is, presumably, why it was formed to begin with). Whether or not a corporation files bankruptcy has nothing to do with any personal obligation the owners or officers of the corporation may have. For example, if the owner of a corporation signed personal guarantees on certain corporate debts, or has personal tax liability for corporate tax obligations (such as employee payroll trust fund taxes), that obligation does not disappear unless and until those debts are paid. So unless there are enough assets available in the corporation to pay all those debts, the owner will still be obligated on those debts for which they are personally liable regardless of what the corporation does. Filing bankruptcy for the corporation does not affect their individual liability either way.

So, in short, whether or not a corporation receives a discharge of debts is a big “who cares?” because it simply doesn’t affect anything. If a corporation is going out of business, it simply doesn’t matter whether the debts are discharged or not because the corporation’s creditors will just sue the corporation and recover against whatever assets of the corporation are available and that does not affect the principals of the corporation.

Most of the time, these corporate owners are actually looking to do is file a bankruptcy for themselves personally. In such cases, they should consult with a bankruptcy attorney about an individual bankruptcy case.

But, there are times where filing a Chapter 7 case for a corporation is beneficial such as where the corporation has assets and wants to stop doing business. In such a case, having an independent Trustee appointed to sell and disburse assets to creditors can eliminate that responsibility for the owner(s) of the corporation and releases them from liability for not having properly disbursed corporate assets and winding up the corporation properly. this satisfies the fiduciary duty all corporate officers have to the corporation’s creditors when a corporation becomes insolvent.

Another benefit of filing a Chapter 7 for a corporation is that it puts all the corporation’s creditors on notice that the business is terminating and whatever assets may be available will be distributed through the bankruptcy, and that will be all. Thus, there would be no reason for the creditors to sue the corporation post-bankruptcy, whereas if a bankruptcy is not filed, the owner of the corporation may have to continually appear in court to inform the judgment creditors that the corporation is no longer operating and has no assets.

It can help when you’re consulting with a bankruptcy attorney to understand the basic concepts above.