IB Portal DOES NOT offer advice on forming a corporation. For advice on which structure to choose, you should contact an attorney or accountant. The information contained on this website is meant to be used as a guide for the initial stages of getting your new Introducing Brokerage off the ground. However, it is important to conduct your own due diligence and set up your business in the most conforming way while the foundation for your profitable endeavor is built.
Important: It is not required to set up a company in order to become an Introducing Broker with an FCM. IB’s have the option to set up the Introducing Broker relationship as an individual or form a new entity, registering as a company.
When an Introducing Broker forms a corporation there is three different options to choose from: C corporation, S corporation, and Limited Liability Company. Deciding on which is best often depends on the goals you have for your business. Below we have examined the different types of corporations, including the advantages of each of them.
Limited Liability Company (LLC) Limited Liability Company (LLC) is a business entity that offers limited liability protection and pass-through taxation. An LLC can be managed by either the members or by managers.
Advantages of an LLC:
LLCs allow for pass-through taxation
Members on an LLC are not typically held personally responsible for the debts and liabilities of the business
LLCs generally have no ownership restrictions <
LLC members have flexibility in structuring the management of the company
An LLC does not require as much annual paperwork, or have as many formalities, as a C corporation or an S corporation
Written consent of LLC members must be obtained prior to increasing ownership in the company
Potential customers may perceive an LLC as a more professional entity than a sole proprietorship or partnership
C corporation (Corp.)
The standard corporation, also called a C corporation, is the most common corporate structure. The corporation is a separate legal entity owned by the shareholder(s). The shareholders cannot be held personally responsible for the debts of the corporation. Typically, the shareholders’ personal liability is limited only to the amount the shareholder invested in the company.
Taxation implications are the most significant consideration when deciding which corporate structure to choose, C Corp., S Corp., or LLC. Shareholders of C corporations may experience double taxation when corporate profits are taxed at both the corporate and individual levels. Profits of the business are reported and taxed at the corporate level first. If the corporation distributes any profits to the shareholders in the form of dividends, the shareholders must report the dividend as personal income and are responsible for taxes as an individual.
Advantages of a C corporation
Shareholders of a C corporation are typically not personally responsible for the debts and liabilities of the business
C corporations can have an unlimited number of shareholders
Ownership of a C corporation is easily transferable through the sale of stock
C corporations have unlimited life extending beyond the illness or death of the owners
Additional capital can be raised by selling shares of the C corporation's stock
Potential customers may perceive a C corporation as a more professional entity than a sole proprietorship or partnership
C corporations are generally audited less frequently than sole proprietorships
Certain C corporation business expenses may be tax-deductible
Forming a C corporation can result in self-employment tax savings
C corporations may provide a number of income and tax savings
To create a C corporation the proper formation documents, typically called the articles of incorporation or certificate of incorporation, must be filed with the appropriate state agency and the necessary state filing fees paid.
S corporation (S Corp.)
An S corporation is a standard corporation that provides a special tax status with the Internal Revenue Service (IRS). One reason so many small business owners choose to elect S corporation status with the IRS is that the S corporation’s special tax status eliminates the possibility of double taxation common to C corporations. With S corporations, a corporate income tax return is filed but no tax is paid at the corporate level. Instead, the profits or losses of the corporation are “passed-through” to the shareholders and are reported on their individual tax returns.
Advantages of an S Corporation:
S corporations avoid the possibility of double taxation on profits
Shareholders of an S corporation are typically not personally responsible for the debts and liabilities of the business
Ownership of an S corporation is easily transferable through the sale of stock
S corporations have unlimited life extending beyond the illness or death of the owners
Additional capital can be raised by selling shares of the S corporation's stock
Potential customers may perceive an S corporation as a more professional entity than a sole proprietorship or partnership
S corporations are generally audited less frequently than sole proprietorships
Certain S corporation business expenses may be tax-deductible
S corporations can result in Self-Employment Tax Savings
S corporations may provide a number of income and tax savings
To create an S corporation the proper formation documents, typically called the articles of incorporation or certificate of incorporation, must be filed with the appropriate state agency and the necessary state filing fees paid. After the corporation is created at the state level, a timely filing with the IRS of Form 2553 is necessary to elect S corporation status. The election process typically takes approximately 60 days, according to the IRS instructions.
Forming in Delaware
As you are evaluating where to form your corporation or LLC, you may be considering Delaware. Maybe you’ve heard that over half of the public companies and Fortune 500 companies are incorporated in Delaware. While this is true, you should closely assess whether Delaware is the appropriate choice for your particular business.
For large businesses, there are a number of reasons why it is advantageous to incorporate in Delaware; however, these reasons may not be as beneficial to smaller businesses.
Common Advantages of Forming in Delaware
Delaware’s business law is one of the most flexible in the country.
The Court of Chancery focuses solely on business law and uses judges instead of juries.
For corporations, there is no state corporate income tax for companies that are formed in Delaware but do not transact business there (there is a franchise tax, however).
The taxation requirements are often favorable to companies with complex capitalization structures and/or a large number of authorized shares of stock.
There is no personal income tax in Delaware for non-residents.
Delaware does not require director or officer names (corporations) or member/manager names (LLCs) to be listed in the formation documents, thereby providing a level of anonymity.
Shareholders, directors and officers of a corporation or members or managers of an LLC need not be residents of Delaware.
Shares of stock owned by persons outside Delaware are not subject to Delaware taxes.
Typically the court system is not a primary factor evaluated when choosing where to form a business; however the Delaware court deserves a special mention. The Delaware Court of Chancery is often considered an advantageous venue for shareholder lawsuits. As mentioned above, the Court of Chancery hears only business cases and uses only judges, no juries. For large corporations with thousands or hundreds of thousands of shareholders, this can be beneficial.
For small corporations with only a few shareholders, shareholder suits are unlikely. Also, undertaking a case in the Delaware courts may place more of a burden on a small business versus undertaking a case in a court in the company’s home state. Therefore the Court of Chancery does not often hold the same advantages for small businesses that it does for large public companies.
Another factor to consider if you are evaluating forming your corporation or LLC in Delaware is whether you need to foreign qualify your company in another state.
Corporations and LLCs are considered "foreign" in every state other than their state of formation. Foreign qualification registers a company to transact business in a state other than the home state.
Corporations and LLCs formed in Delaware often need to foreign qualify in their home state, since they have a physical location and employees there. If you are considering Delaware as the state of formation, you should include the initial and ongoing costs of formation and also foreign qualification costs in any other state(s) in your evaluation. For questions on which state is best for the formation of your business, please seek the advice of an attorney or an accountant.
Forming the Company
Once IBs determine which corporate structure is the best suited for their business, IBs can 1) form their company themselves, 2) utilize the services of an attorney or accountant or 3) form the corporation using an online service such as Bizfilings.com.
1) If the IB is forming the company in his or her resident state, you will need to contact the Division of Corporations. Division of Corporations for your respective State can be found online, simply by searching (Google) for “Division of Corporations” “State”. For example, if you would like to incorporate in the State of New York, Google “Division of Corporations” “New York”. You will arrive at http://www.dos.state.ny.us/, State of New York’s Division of Corporations. You will find all the required information, including the advantages and disadvantages of the types of corporations, to form your own company without the assistance of a 3rd party.
A corporation may be formed by filing a Certificate of Incorporation pursuant to Section 402 of the Business Corporation Law. The Department of State has prepared a booklet entitled "Forming a Corporation in New York State." The booklet is intended for use by first-time domestic incorporators. It includes answers to commonly asked questions, names and addresses of other government agencies that a corporation may need to contact, instructions for completing a Certificate of Incorporation, tax information, and fee information. The booklet has been designed to make the filing of a Certificate of Incorporation as easy as possible.
Section 301 of the Business Corporation Law includes provisions relating to the use of certain words and phrases in the name of the corporation. For example, the name of the corporation must contain the word "Incorporated" or the abbreviation "Inc." or one of the other words or abbreviations in Section 301 which are indicative of corporate character. In addition, certain words and phrases, such as “Financial” or “Bank” also require consents and approvals from other agencies prior to filing the document with the Division of Corporations. If there is any doubt as to what, if any, consents or approvals may be required, the Division of Corporations or the agency in question should be contacted, prior to submitting the document for filing to the Division of Corporations.
For New York, you need a completed Certificate of Incorporation, together with the statutory filing fee of $125, plus the applicable tax on shares pursuant to Section 180 of the Tax Law, should be forwarded to the Department of State, Division of Corporations, One Commerce Plaza, 99 Washington Avenue, Albany, NY 12231. When submitting your completed Certificate of Incorporation, you may want to obtain a Certified Copy and Certificate Under Seal. Both will require additional fees. Many banks will require Certificate Under Seal and Certified copy of your Certificate of Incorporation or for other states, Articles of Incorporation.
The Department of New York State's Division of Corporations accepts MasterCard, Visa and American Express for the payment of fees and services. Requests for copies of documents, certificates under seal, name availability, service of process and all documents submitted for filing may be paid by credit or debit card. The benefit of forming a corporation yourself is the cost savings. In the example above, including the additional costs for Certified copy and Certificate Under Seal, the total cost for Certificate of Incorporation would be $160 USD. The cost to form a corporation varies from State to State. However, you should realize the cost will be less than a few hundred dollars if you incorporate yourself.
With the exception of service of process, which must be made in person, all documents submitted for filing and orders for other services may be faxed or otherwise delivered to the Division of Corporations. To pay for a fee by using your credit or debit card when not appearing in person, simply complete and sign the Credit Card / Debit Card Authorization Form [(43.9KB PDF Form) and submit it to the Division of Corporations with your request. You may fax a document submitted for filing to the Division of Corporations at (518) 474-1418. Requests for copies of documents, certificates under seal and name availability may be faxed to (518) 473-1654.
If you’re filing in the State of New York, visit the Division of Corporations website, http://www.dos.state.ny.us/, for more information. The contact information is below. The cost to file a Certificate of Corporation (Business Corporation or Limit Liability Company) is $125. Requests for copies of documents, certificates under seal and name availability is available at an additional charge. The State’s Division of Corporation will charge you to check for name availability (i.e. New York State is $20 per request), however, if you access the link above, you can see if your future company name is already in use. For specific information, i.e. Frequently Asked Questions, visit http://www.dos.state.ny.us/corp/bcfaq.htm#creditcrd and http://www.dos.state.ny.us/corp/buscorp.html#certinc
The benefit of using an attorney, accountant or 3rd party agent is professional guidance and the preservation of your time. Hiring an attorney or accountant will be the most expensive option, costing as much as $1,000 USD. Online agents such as Bizfilings provide a low cost and efficient solution to form your corporation. Essentially, BizFilings will act as your agent, prepare all documents and file them with the State in which you’re incorporating. In addition, depending on the level of service or “Formation Package” you elect, Bizfilings offers many useful products and options, such Corporate/LLC Kits, which include an embossed corporate seal with the name of your company imprinted, customized stock certificates, sample bylaws, meeting minutes, corporate documents, ledgers and resolutions. Packages range from $300 to $600. For more information, please access Bizfilings.
Once you have registered your company, the Internal Revenue Service (IRS) will send you an Employer Identification Number (EIN Number) or Tax ID. Typically, you will receive your EIN number via postal mail one to three weeks after your filing. However, it is possible to obtain your EIN number sooner by accessing IRS’s website. You will need your “EIN number” and “Certificate of Incorporation” or “Articles of Incorporation” to open a corporate bank account as well as register your company as an Introducing Broker with your Future Commission Merchant.
Employer Identification Number
An employer identification number or EIN, also often called the federal tax identification number, is the number used by the Internal Revenue Service (IRS) to identify a business. It is basically a Social Security Number for a business, and it must be included on all tax filings a business makes.
If you operated your business as a sole proprietorship or general partnership, your EIN was your Social Security Number. When you incorporate or form a limited liability company (LLC), you must apply to receive a new number from the IRS.
In order to obtain an EIN, Form SS-4 must be completed and filed with the IRS. Certain states also require corporations and LLCs to obtain a state tax identification number. To learn if your state requires this, you should contact your state taxation authority.
BizFilings has two EIN-related offerings. With the SS-4 Form Preparation Service, BizFilings will prepare this form on behalf of your business, and then send it to you for you to submit to the IRS. This service is included in our Standard and Complete Formation Service, or can be added to our Basic Formation service for $25.
With the EIN Obtainment Service, BizFilings will prepare form SS-4, submit it to the IRS, and obtain the number on behalf of your business. This service is included with our Complete Formation Service and can be added to our Standard Formation Service for $45, or selected with our Basic Formation Service for $70.
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