What is a Corporation?
A corporation is a limited liability business structure that is separate from its members, and allows them to act as a single entity, much like an LLC. Under the law, a corporation has many of the same rights and responsibilities as an individual and can loan and borrow money, hire employees, enter into contracts, have lawsuits filed against them and for them, and own property and other assets.
Starting a Corporation in New Mexico
The process for starting a corporation will vary from state to state, but many of the details are the same. In New Mexico, like most states, you’ll start by filing your Articles of Incorporation. This document should be submitted to the Secretary of State along with a $100 filing fee plus a one time $25 initial filing fee and must include the following information:
- Your business name that is not by anyone else in the state. It must include the word or abbreviation for, “corporation,” “incorporated,” or “limited”
- The number of shares you wish to start with
- A statement of the purpose of the corporation
- How long it will be in effect for
- The name and address of the registered agent who will be responsible for all state and legal correspondence
- Name of director(s) and incorporator (the person filing the articles)
In addition to the Article of Incorporation, you will also need to write your company’s bylaws, which are the governing rules of your organization. Although you do not have to file these with the state, New Mexico law requires you to have them on hand as internal documents. Bylaws cover items like how your stock will be treated and distributed, how company meetings will run, how records will be kept, how directors will be chosen and what their roles are, and how finances will be handled.
Can I start a New Mexico Corporation on my own?
It is not necessary to obtain assistance for starting a corporation, but can be helpful since the process is more complicated than an LLC or sole proprietorship. You can either obtain advice from a CPA, lawyer, or hire a professional registered agent. Hiring professional help can be especially helpful for writing comprehensive bylaws.
Why would someone want to start a corporation?
- Professionalism: As a corporation it will be easier to raise capital through investors, to obtain loans from a bank, and to establish credibility in the business sector.
- Tax Benefits: Corporations are eligible to receive tax deductions such as health insurance premiums, self-employment taxes, workers compensation, business expenses, and your business income will not be subject to Social Security and Medicare
- Limited Liability: Perhaps the biggest benefit of a corporation is its ability to protect its owners from any lawsuit or liabilities the business may incur. This lets the members share in the profits while not being personally accountable for its losses.
- Privacy: If you do not wish to be named as the owner of your corporation you can file anonymously or hire a registered agent to file your articles of incorporation.
Different Types of Corporations
available in New Mexico
An S Corp is taxed under Subchapter S and allows its shareholders to pass the company’s income and losses through their personal taxes. As such, the corporation itself is not taxed, rather the shareholders are. In this respect it’s more like a partnership or an LLC and is exempt from some corporate taxes. S Corps are capped at 100 shareholders and can only have one type of stock. In New Mexico, S Corps are required to pay a $50 franchise fee, and will need to file IRS form 2553 for this designation.
A C Corp is taxed under Subchapter C, and is taxed separately from its owners. There are no limits to the number or kind of shares, or to the number of shareholders. All income generated by the business is treated as a dividend for tax purposes.
The main difference between a nonprofit and a C or S Corp is that the revenue generated by the business is used for its charitable work or its public and social goals and is not distributed to its shareholders as profit. Any excess profit must be kept within the organization.
Advantages of New Mexico Corporations
- Separate legal entity: By creating a separate legal entity you protect the personal assets of your shareholders. This also makes transfers of ownership easier.
- Limited liability: The larger an organization gets, the more likely it is to be subjected to lawsuits and losses. Under the protection of a corporation, your members will not have to bear personal responsibility for these.
- Easier to attract investors: A corporate designation sets your business up as a reputable and serious organization. Banks and investors will be more likely to work with you.
- Capital: By buying and selling company stock, you will have more flexibility to access and leverage the capital your business generates.
- Tax Flexibility: Depending on your designation, your corporation can take advantage of certain tax deductions or exemptions.
Disadvantages of New Mexico Corporations
- Maintenance is Difficult: Although the initial filing is straightforward enough, there is a lot of work that goes into writing and enforcing your company’s bylaws, including appointing and overseeing a board of directors and allocating shares and profits.
- Potential Double Taxation: If you choose to incorporate as a C Corp, you will likely face double taxation, which means the company and you personally are taxed on the business’ profits.
- State and Federal Scrutiny: Because corporations are permitted to take numerous tax deductions, they are often subjected to more scrutiny by the IRS. This is especially true for S Corps since they are allowed to work as a pass through entity and some companies try to take advantage of this designation when they should be legally classified as a C Corp.
- Expensive: Starting up and running a corporation is often more expensive than an LLC. To set up and abide by bylaws, it’s often necessary to hire outside professionals like lawyers and CPAs.
Should You Start a Corporation?
Starting a corporation is a big decision to make for your business and one that should not be taken lightly. Furthermore, deciding which classification you take on - C Corp, S Corp, or non profit - can radically affect your tax structure.
Corporate status is a good idea for organizations who wish to protect the liability of their members, or who wish to expand their business and investor base. As always, it’s best to get professional legal and financial advice before deciding your designation.