Nevada State Corporation – The Number 1 Reason to Incorporate in Nevada

It’s Extremely Difficult for Anyone to Pierce Your Nevada State Corporate Veil

First, what exactly does “piercing the corporate veil” mean? When you form a corporation, whether it’s in Nevada, California, Texas or wherever, you must follow certain corporate formalities. Remember, a nevada state corporation can do everything you can do except act or think, so it does those things through your board of directors, officers and shareholders. If your corporation does not keep accurate records of meetings by minutes, and if the corporation commingles funds, it makes it easier for someone to pierce your corporate veil if the corporation is involved in a lawsuit.

Low capitalization is another reason why corporate veils get pierced. In some states, like California, we recommend that you capitalize your corporation with at least $1,000. If you don’t, it’s easier for someone to prove that you are simply the alter ego of the nevada state corporation (one and the same as the corporation), and then pierce your corporate veil! How does Nevada feel about this? Nevada is called a “thin capital state,” meaning you can form a corporation in Nevada for as little as $100. Also, Nevada has a certain attitude about piercing the corporate veil, which is why major corporations domicile in Nevada. Let’s explain.

The Nevada State Test – Trying to Pierce the Corporate Veil

First, in Nevada, anyone trying to sue you must pass a three-prong test. They must prove all three parts to pierce your corporate veil:
The corporation must be influenced and governed by the person asserted to be the alter ego.

There must be such unity of interest and ownership that one is inseparable from the other.

The facts must be such that adherence to the corporate fiction of a separate entity would, under the circumstances, sanction fraud or promote injustice.

The burden of proof for all three “general requirements” is on the plaintiff who is seeking to pierce the veil, and a failure to prove any of the three will result in your veil not being pierced! Essentially, Nevada says that unless they can prove fraud, your corporate veil will not be pierced. That is awesome protection.

Nevada State Corporation – Case In Point

The landmark case that proves this point is the case of Roland vs. Lepire (1983). We recommend that you keep accurate corporate records to protect your corporate veil, and make sure you have adequate capitalization as well. In Roland, the corporation had a negative net worth at the time of the trial so it was clear it was inadequately capitalized. On top of that, the corporation never held formal directors or shareholders meetings, never started or kept a corporate minute book, never paid dividends, and didn’t pay salaries to the officers or directors. On the other hand, the corporation managed to secure a corporate checking account, as well as a general contractor’s license and a framing contractor’s license, “both in its name”.

What happened? The court concluded that, “Although the evidence does show that the corporation was undercapitalized and that there was little existence separate and apart from [the two key shareholders]evidence was insufficient to support a finding that appellants were the alter ego of the corporation.” The Nevada Supreme Court has made clear that unless the plaintiff acting against you is able to meet the burden of proving that “the financial setup of your corporation is only a sham and caused an injustice, ” your veil is unlikely to be pierced.

The Nevada state corporation appears as an “Iron Fortress” to creditors. In fact, the corporate veil has only been pierced two times in Nevada in the last 23 years! And that was a case where the corporation was actually doing business in Nevada and had committed fraud against a Nevada resident.

S Corporation Versus Limited Liability Company – An Overview

One of the most important business decisions a business owner will make is to choose a legal entity through which to conduct business. Often times, the decision is narrowed down to two types of entities: (1) the California S Corporation (S Corp), or the California limited liability company (LLC). Both the California S Corp and the LLC provide varying levels of personal asset protection for the business owner, varying tax advantages and disadvantages, and varying complexity in the day to day operations of the business, amongst other differences. The purpose of this article is to highlight some of the key differences when making the choice between a California LLC or a California S Corp.

Important Considerations When Choosing a Business Entity.
Owners of newly formed businesses often find sorting out the differences between the two entities to be overwhelming. However, as a general rule, when deciding whether or not to organize as a S Corp or a LLC it is usually most productive to narrow the focus on three key areas that will be important considerations for a business owner:

  1. Limiting potential personal liability to the owners from the liabilities associated with the business, and the requisite formalities associated with maintain such limited liability;
  2. Limiting potential taxes associated with the business; and
  3. Addressing any other special circumstances applicable or important to the owners.

Achieving the Goal of the Owners with Minimal Compromise.
However, before addressing these three issues, it is important to first determine how many owners the new entity will have (referred to as “shareholders” in the context of an S Corp, and “members” in the context of a LLC). The number of owners is very important. Determining the most important consideration where there is only owner is relatively straightforward. However, in representations involving more than one owner, each owner will often have differing objectives or areas which they feel are the key priority for the business. For example, given two owners, the first owner’s priority could be to obtain certain tax consequences above all else, while the second owner may be more concerned with flexibility with respect to ownership interests, or the allocation of the businesses’ profits and loss. In this situation, it is usually best for the attorney to take a step back, look at the overall purpose of the owner’s business, and choose the entity which would best achieve the varying goals of the owner with minimal compromises.

An Overview of the California S Corporation.
An S Corporation is a legal entity which limits the potential personal liability to the owners from the liabilities associated with the business, provided that it is properly formed and maintained.

1. S Corporation – To Limit Liability, Respecting Corporate Formalities is Essential.
With regards to proper corporate formation, unfortunately I have seen too many instances where a corporation was initially formed for a minimal cost, by a non-lawyer, using an online service (who usually misrepresent the service they are offering), or by some other means, but then once the basic milestone of receiving the stamped Articles of Incorporation from the California Secretary of State is achieved, there is never any follow through with any of the other documents that are required under California law. The end result is that the corporation is improperly formed, and right from the onset, the owners have needlessly exposed themselves to liability in the form that at some point in the future, an aggrieved party may successfully “pierce the corporate veil“. What does this mean? It means that an aggrieved party may look through the corporation to the personal assets of the owner.

With regards to proper maintenance of a corporation, a California S Corporation must observe certain corporate formalities. In comparison to a California limited liability company, it is often thought that the S Corp has more burdensome maintenance requirements than the LLC. In other words, the S Corp is the more formal entity between the two.

For example, if the S Corp is chosen as the entity, in order to afford maximum limited liability protection (and avoid the potential for a piercing action): (1) the corporation should properly notice, hold and document annual meetings of the shareholders and directors, in addition to any special meetings of the board of directors necessary to authorize and affirm certain corporate acts, (2) the corporation should timely file all required documents required under applicable law; (2) the corporation should be funded with a sufficient amount of capital, and should not be inadequately capitalized; (3) the owners should keep the corporation’s corporate minute book in order and up to date, and should sign all documents where the corporation is a party, in their capacity as an officer or authorized agent of the corporation; and (4) corporate funds should never be mingled with other personal funds of the owners.

2. S Corporation – Tax Considerations.
In general, a S Corporation does not pay federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to the shareholders pro rata in accordance with their ownership interest. The shareholders must then report the income or loss on their own individual income tax returns (this form of taxation means makes the S Corporation a type of “flow through” entity). This flow through taxation of an S Corporation is different from a C Corporation, because there is only a tax at the shareholder level. The owners in a C Corporation on the other hand experience what is called “double taxation” in that the entity is taxed separately from the shareholders. In other words, first the corporation is taxed, and then the shareholders are also taxed.

Although the S Corporation’s avoidance of double taxation in the form of pass through taxation is often viewed as one of its primary advantages, one consideration that can be viewed as a disadvantage is that there are strict eligibility requirements for S corporations.

It is also important to note that similar to a LLC, the S Corp must pay an $800 California state franchise tax for the privilege of doing business in California. However, and one big advantage of the S Corporation is that it avoids the gross receipts tax of the LLC, in which gross receipts of an LLC over $250,000 are taxed.

3. S Corporation – Other Considerations.

Eligibility Requirements of the S Corporation.
For a corporation to be eligible for S status it must adhere to fairly strict shareholder requirements. For example, a S Corporation must limit the number of permitted shareholders to 100; the shareholders must be individuals who are United States citizens or legal United States residents (this means that another corporation cannot be a shareholder in a S Corporation), or the shareholder must be a certain type of qualified trust or estate. When there is a qualified trust that is a shareholder of an S corporation, each potential current beneficiary of the trust is treated as a separate shareholder. Related shareholders, whether owning shares directly or by deemed ownership as a beneficiary of a trust, may be treated as a single shareholder pursuant to family attribution rules.

Another very important requirement is that S Corporations are limited to only one class of stock, and in that regard are less flexible with respect to special economic terms that you would often find in a limited liability company Operating Agreement.

Management and Control of the S Corporation.
The three key categories concerning management and control in an S Corporation are the (i) Directors, (ii) Officers, and (iii) Shareholders. Corporations are managed by a Board of Directors, who appoint officers to run the day-to-day business operations of the corporation. The Officers (including a President, Secretary, and Treasurer) are considered agents for the corporation, and are granted with authority to bind the corporation. Shareholders (in other words, the owners) elect the Board of Directors, but have no right to participate in the day-to-day management of the corporation, unless elected as a director, or appointed as an officer. In a typical small business S Corporation, it is not uncommon to for a single individual Shareholder/owner to also serve as both an Officer and/or a Director (in addition to their ownership role as a shareholder).

Transfer Issues in a S Corporation.
In the context of a S corporation, ownership is evidenced by stock certificates, which must be issued to each owner as part of the corporate formation. Usually, significant changes in ownership in a corporation are memorialized in a Stock Purchase Agreement, Asset Purchase Agreement, or occasionally, other forms of acquisition or transfer documents. Whenever stock (sometimes referred to as shares) are transferred, it is always very important to thoroughly review the corporate documents to determine if the shares are bound any Shareholder Agreement (also sometimes referred to as a Buy-Sell Agreement) which may place limitations on transferability.

An Overview of the California Limited Liability Company.
Similar to the California S Corporation, a California limited liability company is a legal entity which affords its owners protection from potential personal liability associated with the business, but again with the proviso that such entity is properly formed and maintained.

1. LLC – Relaxed Requirements Compared to S-Corporation, But Don’t Get Too Relaxed.
With regard to formation, to form a California limited liability company, the owners must file Articles of Organization (as opposed to the Articles of Incorporation filed for a corporation), agree on key business points to be outlined in a company Operating Agreement, file a Statement of Information with the California Secretary of State, amongst various other requirements which are beyond the scope of this article. Unfortunately, too many times I have seen LLC company kits in my office where the Articles of Organization for the LLC were filed and then, not much else happened after that. In such cases, typically, the membership certificates are not issued, no Statement of Information was ever filed, and an inadequate “plain vanilla” (although the online service that sold it bills it as “custom”) Operating Agreement lies in the company kit, unsigned and untouched. The situation is compounded further when several years after formation a disagreement amongst owners arises about distributions or allocations, and the key business terms (that were to become a formal Operating Agreement) are instead buried in roughly outlined emails. Needless to say, this is not something you should let happen with your business.

With regard to maintenance, a California limited liability company is often thought of as having relaxed requirements with respect to formalities in comparison to a S Corp. Although meetings are not required, we suggest that the owner(s) still properly notice, hold and document meetings of the members to bolster the personal limited liability protection.

2. LLC – Tax Considerations.
For federal income tax purposes, by default, an LLC is treated by as a flow-through entity. This means, that if there is only one member in the LLC, the LLC is treated as a flow through entity for tax purposes, and profits and losses would be reported on Schedule C of the owner’s individual income tax return. In the event there are multiple members, the default rule is that the LLC is taxed as partnership, which is required to report income and loss on IRS Form 1065. Under partnership tax treatment, each member of the LLC annually receives a Form K-1 reporting the member’s distributive share of the LLC’s income or loss that is then reported on the member’s individual income tax return. It is important to note that an LLC may elect to be taxed in other ways that are beyond the scope of this article.

Similar to the S Corporation, a California LLC must pay the $800 California state franchise tax. However, one significant disadvantage for a business operating as an LLC is that it must pay an additional California tax on gross receipts over $250,000. This is an annual tax, and its effect can be seen in the table below:


California “Total Income”


$250,000 or more, but less than $500,000


$500,000 or more, but less than $1,000,000


$1,000,000 or more, but less than $5,000,000


$5,000,000 or more

In other words, depending on income, a California business operating as an LLC could be subject to an additional $11,790 tax which is not taxable to a S Corporation.

3. S Corporation – Other Considerations.

Eligibility Requirements
In comparison to the S Corporation, the LLC is a more flexible entity, both in terms of who can be an owner, and the structuring of economic sharing arrangements between the members. For example, a LLC would be implicated where two partners desired to be equal owners but have a disproportionate allocation of profits and losses.

Management and Control.
As compared to a S Corporation, a California LLC is a much more flexible with respect to management and control issues. In comparison to the Officer, Directors, and Shareholders who each play separate roles in a S Corporation, an a LLC, management and control lies either with the members (in a so called “member-managed LLC”) or with the managers (in a so called “manager-managed LLC”). The key difference is that in a member managed LLC, each member is authorized as an agent to bind the LLC by virtue of membership, whereas in a manager managed LLC, there is a centralized management committee in the form of the managing members.

Transfer Issues.
Similar to the S corporation, transferability of a member’s interest can be accomplished easily so long as it is not precluded in the Operating Agreement or some other legal document such as a Membership Buy/Sell Agreement. Before the transfer of any LLC Membership Interest, one should always consult the provisions of the LLC Operating Agreement to check for any transfer restrictions.

What Entity Should I Choose For My California Business?
In any new business, it is important to always keep the three key areas in mind, namely: (i) limited liability and the formalities required to maintain it; (ii) the tax consequences; and (iii) special circumstances applicable to the owners. There is no “one size fits all” legal entity, and the choice must be made with careful deliberation about the long term ramifications.

Professional Corporations – Advantages and Disadvantages

What is a professional corporation(PC)?

A PC is a corporation owned and operated by one or more members of the same profession (e.g. physicians, lawyers, accountants, dentists). The services provided by the corporation are generally restricted to the practice of the profession.

Professional corporations are now allowed in every province and territory across Canada. In each province/territory, the professional regulatory body usually determines whether its members may incorporate. For example, the regulatory body for physicians, in all provinces and territories, allows physicians to incorporate.

How does it differ from a common corporation?

There are some significant differences between a professional corporation and a common

corporation such as:

  • Only members of the same profession can be shareholders of a professional corporation in many (but not all) provinces.
  • The officers and directors of a professional corporation must generally be shareholders of the corporation as well.
  • The professional corporation is generally subject to the investigative and regulatory powers of the regulatory body governing the profession.
  • A professional corporation will not protect a professional against personal liability for professional negligence.

As a result of these differences, some of the benefits commonly associated with a corporation may have a limited application for a professional corporation. This is further described below

Advantages of using a Professional Corporation

Potential tax savings

A reduced federal and provincial corporate tax rate is applied on the first $400,000 of professional income earned by a professional corporation. Some provinces apply the reduced tax rate on income of up to $500,000. The provincial limit varies by province. For 2010, the combined federal and provincial tax on income subject to the small business limit will range between approximately 11% and 19%. As a result of this lower rate, the combined corporate and shareholder taxes paid on professional services income is slightly lower than if such income were to be earned by you directly.

Potential tax deferral

Perhaps the most significant advantage of using a PC is the ability to defer taxes. Professional income earned through a corporation is taxed at two levels – once at the corporate level and then again at the shareholder level when the profits are distributed to you as dividend income.

Since income at the corporate level is taxed at a lower rate than your personal income, a tax deferral opportunity exists when the income is taxed in the corporation (at the lower rate) and is not distributed to the shareholder (i.e. you). The deferral ceases when a dividend is paid to you and you pay the tax on that dividend.

Let’s illustrate. If you earn a professional income of $500,000 per year as a sole proprietor and only need $200,000 of pre-tax income for personal expenses, you will be left with $300,000 that will be taxed at the highest marginal rate. Assuming a marginal tax rate of 47%, you will be left with $159,000 to invest.

On the other hand, if you incorporate the practice, the $300,000 will be left in the corporation and taxed at the small business rate. Assuming a corporate tax rate of 18%, the corporation will be left with $164,000 to invest.

That’s $87,000 more.

Sole proprietor Professional corporation

Income $500,000 $500,000

Personal needs ($200,000) ($200,000)

Remaining funds $300,000 $300,000

Taxes ($94,000) ($54,000)

Net funds $159,000 $246,000

Additional funds in the

professional corporation $87,000

The additional funds in the corporation may be used to pay off debt, purchase capital assets, acquire investments or fund an insurance policy

Flexible employee benefits

As an employee of a professional corporation, you can access certain types of employee benefits that would otherwise not be available if you were a sole proprietor or a partner in a partnership. For example, the corporation can establish an Individual Pension Plan (discussed later on) or a Retirement Compensation Arrangement (RCA) for you. These retirement savings vehicles can also provide you with possible creditor-protection benefits. An employee health and welfare trust can also be created to provide health benefits for you and your family.

Capital gains exemption

The Canadian tax rules permit that up to $750,000 in capital gains arising from the sale of the shares of a qualified small business corporation may be exempt from tax. This $750,000 capital gains exemption is also available for shares of a professional corporation, provided certain conditions are met. However, the ownership of a professional corporation may not be as easily transferable since, in many provinces, it can only be transferred to members of the same profession.

Flexibility in remuneration

You can choose to receive a combination of salary and dividends from a professional corporation. The decision is based on the combined corporate and shareholder taxes paid in your province of residence.

Limited commercial liability

A professional corporation does not generally protect you from personal liability for professional negligence. However shareholders of a professional corporation will have the same protection as other corporate shareholders when it comes to trade creditors.

Income splitting

You can split income through a corporation by paying dividends to adult family members who are shareholders of the corporation. This strategy may be less applicable to professional corporations situated in provinces where share ownership is restricted to members of a particular profession. However other income splitting strategies, such as hiring family members to work in the business and paying them a reasonable wage for services rendered, are still available through a professional corporation.

Multiple small business deductions

As a result of a Canada Revenue Agency (CRA) ruling, it is possible for professionals operating through a professional partnership to render their services through a professional corporation and be able to access multiple Small Business Deductions (SBDs).

Income earned up to the SBD limit of $400,000 is subject to a preferential tax rate (some provinces have a higher SBD). Historically, the SBD had to be shared among all corporate partners. Given CRA’s new ruling, professionals currently operating as a partnership should consider the benefits of setting up a professional corporation to take advantage of multiple SBDs.

Individual pension plan

An Individual Pension Plan (IPP) is a defined benefit pension plan that a professional corporation can set up for the professional. The IPP provides better annual contributions than RSP limits for those over 40. Assets in an IPP are protected from creditors; however, they may be subject to locking-in provisions during retirement. If you would like more information on IPPs, please consult your advisor.

Disadvantages of a Professional Corporation

Costs and complexity

The costs for establishing and maintaining a PC are usually higher than those of a sole proprietorship. Also, a professional corporation will incur more costs to file a corporate tax return, prepare T4 slips for salaries and T5 slips for dividends. A corporation is also subject to greater regulation and compliance than a sole proprietorship or partnership.

Employer health tax and EI premiums

Corporations in several provinces have to pay a provincial health tax levy once the corporate payroll has exceeded a certain threshold. Fortunately the basic amount you are not taxed on is fairly high (e.g. $400,000 in Ontario) so the impact of this tax on professional corporations may not be that significant.

Business losses

You cannot claim business losses incurred by a PC on your personal tax return; whereas, in a sole proprietorship, you may use the business losses to offset your personal income from other sources.

Liability for malpractice

As mentioned above, a professional corporation will not protect you from personal liability for professional negligence.

Who should use a professional corporation?

A PC can provide potential tax savings and tax deferral benefits. This may appeal to you if you do not require all of your income to live on. Professional corporations may also appeal to you if you wish to save for your retirement through alternative means, such as a pension plan or retirement compensation arrangement, or if you would like to limit your personal exposure to commercial liability.

Before incorporating, you should consider the cash-damming strategy, which converts all your non-deductible personal debt into tax-deductible business debt. Find out more
If you have questions on any of the issues discussed in this article, please speak with your advisor.

Choice of Business Entity – S Corporation or LLC?

As an attorney concentrating in business organization, I take a central role advising my business clients on the appropriate entity to form. Most of my clients approach me already armed with the knowledge that an organized business entity will generally shield them from personal liability for the acts or omissions of the business. However, relations between multiple owners, tax considerations and treatment of assets are just a few of the factors that will dictate which choice of entity is truly suitable for your business. By and large, there is no uniform “right” choice. A careful review of the details, strategies and goals of each business needs to be made before the proper entity is chosen.

Corporations and limited liability companies (LLC’s) are the most commonly utilized business entities. Since most small to medium sized businesses are better structured as either a corporation or LLC, this article highlights some basic similarities and differences between these entities. I have attempted to provide an overview of these key elements below. But, keep in mind that the information below, by itself, will not allow you to make a proper, informed choice of entity. This should always be done with the coordinated assistance of your attorney and accountant.

C corporation

Most large companies are C corporations. All publicly traded corporations are C corporations. The “C” designation comes from Subchapter C of the Internal Revenue Code, which governs corporate taxation. There are a variety of reasons C corporations are more aptly suited to large businesses. Multiple classes of stock, unlimited number of and types of shareholders, a fiscal year vs. calendar tax year and retention of corporate earnings are just a few of the key differences of a C corporation. Generally, this structure is desirable for businesses who seek to raise capital publicly or whose class of investors vary.

Most importantly, C corporations are subject to double taxation. This means that all of the income of the C corporation is taxed once at the corporate level, then those same revenues are taxed again at the shareholder level when profits are distributed via dividends. In smaller C corporations, the double tax can sometimes be avoided by eliminating net income each year by making payments to shareholder-employees. Shareholders must report any dividend earnings as capital gains on their personal tax returns.

A corporation starts out as a C corporation for tax purposes. All corporations are automatically recognized as C corporations, unless the shareholder’s elect “S” corporation tax treatment, which is discussed below. The taxable income of the C corporations (after deductions for salary, business expenses and depreciation on furniture and equipment) is taxable to the corporation itself. The C corporation would only be taxed on income “effectively connected with the United States”, beginning at a corporate tax rate of 15% for the first $50,000 of corporate taxable income each year.

If the corporation is classified as a “personal service corporation”, (PSC), is will pay a 35% flat rate from dollar one of net profit. This is a generally undesirable entity type. PSCs are C corporations whose shareholders are engaged in the performance of personal services in the fields of accounting, actuarial science, architecture, consulting, engineering, health and veterinary services, law, and the performing arts. The lowest 15% tax rate is only available to a corporation rendering personal services if a person who is not employed by the corporation owns at least 6% of the issued stock of the corporation. Otherwise the top personal tax rate would apply to the taxable income from personal services in that corporation. A PSC is a C corporation by definition. Thus, a timely made S-election, as discussed below, would negate classification of your corporation as a PSC and avoid the 35% flat tax rate.

There are some unique tax advantages gained with the use of the C corporation. Some of the key advantages most beneficial to small businesses are the ability to deduct all of the premiums paid on health insurance for owners who are employed, along with their spouses and dependents. In addition, a C corporation may adopt a MERP (Medical, Dental and Drug Expense Reimbursement Plan) at any time during a fiscal year, which can be made effective retroactive to the beginning of the fiscal year and can purchase disability insurance for one or more of its executives or other employees. A C corporation can also deduct the premiums of disability insurance without the cost being taxable to the executive or employee. Finally, a C corporation can deduct contributions to qualified retirement plans.

In terms of ownership, shareholders own the corporation by virtue of owning stock (or shares) in the corporation. Corporations issue stock certificates to its shareholders to indicate ownership percentage in the corporation. C corporations are permitted to have different classes of stock, such as common and preferred stock, offering dissimilar distribution and voting rights among shareholders. Shares may be freely transferred or redeemed without affecting the corporation. Under Illinois law, as every other State, shareholders of corporations generally enjoy a complete liability shield from the acts or omissions of the corporation itself. The shareholders elect a board of directors, who then manage the business and affairs of the corporation. Illinois law requires that a President, Secretary and Treasurer be appointed as officers of the corporation, although sole-shareholder corporations are permitted.

The Bylaws of the corporation are its governing document. The bylaws govern the business and affairs of the corporation (both C and S corporations) and specify mattes such as the number and powers and duties of the board of directors, shareholder voting rights, dissolution of the corporation, annual and special meetings, and other rules of the corporation. Typically, the relationship governing the owners (shareholders) in a small or closely held corporation is governed by a stock purchase or stock restriction agreement or similar document. This instrument can provide for shareholder purchase and sale rights, restrictions on the sale or transfer of shares and corporation purchase rights, among other matters. In all jurisdictions, corporations must have a set of bylaws that govern the corporation, or the corporation will be subject to the default provisions set forth under state statute.

Keep in mind, the relationship between the owners (shareholders) of the corporation can also be governed by a separate instrument, such as a stock purchase or stock restriction agreement, shareholder’s agreement or similar document. This document generally controls share transfers and purchases of additional stock and company and/or shareholder stock purchase rights.

C corporations are best suited for active businesses with a likelihood to appreciate and strong potential to offer shares publicly. C corporations generally retain their earnings in the beginning stages of growth and do not distribute corporate earnings to shareholders in an effort to appreciate.

S corporation

An S corporation is a corporation, just like a C corporation. Its shareholders enjoy the same general shield from personal liability for the corporations’ acts or omissions.

The major difference lies in the tax treatment of the S corporation. As stated, C corporations are subject to taxation at the corporate level and the shareholders are then subject to taxation on that same stream of revenue when distributed in the form of dividends. By contrast, S corporations avoid double taxation since only the individual shareholders are taxed. S corporation status is achieved by electing such tax treatment after organization (IRS Form 2553). Net profit or loss after expenses for S corporations, including salaries paid to employees and shareholder-employees, is reported on federal Form 1120S and “passed through” to shareholders’ personal tax return via Schedule K-1, where it is subject only to ordinary income taxes. Additionally, pass-through losses are limited to the taxpayer’s basis in the stock of the S corporation.

All wages are subject to self-employment (payroll) taxes. S corporations must pay reasonable compensation to a shareholder-employee in return for services that the employee provides to the corporation before non-wage distributions may be made to the shareholder-employee. The S corporation will pay the employer’s share of FICA taxes (7.65%), and the employee will pay the other share of FICA taxes (also 7.65%). Between the S corporation and the shareholder, wages are subject to approximately a combined 15.3% payroll tax, plus the shareholder’s income tax rate. So all things considered, the shareholder-employee should pay only a minimal salary to themselves in order to decrease the amount of taxes paid on corporations’ profit stream. IRS rules do require that reasonable salaries must be paid to shareholder-employees (the failure to do so is considered by many to trigger an internal audit). But, all other earnings avoid self-employment taxes and are subject to either ordinary income or capital gains. This means the payroll taxes would have to be paid on reasonable salaries (wages) of employee-shareholders only, and not the S corporation’s distributions.

When do you need to pay wages? According to the IRS, reasonable compensation is determined by what the shareholder-employee did for the S corporation. The IRS will look at the source of the S corporation’s gross receipts: 1) services of shareholder, 2) services of non-shareholder employees, or 3) capital and equipment. If the gross receipts and profits come from items 2 and 3, then no compensation needs to be paid to the shareholder-employee. However, if most of the gross receipts and profits are associated with the shareholders personal services, then most of the profit distribution should be allocated as compensation. (Of course, you should ask an accountant for more details).

Even if income is not distributed to the shareholders and left as operating capital, it will still be taxable to the individual shareholders. This is because all income is passed through to the shareholders automatically. Shareholders in a C corporation are only liable for taxes on dividends they actually receive (but, undistributed income of the corporation is not subject to self-employment taxes).

Some disadvantages of the S Election status are that deductions for health insurance, disability insurance, automobile, and medical, drug and dental plan reimbursements would be taxable to the S corporation stockholders for whom they are paid.

Among other key differences, S corporations are less flexible than C corporations and LLC’s. Only a limited number of shareholders, usually only individuals, and no foreign shareholders are allowed. In this sense, S corporations are typically more suitable for small and closely held businesses who do not seek to raise large amounts of capital publicly. As with a C corporation, shareholders own the corporation by virtue of their stock in the corporation. However, there can only be one class of stock with respect to distribution rights, unlike a C corporation.

S corporations are generally suitable for active businesses with little debt, no high risk assets and low chance for substantial appreciation since all corporate earnings are typically distributed to the shareholders.

Limited Liability Company (LLC)

An LLC, or limited liability company, offers the same personal liability shield to each of its owners that a corporation offers. But, it provides significant flexibility in terms of the treatment of capital contributions and allocation of profits and losses to its owners. Specifically, an LLC can distribute profits in the manner its members see fit. For example, assume you and your partner own an LLC to which you contributed $80,000 in capital and your partner only contributed $20,000. If your partner performs 80% of work, the owners could still decide to split the profits 50/50. However, if you and your partner were shareholders in an S corporation, you would be required to distribute 80% to you and 20% to your partner by law. This can be an inequitable way to structure your business if you have any partners.

The LLC is taxed as a partnership as profits and losses are “passed through” to the members and there is no entity level income tax. The LLC avoids double taxation then just like the S corporation. (Again, some states do impose replacement taxes on the income of LLC’s). The LLC income is reported on Form 1065 and then distributed to owners via Schedule K-1. The owners then report this income on their individual returns (1040) on schedule E. If the LLC has only one owner, the IRS will automatically treat the LLC as if it were a sole proprietorship (a “disregarded entity”). A disregarded entity does not file a tax return and the owner reports the income through schedule C of his or her individual return. If the LLC has multiple owners, the IRS will automatically treat the LLC as if it were a partnership. However, an LLC is known as a “check the box” entity, meaning it may elect to be taxed as a corporation or as a partnership.

In terms of self-employment taxes, there is a lot of confusion when it comes to LLC members. In general, the difference of whether you are treated as a general partner compared to a limited partner is significant for determining self-employment tax liability since an LLC is taxed as a partnership. If a member of an LLC is treated as a limited partner, there is no self-employment tax on the member’s share of LLC income (except for any “guaranteed payments”). If a member is considered a general partner, he or she must pay self-employment taxes on all LLC income. However, under the 1997 Proposed IRS Treasury Regulations Section 1.1402(a)-2, if an LLC member is personally liable for debts, does have the power to bind the LLC to a contract or does provide more than 500 hours of service per year to the LLC, the member will be taxed as a general partner and will have self-employment tax obligations on his or her LLC income allocations. Otherwise the member will be taxed as limited partner and will not have self-employment tax obligations on his or her LLC income allocations.

Also, it is possible that the LLC will have two classes of interests, one of which is treated as a general partnership interest and one of which is treated as a limited partner interest. If a partner or a member owns interests of both classes, then the member will be able to allocate his or her income allocations between the two classes and will be required to pay self-employment taxes on the general partner portion, but not on the limited partner portion. The 1997 Proposed Regulations have never officially been adopted by the IRS, but they have been relied on by many professionals and taxpayers. Also, IRS representatives have now stated they can be relied upon.

All profits and losses distributed to the members and any “salaries” (generally considered any guaranteed payments) paid to them are considered self-employment income and are subject to self-employment taxes. Owners of the LLC are considered to be self-employed and must pay a self-employment tax equal to 15.3%. Remember, in an S corporation, only the salaries, and not the distributions to shareholder employees, are subject to employment taxes. Thus, the S corporation provides significant employment tax savings to its shareholders in contrast to the LLC.

LLCs provide limited liability protection in most instances if properly established and maintained, but usually few or no tax benefits versus a sole proprietorship or general partnership exist. One significant benefit of LLC’s over corporations is the ability of the members to limit a transfer of a membership interest to transferring an economic interest only. This means future members can be restricted to receiving distributions (and paying taxes on those distributions) but with no accompanying voting or management rights. When a shareholder of a corporation transfers his or her stock, all attributes of ownership including voting rights accompany the transfer, unless the stock is non-voting stock.

The LLC’s owners are called members and each Member owns a percentage of the LLC by virtue of owning a Membership Interest in the company. Similar to C corporations, LLC’s may create differing classes of membership interests. Members can include corporations and other LLCs, providing ultimate flexibility in ownership structure with this entity. An LLC is usually member-managed, where the business and affairs of the LLC are managed by the members themselves, or can be a manager-managed LLC where either a member-manager or an outside manager is appointed instead. Most small business LLCs are usually member-managed. Illinois allows single-member LLCs, like most if not all other states. Illinois also allows professional service providers, such as attorneys and doctors, to form LLC’s for conducting their business, unlike many other states.

The Operating Agreement is the governing document of the LLC. It is similar to corporate bylaws and controls basically the same aspects. However, most jurisdictions specify the contents that are required to be included in bylaws and operating agreements and there are, of course, differing provisions. Also, the relationship between the members of an LLC is stated in the operating agreement, whereas corporations typically use a separate instrument for certain shareholder rights, such as stock transfers and corporation buy-out rights.

Real estate investments and businesses that own other assets that generally expose its owners to risk of liability are generally appropriate for LLC’s. Of course, if you have one or more partners and want to be flexible with how the business distributes profits (and losses) to the owners, then the LLC is likely the best choice.

Purchasing or Selling a Corporation

When taking into account all pertinent tax ramifications, there are four basic classifications that must be considered when purchasing or selling a corporate business. These are;

1. Transferring corporate assess in exchange for cash or notes

2 .Acquiring corporate assets by use of stock

3 .Acquiring corporate stock utilizing cash or notes

4 .Acquiring the stock of a corporation utilizing the stock of the acquiring corporation.
In the 1st type of transaction, corporate assets are sold in return for cash or notes, or a combination of both from the purchaser. After the transaction the corporation is left with cash or notes , which it may use for investment purposes. This transaction usually gives rise to a taxable gain or deductible loss to the corporate entity. As an alternative solution , the sale of all the assets may be followed by the complete liquidation of the corporate entity in a tax free transaction. However there will be a taxable gain or deductible gain to the shareholders involved. Thus this type of transaction gives rise to two events; the sale of assets and the liquidation of the corporation . while the emphasis of this articles on the start-up of a business , the sale of corporate assets and the subsequent liquidation of the selling corporation would allow the purchaser to acquire the entire assets of a successful selling entity while at the same time allowing the selling shareholders at least one tax- free event in the process.

In the event that both the buyer of all the assets of a corporation and the seller agree to the terms of the sale , the purchaser obtains a basis for the assets purchased equal to the purchaser cost. Thus if any assets or inventory are purchased for an amount greater than the seller basis , the buyer would obtain a higher depreciation basis and a higher cost of goods sold.

The buyer of all the corporate assets may expedite the transaction and also negotiate a better purchase price for all the assets by making the corporate seller aware of the benefits of a complete liquidation. If a corporation distributes all of its assets in a complete liquidation within twelve months after the adoption of a plan of liquidation , no gain or loss will be recognized on the sale of property by the corporation during there twelve month period. As a result , the tax treatment for a corporation selling all of its assets and then liquidating is no different from the case where a corporation liquidates first , with the shareholders later selling the assets that were distributed to them during the twelve month liquidation period
In an assets deal , care should be taken to see that the purchaser is not made liable for any part of the seller contingent or actual debts that the purchaser did not agree to assume. When acquiring only assets , the possibility is minimal that the purchaser will become liable for any contingent liabilities that the acquiring party was unaware of at that time of the transaction. However , such unitende3d liability might arise through noncompliance with the sales Act. The purchaser in this case will have to notify each creditor within a specific time period before he takes possession of the assets or before paying for the assets . if the purchaser fails to comply with this statutory requirement, the law will create a trust consisting of the assets purchased for the benefit of the creditors of the selling corporation.

If the purchaser pays an adequate price for the assets acquired , the rights of the seller creditors will not be prejudiced. This will probably prevent the seller creditors of the selling corporation from proceeding against the purchaser. If however, the purchase price is paid directly to the shareholders of the selling corporation, the possibility always exist that the rights of the creditors will have been prejudiced since this method of payment may enable the shareholders to defraud the creditors. Thus , care should be taken to see that the purchase price is paid directly to the selling corporation only.

The second method , how to acquire corporate assets by the use of stock come this way; a purchasing corporation might elect to acquire all the assets of another corporation by utilizing its own shares. In order to make this type of transaction tax free under so called C- type reorganization requirements ,the acquiring company must issue voting stock. One troublesome point in this type of transaction is that it would result in the dilution of the voting interests of the shareholders who held stock prior to the date of the acquisition since more shares will now be outstanding. Because this result would be impossible to avoid tax -free stock deals.

The warning her is that there is hidden danger in seeking to purchase all of the selling corporation assets utilizing the purchaser stock. Conclusions in the past have been arrived at that when the purchase uses its own stock to conclude the purchase , this transaction is tantamount to a statutory merger , thereby making the purchaser automatically liable from the debts of the selling corporation. One distinct advantage of this method is that it does not require the use of the purchaser working capital.

The third method, how to acquire corporate stock utilizing cash or notes goes this way; should a stockholder of the selling corporation elect to sell his stock in the corporation to be acquired, the result will be a taxable transaction unless the proceeds of the salary equal to the adjusted basis of the seller stock.
Example in 2006 X sells his stock in Z corporation , which represents a controlling interest in the corporation for 400.000FCFA , X had acquired the stock in 2004 for 100.000FCFA , X will have a long term capital gain of 300.000FCFA.

The fourth method, how to acquire the stock of a corporation utilizing the stock of the acquiring corporation can be done this way; a corporation might use its own stock in acquiring the stock of another corporation. If done pursuant to the requirements of a B- type reorganization it will be completely tax free. This method has the advantage of avoiding the use of the acquiring corporation working capital.

Business Relationships As They Relate to Corporate America


As we form business relationships, the question arises to whether a sole proprietorship or corporation is needed. For a definition purpose, a corporation is a legal entity, separate from its shareholders, created under the authority of the legislature. As an entity, a corporation is responsible for its debts. The shareholders are not responsible for the corporate debts. Shareholders risk is limited to the amount of their investment. The ownership interests of the corporation are represented by shares, which are freely transferable. Management control of a corporation is centralized in the board of directors and officers acting under the direction of the board’s authority. Shareholders generally elect the board, but they cannot control the activities of the board and have no power in management of corporate business.

Corporations have distinct differences than partnerships. Partnerships are governed by the Uniform Partnership Act (UPA). Partnerships are not legal entities, but aggregates of two or more persons engaged in a business. With corporations, shareholders are limited their investments. In partnerships, each partner is subject to lunlimited personal liability for all debts of the partnership. Know your goals in what you want and research each before deciding on a partnership or corporation (refer to my March 2003 article in Chiropractic Products “Partnerships”).

A corporation, as a legal entity notwithstanding the death or incapacity of its shareholders can have a perpetual duration. Partnerships are not able to perpetuate. If a corporation goes bankrupt, any debts owed by the corporation may, under certain circumstances be subordinated to the debtors. This means the debts would have to be paid before the shareholders get any money. This came about in a case (Taylor vs. Standard Gas and Electric Corp.) and is called “Deep Rock Doctrine”. Formation or organization of a corporation is completed under “general corporate law” or “business law” statutes of the state in which you are incorporating. Usually a corporation is organized by the execution and filing of the “certificate of articles” of incorporation by the person or persons forming the corporation. The articles must show the names of the shareholders, address and name of the corporations registered agent, name and the address of each person forming the corporation. Optional provisions may include:

1. Purpose of the incorporation
2. Names of board of directors and management powers
3. Par value of shares or class of shares.

Corporations can engage in any legal business without spelling out a long list of corporate purposes. Most states confer certain powers for every corporation whether of not those powers are stated in the articles, Typically a corporation is grated the following:

1. Purpetual existence
2. To have the ability to sue and be sued
3. Have a corporate seal
4. To acquire, hold, dispose of personal and real property
5. Appoint officers
6. Adopt and amend by-laws
7. Conduct business in and out of state
8. To make contracts
9. To make donations

When A corporation acts beyond the purpose and powers it is called “Ultra Vires”. This is not a defense in tort law or liability to escape civil damages by claiming the corporation had no legal power to commit a wrongful act. This also applies to criminal liability. A corporation must act within its powers and purpose as stated in state statues. Most state statutes prohibit the use of Ultra Vires as a defense in a suit between contracting parties. However, if a contract has been performed and has resulted in a loss to the corporation, the corporation can sue the officers or directors for damages for exceeding their authority. If the corporation refuses to sue, a shareholder may bring a derivative suit. States may sue to enjoin the corporation from transacting unauthorized business. If the prevailing party wins, they may be entitled to compensatory damages.


Generally the powers to manage the corporation belongs to the board of directors and not the shareholders. The shareholders cannot order the board of directors to take certain actions in managing the corporation. However, shareholders approval is required for certain fundamental changes including: amendment to the articles of the corporation, mergers, and sale of substantial assets and dissolution of the corporation. Shareholders also have the power to remove a director for “cause”. Shareholders also have the right to:

1. Ratify certain kinds of management transactions
2. Adopt non-binding resolutions
3. Right to adopt and amend by-laws

A “Close” corporation is defined by ownership by a small number of shareholders, have no general market for the stocks, have limitations of the transfer of the stocks and adopt special governance rules. In this respect a close corporation is similar to a partnership. Most states define a close corporation by the number of shareholders. Each state varies as to that number. In California it’s 35 shareholders, in Delaware it’s 30.


Original directors are those persons who initially set up the Corporation. The shareholders at the annual meeting elect board members, which can also be the original directors if there are no other shareholders. Once elected, shareholders can only be removed for “cause”. Cause may be fraud, dishonesty, etc. Directors can be removed by the shareholders without cause if there is specific authority to do so in the articles of incorporation.

The director that is to be removed is entitled to a hearing before a final vote on removal is cast. Courts generally do not have the authority to remove directors, but some courts have taken the position of removing directors for specific reason such as fraud or dishonest act. Each director has a fiduciary relationship to the corporation and must exercise the care of ordinary prudent and diligent person would act under similar circumstances. Courts vary on what constitutes a bad decision by a director that would breach his or her duty to the corporation. When a director has not exercised proper care, he can be held liable from corporate losses suffered as a direct and proximal result of his breach of duty. Injury and causation must still be shown when duty is breached. There can also be criminal misconduct that would make a director or officer liable. There are a variety of types of corporations you can establish. Make sure you set up the proper type of corporation that will meet your particular needs.

Creating a Powerful Corporate Brand

Development and management of the corporate brand is one of the most potent tools available for senior executives to use in ensuring the viable execution of the corporate vision. Not only does the corporate image management process provide entrepreneurs and business leaders with the highest level of functional control of the organization, it also provides one of the most powerful strategic marketing weapons available in the corporate arsenal. Progressive corporate leaders will use this new management and marketing discipline to drive their organizations forward in victory in today’s and tomorrow’s marketing battlefields.

The underlining principle of this discipline is simply this: if it touches the customer, it’s a marketing issue. Nothing touches the customer more than how he or she perceives your corporate image. This fundamental perception will be the major factor that determines whether the customer will decide to conduct business with you and, more importantly, enter into a long-term and mutually rewarding relationship with your organization.

There may be no greater marketing issue than corporate image management in today’s increasingly competitive markets. In short, corporate image management will be a key marketing discipline well into the next century. The ultimate battleground for winning and maintaining customer relationships now takes place in the minds, hearts, emotions and perceptions of the customers. Developing a powerful corporate brand is a circular, continuous, five-phase process that can be applied at any stage of an organization’s development. Unfortunately, the process is usually marketed as a one-off “corporate identity exercise” which CEO s resort to at times of turmoil, during periods of sweeping change, or when they desire to leave their mark on the organization for future generations.

Corporate image management should not be an occasional stimulus that prompts the senior management of the organization to regroup and analyze how to project the “best” image for the organization. It should not be a sporadic or irregular process of rethinking key issues facing the company, and then packaging a plan of action items bundled under an inflated “mission statement” that gets communicated to the people in the organization.

It should definitely not be a series of temporary measures that are reactions to market conditions that do not change the primary value systems or conduct of the organization. When organizations start to think “our customers just don’t get it,” or “if they really knew and understood us, they’d want to be our partner,” the organization has a corporate image perception problem that is not necessarily going to be fixed through marketing communications. Most likely, the problem requires internal procedures and behavior patterns to change and be communicated through action, not via a media campaign. The consultants who come in and tell you that senior management needs to take time away from their busy schedules to participate in a short-term corporate identity exercise are wrong. This leads to the attitude that the corporate image can be fixed through an assigned task force that will tell the rest of the organization what and how to communicate the corporate identity.

Corporate brand management should be the driving force for a continuous process of thinking and evaluation on how the organization can leverage its strengths and its corporate persona to evolve into the kind of organization it desires to be. It is the constant need for self-understanding and systemic feedback from employees, customers, stakeholders and the market place that is at the heart of an authentic corporate image management process. It is also a never-ending process that must be integrated into all aspects of the organization.

The five phases of the corporate image management process are:

• Preliminary Audit, Research and Evaluation
• Analysis, Strategy, Planning and Development
• Creative Exploration
• Refinement and Implementation
• Monitoring, Managing and Marketing of the Corporate Image

This corporate image management process helps to ensure that channels of communications within the organization, and with all appropriate external audiences, are both fluid and multi directional. Such fluidity helps to prevent miscommunication and better ensures that the organization has a conscious and collective finger on the pulse of evolving market forces, marketing environment trends, changing customer needs and desires, and relationship development and maintenance requirements.

Internally, the multi-directional and cross-organizational communications result in almost everyone within the organization understanding and accepting the collective goals and knowing the importance of the path being embarked upon by the organization. This becomes crucially important when the organization begins to include partnering and external partnerships as part of its future growth strategy. The objective of the corporate brand management process is to provide the organization, on an on-going basis, with a cohesive corporate image management structure, corporate culture and a set of acceptable internal and external behavioral patterns. A powerful corporate brand will provide optimum competitive advantages, increased employee morale and loyalty, and a future direction for the organization.

A Qualitative Process
Part of the initial process to developing a powerful corporate brand comprises qualitative interviews with internal and external audiences. The internal interviews are conducted at all levels of the organization, from front line staff and backroom support personnel to senior management and the Board of Directors. The interviews with external audiences will include key customers, end users, joint venture or other business partners, shareholders or other stakeholders, suppliers, distributors, retailers, prospective customers and partners, government officials, senior media people and other outside influences, competitors, and members of the general public.

The interviews focus on how the organization is currently perceived by these key audiences and what perceptions are held about the company’s directions for the future and its capabilities to handle or execute change. The objective is to gain an understanding of the market’s perception of the organization by its customers, partners and competition, and to contrast these perceptions with those held by various levels its own employee and management staff. Another aim is to identify the organization internal willingness and current acceptance levels for change.

While this research is qualitative in nature, the issues to be examined and discussed during the interview process are highly strategic in nature. The benefit of the one-on-one qualitative interview methodology is that it allows each respondent to focus on those points that are of the greatest importance to him or her. Due to the extreme sensitivity of the topics to be covered during the discussions, an outside resource is definitely required to handle and analyze these interviews. Also, the outside resource must completely ensure the confidentiality of each participant and in no way reveal to the client any details or particulars about which comments came from any individual.

The number of interviews required for this process to be effective is usually a minimum of between 25 and 40, depending upon the size and complexity of the organization. It is best if the interviews are conducted by two or more researchers or consultants, who then compare notes at the one-third point to see if any trends are already developing or if the questionnaire needs adjusting. This methodology will yield a tremendous insight into the present corporate image of the organization, as perceived both internally and externally. Because of the open-ended nature of the specific questions used, the feedback can be readily interpreted into specific observations and recommendations that can be actioned later in the corporate image management process.

The interview process answers these key questions:

• how is the corporate image being portrayed and projected today?
• how is the organization perceived by its key internal and external audiences?
• how does the image of the organization compare with those of its competitors?
• how does the image of the organization compare to the image desired by management?
• will the current corporate image enable the organization to reach the goals and objectives set for it over the next three to five years?

By starting the corporate brand development process with a review of the existing corporate brand perceptions, the organization has a clear view and understanding of where it is today, an important criterion when trying to decide how one wants to be perceived in the foreseeable future.

From here, it is a matter of relatively simple steps to create a well-defined corporate brand positioning platform that is supported by the core attributes of the organization and a series of strategic image marketing objectives that will help to guide future business directions and brand development. Your corporate brand image needs to be thoroughly thought out, planned, nurtured, executed, monitored and, when necessary, modified. It’s the organization’s most valuable commodity and deserves to always be treated as such.

Corporate Governance and Accounting Standards in Oman: An Empirical Study on Practices


In recent years, the Oman economy has undergone a number of reforms, resulting in a more market-oriented economy. Particularly, the financial impetus extended by the Sultanate of Oman had signaled the beginning of a positive trend. The size of Oman industry is becoming much bigger and the expectations of various concerned parties are also increasing, which can be satisfied only by good Corporate Governance.

The importance of good Corporate Governance has also been increasingly recognized by the industry for improving the firms’ competitiveness, better corporate performance and better relationship with all stakeholders(1). In oman also the industries have obliged to reform their principles of Governance, for which, Oman companies will now be required to make more and more elaborate disclosures than have been making hitherto. This necessiates to adhere to the uniform and proper accounting standards, as the standards reduce discretion, discrepancy and enhances not only the degree of transparency in sharing of information with the parties concerned but also reinforces the broader role the directors need to play for achieving Corporate objectives in the midst of challenges and adversities.

Here, the Corporate Governance is a voluntary, ethical code of business concerned with the morals, ethics, values, parameters, conduct and behavior of the company and its management. The corporate responsibility begins with the directors who are the mind and soul of a firm.

The Board is expected to act as conscience-keeper of the corporate vision and mission, and devise the right type of systems for organizational effectiveness and satisfaction of stakeholders. Thus, the Corporate Governance is a system of accountability primarily directed towards the shareholders in addition to maximizing the shareholders’ welfare(2), where the debate on disclosure/ transparency issues of Corporate Governance eventually centres around the proper accounting standards and their practices and issues, as the application of accounting standards give a lot of confidence to the corporate management and make the disclosure more effective and ensure the good Corporate Governance to promote a healthy investment climate.

Thus, the study of practices of accounting standards is an important and relevant issue of good Corporate Governance in the present environment, as the standards are viewed as a technical response to call for better financial accounting and reporting; or as a reflection of a society’s changing expectations of corporate behavior and a vehicle in social and political monitoring and control of the enterprise(3).


The old ways of selective and conservative reporting is yielding place to more transparent and voluntary disclosures, in tune with the changing times. There is no alternative to adopting by the corporate entities of new standards of accountability, where the accountability is largely a matter of disclosure, of transparency, of explaining a company’s activities to those to whom the company has responsibilities(4) i.e. the disclosure in simple, understandable and comparable form, forms clearly the basis for accountability, which can be provided only if companies adopt uniform accounting policies and disclose adequate information about the accounting standards followed. Thus, accounting standards ensure the comprehensive disclosure of the corporate’s accountability, which may be regarded as a prime issue and a pre requisite for good Corporate Governance.

An examination of practices of accounting standards, and their issues in Oman industry may help to understand the existing practices of accounting standards, which in turn help in designing the effective standard practices so as to ensure good Corporate Governance leading to a healthy investment environment.

In this context, an attempt is made here to examine the accounting standards and their practices in Oman, with a view to strengthen the accounting standards and improve their practices for good Corporate Governance. The data for the study are obtained from the annual reports (published during 2001-’02) of ten Omani companies of different nature, selected from the top companies in terms of assets. The sample consisted of 6 private and 4 public companies. The simple per centage method is used to analyze the data. The authenticity of the data is verified with the opinions of management, who are aware of the company affairs and Corporate Governance. The corporates’ perceptions on the relevance of accounting standards for good Corporate Governance in the context of Oman are also examined.


In any country, the awareness and competitiveness among the corporates would be strengthened when they understand each other and compare their performance, for which the simple, understandable and comparable disclosure is an important instrument. The main objective of disclosure would be fulfilled and the utility of the disclosure towards good Corporate Governance would be improved when the disclosure is done on the basis of uniform and consistent accounting standards. Thus, the development and the practice of uniform accounting standards has become an essential ingredient of Corporate Governance and the various bodies have been contributing their wisdom to strengthen the standards to make the Corporate Governance more effective in the context of the changing corporate environment. The corporate management is also now feeling the pressure for reforming accounting practices and level of transparency emanating from alert lenders, regulatory agencies, financial analysts and above all, board of directors who realize that it is the quality of information which will determine how efficiently they have discharged their responsibilities towards the good Corporate Governance.

In Oman, though the financial statements have been prepared in accordance with International Accounting standards issued by the International Accounting Standards Committee (IASC), interpretations issued by the Standing Interpretation Committee of the IASC and the requirements of the Commercial Companies Law of the Sultanate of Oman and the disclosure requirements set out in the rules for disclosure issued by the Capital Market Authority of the Sultanate of Oman, the disclosure is inadequate and is a negative phenomenon to a country which wishes to be strengthened further, because it cannot hope to tap the GDR market with inadequate financial disclosures, since the more transparent activities of a company governed by the proper accounting standards, the more accurately will its securities be valued(5).

The International Accounting Standards followed in Oman industry are Presentation of Financial Statements (IAS 1); Inventories (IAS 2); Cash Flow Statements (IAS 7); Net Profit or Loss for the period (IAS 8); Fundamental Errors & Changes in Accounting policies (IAS 9); Events After the Balancesheet Date (IAS 10); Construction Contracts (IAS 11); Income Taxes (IAS 12); Segment Reporting (IAS 14); Effects of Changing Prices (IAS 15); Property, Plant and Equipment (IAS 16); Leases (IAS 17); Revenue (IAS 18); Employment Benefits (IAS 19); Accounting for Govt. Grants & Govt. Assistance (IAS 20); Effects of Changes in Foreign Exchange Rates (IAS 21); Business Combinations (IAS 22); Borrowing Costs (IAS 23); Related Party Disclosures (IAS 24); Retirement Benefit Plans (IAS 26); Consolidated Financial Statements (IAS 27); Investments in Associates (IAS 28), Hyperinflationary Economies (IAS 29); Banks & Similar Financial Institutions (IAS 30); Interests in Joint Ventures (IAS 31); Financial Instruments: Disclosure & Presentation (IAS 32); Earnings Per Share (IAS 33); Interim Financial Reporting (IAS 34); Discontinuing Operations (IAS 35); Impairment of Assets (IAS 36); Provisions, Contingent Liabilities & Assets (IAS 37); Intangible Assets (IAS 38); Financial Instruments: Recognition & Measurement (IAS 39); Investment Property (IAS 40); Agriculture (IAS 41).

Though the Oman industry has been following all the International Accounting Standards, in practice, some of them are not free from criticism due to certain inherent weaknesses. The practices of these standards in the Oman industries and the gaps are discussed in what follows with a view to strengthen them for ensuring the good Corporate Governance.


The primary and secondary data collected from the select companies are carefully examined to find the extent of compliance with the accounting standards and issues in corporate practices. Some of the important findings are as follows:

i) Perceptions on the relevance of Accounting Standards for Corporate Governance: Except one sample of private companies which has not disclosed its opinion, all others (90% of the sample) have expressed the accounting standards as more relevant for Corporate Governance.

ii) Practices of Accounting Policies Disclosed in Annual Reports: The majority of the sample companies (80%) disclosed twenty to twenty five policies and the remaining is equally distributed between less than twenty and more than twenty five standards disclosed by the select companies. All the select public limited companies have complied with twenty to twenty five accounting standards.

iii) Practices of Inventory Valuation: The sample companies have adopted either the lower of cost or net realisable value or moving average methods for the inventory valuation.

iv) Practices of Preparation of Cash Flow Statement: All the select companies have presented cash flow and changes in equity statements.

v) Corporate Practices of Depreciation: The study revealed that the majority of the sample companies (90%) have followed straight line method for the computation of depreciation and the remaining followed diminishing value method. Further examination revealed that all sample public companies followed the straight line method of depreciation.

vi) Practices of Construction Contracts: The sample consists of one construction company, which has followed per cent of completion method.

vii) Practices of Research & Development: None of the select companies has disclosed the expenditure on research and development.

viii) Practices of other Standards: The study revealed that the accounting practices related to fundamental errors and changes, effects of changing prices, business combinations, hyperinflationary economies, financial statements of banks and similar financial institutions and agriculture were not disclosed by any of the select companies as the companies are not concerned with such activities.

From the analyses of practices and general discussions, some of prime issues of accounting standards in the context of Oman are identified and presented here under in brief.


i) Disclosure of Accounting Policies is followed by most of the sample companies, since it is mandatory. The items stated under accounting policies or notes are more or less same in all the concerns selected for the study, but the treatment of some items were not similar to the other concerns.

The requirement of the disclosure standard is only to disclose the material facts, what is the material or immaterial it would be decided by the organization, where the influence of personal judgement is expected in the absence of concrete guidelines. Therefore, the existence of the standard is doubtful.

ii) In few accounting standards, such as, valuation of inventories and depreciation accounting, the alternative accounting treatment is allowed. This kind of flexibility creates problems in judging the quality and reliability of financial statements of an enterprise and the different methods are followed for different companies or for different periods, the possibility of inter-unit, intra-industry or inter-period comparison is impaired. The lack of comparability renders the financial information less useful and creates confusion in the minds of the investing public.

iii) In case of construction contracts, the standard provides for adoption of either completed contract method or percentage of completion method for recognition of profit on completed contract, which attracts the same limitation of comparability.

iv) The hybrid method of accounting i.e. accounting for income on cash basis and expenditure on accrual (mercantile basis), followed by corporates, conveniently allows them to manipulate their reports.

v) The standards setting process is closed and narrow and the execution is unsound , that causes the various practices and imperfect disclosure, which defeats the prime objective of accounting standards in achieving the good Corporate Governance.

vi) The adoption of IAS in toto without looking into their relevance in the context of Oman industrial environment, lacks the focus on the domestic problems and indigenisation.

The following suggestion are made on the basis of discussions with the corporates to solve the above issues and to improve the utility of accounting standards for ensuring good Corporate Governance.


i) The most important suggestion for strengthening the accounting standards to improve the quality reporting thus Corporate Governance values, is focusing on the local conditions, improving the relevance i.e. indigenisation of accounting standards to make the standards more suitable or appropriate to the existing industrial phenomenon in Oman.

ii) The Capital Market Authority in Oman in consultation with other professionals and regulatory bodies should evolve some mechanism to limit the scope of alternative methods available within an accounting standard. Thus,the use of uniform accounting standards would enhance the qualitative and comparability dimensions of financial statement and reporting.

iii) The establishment of harmony among the applicable laws like Companies Act, Income Tax Act, Banking Regulations etc., which have significant bearing on different items of financial statements, would give true and fair view of business.

iv) The formulation of comprehensive and indigeneous standards, like accounting for changes in prices, inflationary economies, segment accounting, accounting for joint ventures, earning per share, investment in subsidiaries, associates etc., useful to make accounting standards more user friendly and international acceptable.

To sum up, though the entire industrial community in Oman has been following the International Accounting Standards and adopting disclosure practices to ensure true and fair view of the economic activities, still a lot more needs to be done to promote good corporate governance and a healthy investment climate. The other middle east countries, which adopt the policy of liberalization and intend to increase in international capital market activities due to globalization should learn that reducing the variety of approaches in the each accounting standards, formulating the comprehensive and indigeneous standards and making all accounting standards as mandatory have to be given top priority for attaining the required objectives, otherwise it will be exceedingly difficult for Oman investors to trust the Corporate Governance.

* The article is presented in Accounting, Commerce & Finance: The Islamic Perspective International Conference V, held in Brisbane, Australia during 15-17, June 2004.


1. Tiwary, Ojha, Arun Kumar, “Corporate Governance in India: What it Means and What it needs?”, The Indian Journal of Commerce, New Delhi, Oct-Dec,1998, p.154.

2. Chandratre, KR, “Role of Board of Directors in Emerging Dimensions of Corporate Governance and Impending Changes in Company Law, The Chartered Secretary, The Institute of Chartered Secretary of India, New Delhi, May 97, p. 505.

3. R.I.Ticker, “Corporate Responsibility, Institutional Governance and the Roles of Accounting Standards” in Michael Bromwich and Anthony G. Hopwood (Eds.), Accounting Standards Setting, An International Perspective, Pitman Books Ltd., London, 1883, p.27., Cited in Lele RK, Jawahar Lal, “Accounting Theory”, Himalaya Publishing House, New Delhi, 96,p.56.

4. Sir Adrian Cadbury, “Developments in Corporate Governance”, The Company Secretary, The Institute of Chartered Secretary of India, New Delhi, May 97, p. 497.

5. The Report of the Cadbury Committee on “Financial Aspects of Corporate Governance”, The Company Secretary, The Institute of Chartered Secretary of India, New Delhi, May 97, p. 573.

6. Verma, Garg, Singh, “Disclosure of Accounting Standards Vis-à-vis Company Characteristics: A Study of Indian Corporate Sector”, The Indian Journal of Commerce, New Delhi, Oct-Dec,1998, p.131.


What are S Corporations?

S Corporation is an elective provision that permits small business corporations and their shareholders to elect special income tax treatment. In S corporation status, corporate income tax can be avoided and shareholders can claim corporate losses. These are domestic corporations that can avoid double taxation by electing to be taxed under Subchapter S of the Internal Revenue Code. The S corporation cannot have more than 75 shareholders. Only certain entities and individuals are allowed to be shareholders. All S Corporation shareholders must be U.S. citizens or permanent resident aliens. S Corporations may have only one class of stock. It is exempted from federal income tax other than tax on certain capital gains and passive income.

S corporation is a for-profit corporation that begins to exist upon filing the Articles of Incorporation at the state level. S Corporation status can be obtained by submitting IRS form 2553 to the Internal Revenue Service. Taxation is done as a partnership or sole proprietorship rather than as a separate entity. For purposes of computing tax liability, income is “passed-through” to the shareholders in S corporation. Thus, the individual shareholder’s tax return will report the gain or loss generated by the S corporation.

The IRS treats corporate income and corporate losses very differently when a corporation has elected S Corporation status. Therefore, businesses that need the limited liability of a corporation and the pass-through tax treatment of a partnership will elect S corporation. In general, S corporation structure is preferred only when shareholders are employed at least half of the time within the corporation. In other words, the shareholders intemperately manage the corporation’s daily activities and income is distributed to them each year.

A financial advisor would be able to guide you in terms of S corporation status as to whether it would yield a profit for your business. If you plan to draw a very low salary and leave most of the corporate earnings in the corporation for reinvestment, S corporation may not be the right choice for you.

Keys For Using a S Corporation

If you have been considering forming a corporation or other business entity to provide yourself with limited liability and financing options in your business venture, you have made an important first step. You may have compared the tax benefits of corporations and limited liability companies or limited partnerships. If you have done so, you likely realized that corporations are taxed twice, while limited liability companies and limited partnerships are taxed once. While a corporation’s profits are taxed once as the corporation’s income and again when the profits are distributed as dividends, a limited liability company or limited partnership’s profits flow through the entity and are only taxed once as personal income to the individual member of the limited liability company or partner in the limited partnership. This is referred to as flow-through taxation. Based solely on the tax treatment of corporations, you may be prepared to use a limited liability company or limited partnership for your business.

While limited liability companies and limited partnerships feature outstanding charging order protection, Nevada has recently extended such protection to corporations with between two and seventy-five shareholders.

Before you decide which business entity to use, there is one more option for you to consider. If you choose to use a limited liability company or a limited partnership, your business may limit its financing options. Financing for a limited liability company or a limited partnership may not be as readily available as financing for a corporation, because interests in such entities are not as transferable as interests, or shares of stock, in a corporation. An S-corporation is the alternative that provides both financing options and flow-through taxation; however, to be treated as an S-corporation, your business must do the following:

o Incorporate the Business – As with a regular corporation, referred to as a C-corporation, an S-corporation must prepare and file Articles of Incorporation with the state, prepare and operate under Bylaws, operate under a Board of Directors and corporate officers, and engage in corporate formalities.

o File an S-Corporation Election Form – To be eligible for S-corporation tax treatment, the corporation must (1) be a corporation organized in any U.S. state, (2) not be an ineligible corporation (certain types of businesses are not eligible), and (3) have only one class of stock. If eligible, the corporation may file an S-corporation election form, Form 2553, with the Internal Revenue Service within forty-five days after incorporating. While this will allow flow-through federal taxation, it is important to note that five states do not recognize S-corporations and may tax the corporation as a C-corporation. It is also important to note that S-corporations are not eligible for certain tax deductions that C-corporations may enjoy.

o Notice and Obey S-Corporation Limitations – Once the corporation has made its S-corporation election, it must notice and obey the limitations on S-corporations to maintain its flow-through tax status. If the corporation violates any of the following limitations, it will lose S-corporation status and will not be eligible for flow-through taxation for five years: (1) it must have one hundred or fewer shareholders; (2) all of its shareholders must be individuals, descendants’ estates, estates of individuals in bankruptcy, or certain trusts, because business entities may not be shareholders; and, (3) all of its shareholders must either be United States citizens or resident aliens in the United States (nonresident aliens may not be shareholders). If the corporation loses its flow-through tax status, the Internal Revenue Service will treat it as a C-corporation.

Every business is unique. Your business’s form should be based on your specific circumstances. While the limitation on the number and types of shareholders allowed in S-corporations may affect financing options, such limitations may have less practical importance than the limitations on financing options created by using a limited liability company or a limited partnership. Accordingly, S-corporations’ tax benefits, management structure and transferability of shares may provide the benefits that your business needs in an entity that also provides you with limited liability. By considering your business’s options and choosing the best available business form, you will ensure that you take advantage of available opportunities.