Incorporating

To incorporate or not? Many of our clients consult with us to determine the best form of ownership for their business. There are many choices when establishing your own business:
• Sole Proprietor
• LLC
• S-Corporation
• C-Corporation

Learn About Incorporating : Advantages of Incorporating

Anyone who operates a business, alone or with others, may incorporate. Under the right circumstances, the owner of any size business can benefit!

• Reduces Personal Liability
Incorporating helps separate your personal identity from that of your business. Sole proprietors and partners are subject to unlimited personal liability for business debt or law suits against their company. Creditors of the sole proprietorship or partnership can bring suit against the owners of the business and can move to seize the owners’ homes, cars, savings or other personal assets. Once incorporated, the shareholders of a corporation have only the money they put into the company to lose, and usually no more.

• Adds Credibility
A corporate structure communicates permanence, credibility and stature. Even if you are the only stockholder or employee, your incorporated business may be perceived as a much larger and more credible company. Seeing “,inc.” or “corp.” at the end of your business name can send a powerful message to your customers, suppliers, and other business associates about your commitment to the ongoing success of your venture.

• Tax Advantages – Deductible Employee Benefits
Incorporating usually provides tax-deductible benefits for you and your employees. Even if you are the only shareholder and employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may now be deductible. Best of all, corporations usually provide an increased tax shelter for qualified pensions plans or retirement plans (e.g. 401K’s).

• Easier Access to Capital Funding
Capital can be more easily raised with a corporation through the sale of stock. With sole proprietorships and partnerships, investors are much harder to attract because of the personal liability. Investors are more likely to purchase shares in a corporation where there usually is a separation between personal and business assets. Also, some banks prefer to lend money to corporations.

• An Enduring Structure
A corporation is the most enduring legal business structure. Corporations may continue on regardless of what happens to its individual directors, officers, managers or shareholders. If a sole proprietor or partner dies, the business may automatically end or it may become involved in various legal entanglements. Corporations can have unlimited life, extending beyond the illness or death of the owners.

• Easier Transfer of Ownership
Ownership of a corporation may be transferred, without substantially disrupting operations or the need for complex legal documentation, through the sale of stock.

• Anonymity
Corporations can offer anonymity to its owners. For example, if you want to open an independent small business of any kind and do not want your involvement to be public knowledge, your best choice may be to incorporate. If you open as a sole proprietorship, it is hard to hide the fact that you are the owner. And as a partnership, you will most likely be required to register your name and the names of your partners with the state and/or county officials in which you are doing business.

• Centralized Management
With a corporation’s centralized management, all decisions are made by your board of directors. Your shareholders cannot unilaterally bind your company by their acts simply because of their investment. With partnerships, each individual general partner may make binding agreements on behalf of the business that may result in serious financial difficulty to you or the partnership as a whole.

back to top

Responsibilities when Incorporating

While the argument for incorporating is strong, maintaining your corporation comes with a set of responsibilities.

• Maintaining a corporation requires more paperwork and record keeping than sole proprietorships. Each individual state has its own legal procedures and regulations for forming and maintaining a corporation in good standing.

Learn About Incorporating : Types of Corporations
Businesses may choose from a variety of corporate entities, based on their needs. Below are useful descriptions. If you have further questions, your legal or financial advisors can help you decide which type of structure best suits your business needs.

• General Corporation, also known as a "C" corporation
• Close Corporation
• Subchapter S Corporation
•••• Subchapter S Restrictions
•••• How to file as Subchapter S
• Limited Liability Company (LLC)

General Corporation
A general corporation, also known as a “C” corporation, is the most common corporate structure. A general corporation may have an unlimited number of stockholders. Consequently, it is usually chosen by those companies planning to have more than 30 stockholders or large public stock offerings. Since a corporation is a separate legal entity, a stockholder's personal liability is usually limited to the amount of investment in the corporation and no more.
back to list

Close Corporation
A close corporation is most appropriate for the individual starting a company alone or with a small number of people. There are a few significant differences between a general corporation and a close corporation. A close corporation limits stockholders to a maximum of 30. In addition, many close corporation statutes require that the directors of a close corporation must first offer the shares to existing stockholders before selling to new stockholders. Not all states recognize close corporations.
back to list

Subchapter S Corporation
A Subchapter S Corporation is a general corporation that has elected a special tax status with the IRS after the corporation has been formed. Subchapter S corporations are most appropriate for small business owners and entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners. When a general corporation makes a profit, it pays a federal corporate income tax on the profit. If the company also declares a dividend, the stockholders must report the dividend as personal income and pay more taxes. S Corporations avoid this "double taxation" (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the stockholders. For many small businesses, the S Corporation offers the best of both worlds, combining the tax advantages of a sole proprietorship or partnership with the limited liability and enduring life of a corporate structure.
back to list

S Corporation Restrictions
To elect S Corporation status, your corporation must meet specific guidelines.

1. All stockholders must be citizens or permanent residents of the United States.
   
2. The maximum number of stockholders for an S Corporation is 75.
   
3. If an S Corporation is held by an "electing small business trust," then all beneficiaries of the trust must be individuals, estates or charitable organizations. Interests in the trust cannot be purchased.
   
4. S Corporations may only issue one class of stock.
   
5. No more than 25 percent of the gross corporate income may be derived from passive income.
   
6. Not all domestic general business corporations are eligible for S Corporation Status.

Exclusions:

• a financial institution that is a bank
• an insurance company taxed under Subchapter L
• a Domestic International Sales Corporation (DISC)
• certain affiliated groups of corporations

For more detailed information about these changes and other aspects regarding S Corporation status, contact your accountant, attorney or local IRS office.
back to list

How to File as a Subchapter S Corporation
1. Form a general or close corporation in the state of your choice.
2. Obtain the formal consent of the corporation's stockholders and note this consent in your corporation's minutes.
3. Complete Form 2553, Election by a Small Business Corporation.
back to list

Limited Liability Company (LLC)
The LLC is not a corporation, but it offers many of the same advantages. Many small business owners and entrepreneurs prefer LLC’s because they combine the limited liability protection of a corporation with the "pass through"" taxation of a sole proprietorship or partnership.

• LLC’s have additional advantages over corporations:
• LLC’s allow greater flexibility in management and business organization.
• LLC’s do not have the ownership restrictions of S Corporations, making them ideal business structures for foreign investors.
  
• LLC’s accomplish these aims without the IRS' restrictions of an S Corporation.
• LLC’s are now available in all 50 states and Washington, D.C. If you have other questions regarding LLC’s, be sure to speak with a qualified legal and/or financial advisor.
  

back to list

back to top