Incorporations

Liability and taxes are big factors in deciding whether to incorporate or not. Other important facets are how will the business be funded and are there plans to take the company public.

A corporation is a legal entity with legal standing similar to an individual person. For this reason, a corporation’s actions are considered as made by the corporation, not by an individual person. This simple legal distinction is what keeps the liability with the corporation and not with the actual individual who is acting for the corporation. This liability protection is one of the biggest reasons that corporations are formed.

Taxes are another big consideration that a business would rather operate as a corporation than as an individually owned business. A privately owned business that is operating as an individual or partnership is considered the same, as if the individual were doing the business of the company. This presents direct tax requirements and obligation. The same actions done by a corporation are taxed through the corporation and are not directly the actions of the individual who owns the corporation. This is true in a typical corporation, but there are exceptions to this basic rule, like an LLC or the like.

Another reason that a corporation may be formed is if the owner wishes to take advantage of the retirement benefits that a corporation can offer its employees and uses of boats and cars. A person in a high tax bracket can benefit in some corporate environments better than they could as an individual owner.

Any individual or individuals can form a corporation. A corporation can form another corporation. How this is done as far as registration with the state or country can be completed by various means. An individual can do this by himself or herself if they know how. A law firm that specializes in filing the documents can do this. There are also Internet firms that will do this for the individual, but it is much the same as if the individual did it for himself.

The result is the same, if the papers are properly completed and filed. When the fees are paid, the corporation is now a breathing live entity. The problem with an individual doing this filing without any advice is the language and information in the filing may not be correct and leave open unintended consequences. The more complicated the filing, the more reason to act on sound advice from an expert in such filings.

The savings of attorney fees by doing this yourself may be a foolish savings, if it is done improperly and leaves open areas of liability.

Incorporate a business is the legal act of filing the necessary papers, so the business can operate as a corporation and not as a private person. This legal entity is then responsible for all actions done in the corporate name. The new entity is required to file state and federal taxes and acquire any licenses to do business in the name of the corporation. The new corporation can purchase insurance, own real estate, and cars, as if were a live person and not just a paper person. The corporation enjoys all the advantages and disadvantages of a blood and tissue person. As far as the law is concerned, this new legal entity is a person, and therefore all the laws and rules that govern people apply to it in very similar ways.

It also means that it is responsible for actions good and bad done in its name. Contracts can be signed and enforced between the corporation and the contracted party. Leases and ownership can be done in legally binding ways. The point is that when a business incorporates, it becomes a separate entity from the people who own the stock of the corporation. This results in liability protection for the corporate owners. It also allows the business to do actions in its own name and not in the name of the owners.

The idea of an LLC was first established in the State of Wyoming. It is now accepted legally in all fifty states. A similar idea was also seen in Germany under the name of GmbH and in Latin America under the name of limitadas.

A limited liability company has legal coverage of a corporation, while allowing the owners some uniquely different ownership abilities that do not exist with a regular corporation. An LLC is similar to a corporation, but has far greater flexibility for the owners. An LLC can be set up to send all the deductions to one person and the bulk of the profits to another. The write offs can be set up differently each year to the benefit of the various owners. Purchases can be attributed to one or more of the LLC participants and not to others. Then, the amortization can be passed on to these same owners. The LLC form for a business has all the perks of private ownership without much of the liability.

The percentage of ownership can be negotiated for more pass through of business expenses. This can have significant advantages based on the tax brackets of the several owners.

An LLC is an excellent way for several partners to own a small business. This is particularly true when there are ranges of ability to contribute to the business. The liability protection an LLC provides is very similar to that offered by a simple corporation. On the other hand, an LLC business results can be handled like a privately owned business. This is a terrific advantage for an LLC.

One caveat of an LLC is it may not be the best way for a single owner to own the business, as this is treated in many cases like a privately owned business. In this case, if the owner is worried about liability, or now being able to set up a corporate retirement plan, a simple straightforward corporation may be the best answer.

A sub chapter S Corporation is formed and elects to have its profits pass through to the owners and not be taxable to the S Corp itself. This type of corporation is popular with medical clinics with physician ownership. The reason for this type of ownership again is the liability protection it affords the owners. Another reason is the associated retirement benefits that may not be available to a private person doing business. These retirement benefits are also available for most of the other types of corporations.

There are several other requirements for S Corporations that need to be followed in order for the S Corporation to be formed. An example would be the number of owners in the S Corp. There has to be less than 100 shareholders.

The shareholders have to be real people and not corporations or partnerships. These shareholders must also be US citizens or residents.

Unlike an LLC, an S Corp shareholder has a proportional share based on their financial interest in the corporation. The profits or losses are then passed through based on this proportional interest.

This special class of corporation is where you will find corporations that are foundations or charities. This type of corporation must qualify for this class of corporation by stating in their corporate papers what they intend to do with any monies they raise. In the case of a charity, they must also show how they gave out the money and the criteria they used for making their gift. Foundations that give out scholarships can earn a certain amount of income from their investments, before having to even file any tax returns. Currently, this earnings threshold is $25,000.

Expenses, salaries, and other payouts must be carefully accounted for in order to show what was done with the non-profit funds. These expenses also have to have some reasonable relationship to a legitimate need of the organization. Valid reasons for an expense will usually suffice.

Any search engine will show quickly how many ways a person can use the Internet to incorporate. Legal firms and forms firms with many levels of help are easy to find and check out via the Internet. Their individual rates and services can be compared, as well as the level of services they provide.

These firms that show up through the Internet can provide only the forms to a full scale handling of the registration of the incorporation papers. Many can service any state the buyer wants to incorporate in and at various prices and levels of help filling out the respective forms.

When the owners of a corporation want to close it down and cease to do business under the corporate name, they must at least notify the respective authorities they have registered with and the state and fed tax folks.

If the closeout is the result of a merger or sale to a new entity, then the new entity may have requirements it needs to meet. Worker compensation would be such an example. Final sales tax reporting, as well as final reporting of state and fed taxes, would be in order.

Payment of all employee disability payments must be completed, if state sponsored and mandated. Payroll deductions must also be forwarded. Other obligations of the corporations should be met, but may not be if this closing is the result of a business failure.

Whether to incorporate or not is a decision that each business owner must make for their personal situation. One method to reach a good decision is to get the advice of an expert tax, retirement, and a liability lawyer as to your possible need or advantage. Look at what you are now paying out of your own pocket, and if you would gain from a different way of conducting your business.
Would there be advantages for your heirs as far as inheritances are affected. Are the tax differences enough to make up for the requirements of running a corporation that has more state or fed reporting? Would the corporate rules of your state make it more difficult to run your business?

Running a private business has some very real advantages as to what the reporting rules are compared with a corporation. On the other hand, if your business is a high liability organization, maybe that alone is enough of a reason to go with incorporation. Liability protection is worthwhile, if you have amassed a real net worth.

The wide variety of retirement plans that are available to corporate employees make incorporation very desirable for high-income individuals that own a private business. There could be large differences of what such an individual could put in a retirement plan via a corporation. This significant difference could turn a comfortable retirement into a very plush retirement.