Incorporating a company is a way to establish a separate legal entity for all purposes, meaning it is separate and distinct from its shareholders.
WHY SHOULD I INCORPORATE?
- Tax Savings: This is one of the greatest benefits but must be discussed with your accountant.
- Privacy: The law treats a corporation as a legal “person” that has standing to sue and be sued, distinct from its stockholders. This protects your personal name from the public thereby providing you with privacy.
- Asset Protection: The legal independence of a corporation prevents shareholders from being personally liable for corporate debts. This means that the corporation itself is liable, not the shareholders. Therefore, your assets will be protected including current assets and those you will acquire in the future such as a home.
- Financial Flexibility: The legal “person” status of corporations gives the business perpetual life; deaths of officials or stockholders do not alter the corporation’s structure. The business continues so you can always transfer and sell stock as the business grows. A business that is established will generate wealth and prosperity. In close corporations, many generations will prosper as the business can continue in perpetuity.
WHAT TYPE OF CORPORATE FORMATION SHOULD I CHOOSE?
This is a very important decision and one that will be discussed in detail with your attorney and accountant so that you will meet your stated objectives as outlined above. The following is a brief overview of the different types of corporate formation, including a C corporation, S corporation and a LLC.
- Shareholders provide capital.
- Directors and officers manage the business.
- Perpetual existence regardless of what happens to the shareholders, directors or officers. *This is contrasted with the LLC, which dissolves upon the death or withdrawal of any member. See below.
- Owners are limited from personal liability if the separateness of the entity is maintained and enough capital is put into the business to cover liabilities.
- Taxes are levied on the corporation as well as on the shareholders. (This is contrasted with the S Corporation whereby taxes flow through to the shareholders so there is no second layer of taxation.)
- The sale of stocks or bonds can generate additional capital and the longevity of the corporation can continue past the death of the owners.
- An S corporation retains all of its corporate attributes (including limited liability) but is not subject to an entity tax.
- All corporate income, losses, deductions and credits flow through to the shareholders. To be eligible, the S Corporation must be a domestic corporation with no more than 35 individual shareholders and only one class of stock.
- Typically, S corporation shareholders can only write off losses up to the amount of capital they invested (though the loss can be carried forward and recognized in future years.)
LIMITED LIABILITY COMPANY
- Combines corporate limited liability and partnership-type tax treatment.
- Potential disadvantages: not all states have LLC statutes and operating a business as an LLC outside the state of formation may expose LLC members to partnership-like personal liability.
- A hybrid between a partnership and a corporation.
- Members of the LLC provide capital and manage the business according to agreement.
- A Member’s interests are not freely transferable and the LLC dissolves upon the death or withdrawal of any member.
WHAT YOU NEED TO INCORPORATE YOUR COMPANY
- Names of Officers and Directors.
- Amount of capital to contribute.
- Company Name (This is different from a trademark.)
- Name and Address of Registered Agent to receive service of process.
- Social Security Number of an Officer of the Company.