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To Incorporate or Not to Incorporate
If you are thinking about incorporating, you are probably overwhelmed by the pros and cons as well as the checklist that seems to be never-ending. Is it worth it? Would it be beneficial to you? What are your options? You've come to the right place for help on learning about incorporating.
First of all, should you incorporate? Let's take a look at the advantages. If you decide to incorporate, you will have:
· A modest amount of liability. A corporation stands by itself without putting the personal assets of shareholders at significant risk
· Tax advantages. Corporations pay their own taxes separate from the owners. Owners only have to pay taxes on their corporate profits from bonuses, dividends and salaries.
· Attraction for investors. The way the stock structure works with a corporation makes it appealing to potential investors.
· Attractive options for potential employees. Corporations tend to attract a higher quality employee because of ownership interest with stock or stock options.
· The option of being an owner and employee. Expenses can be deducted or reimbursed if a business owner is also an employee.
· Structure. Within a corporation, there is a predictable set management structure.
· The power of existence. Unless shareholders decide to merge with another business or dissolve the existence of a corporation, it will continue to exist.
· Transferrable shares. These are attractive because they can be transferred without limitations, with the exception of securities laws.
As with most things in life, there are disadvantages to measure along with the advantages. The disadvantages of incorporating can include:
· Additional costs. Just as it takes money to make money, it costs you money if you want to incorporate. The fees in incorporating can be broken down into four categories:
You must pay a fee when you file the Articles of Incorporation with the Secretary of State
Another fee is due when you must pre-pay for your first-year franchise tax
There will be a number of random fees when you take care of the necessary filing with the government
Attorney's fees if you choose to use one when you incorporate
· Mandatory compliances. If you incorporate, there are rules that you have to follow.
· Paperwork. Incorporating takes a huge amount of paperwork not only when you incorporate, but also as you maintain your corporation. Record keeping can become quite burdensome if you don't have someone specifically designated to deal with these matters.
· Lack of privacy. If you value your privacy and don't wish to have publicly displayed records, you might not want to incorporate. Most states require that all names and addresses of the directors and corporate offices are detailed on at least one or more documents that are filed with the Secretary of State.
· Dissolution takes time. Whether it is voluntary or involuntary, dissolution can happen in any corporation.
· Taxes. Depending on your corporation's profits and dividends, taxes can be a serious expense issue.
Incorporating is a huge decision and shouldn't be taken lightly. You will always want to consider control, taxes and liability when you make your decision. When you are ready to incorporate, you're ready to take the first steps!
You Have Options for Incorporation
When you decide to incorporate, you need to know what kind of corporation you want to be. You have these choices:
1. Sole Proprietorship
With a sole proprietorship, the business is owned and operated by a single person. For this type of corporation, you need:
A business name
A business license
As the owner of a sole proprietorship, you risk your personal assets and you must file your own paperwork. You have both the advantage and disadvantage of have sole responsibility for your business.
2. General Partnership
Two or more people own and operate a general partnership and the control is divided between the owners. It isn't as complicated to work out as it might sound, but legal contracts will need to be drawn up.
Personal assets are at risk if the business fails or a lawsuit is filed against the corporation.
The advantage to a general partnership is that more than one person is sharing in performing duties and investing. The disadvantage is that if all the partners don't agree, legal problems could arise.
3. Limited Partnership
Two or more people invest in and are responsible for the company, however they do not all have to be equal.
For organizational purposes, the company will need a name and business license for operation.
All owners have unlimited liability unless otherwise stated in the contracts.
Form 1065 or the Partnership Return of Income form must be filed in addition to personal income tax forms.
The advantage to a limited partnership is that more than one person is sharing in performing duties and investing. The disadvantage is that if all the partners don't agree, legal problems could arise.
4. Limited Liability Corporation
A Limited Liability Corporation or LLC is owned and run by its members. They have complete control.
For a LLC, most states require articles of corporation to be filed. As this is a "limited liability" corporation, personal assets are not at risk.
Depending on how the business has been structured, the business might be taxed as either a partnership or corporation.
Many business owners like that a LLC allows them to have control with the protection of personal assets. Unfortunately, the paperwork of a corporation can make it a bit burdensome.
5. Corporation
Shareholders own the business when it is a corporation. Any control you have over your corporation must be checked by the board of directors.
Articles of corporation must be filed.
State, local and federal agencies will monitor a corporation to make sure all the rules are adhered to.
With a corporation, the shareholders have limited liability for any debts incurred by the corporation.
A Form 1120 Corporation Income Tax Return, Form 8109-B Deposit Coupon and Form 4625 Depreciation must be filed with a corporation.
While the benefit of having a corporation is that you are able to raise money by issuing stock, there are higher taxes to be paid because you cannot deduct shareholder dividends from business income.
6. S Corporation
An S Corporation is a business owned by shareholders and your control will be monitored by the board of directors.
Articles of corporation must be filed.
State, local and federal agencies will monitor a corporation to make sure all the rules are adhered to.
The shareholders will have limited liability for any debts incurred by the corporation.
IRS form 1120S Corporation Income Tax Return, Form 1040 Individual Income Tax Return, Form 4625 Depreciation, Schedule E and Schedule SE must be filed.
With an S Corporation, money can be raised though stock and earnings are distributed by passing directly to shareholders and their own personal tax returns. Shareholder, however, must pay themselves wages that meet the criteria of reasonable compensation.
Q.Are You Ready to Incorporate?
Is it time for you to incorporate? Here's what you need to do:
Decide on a name for your business
Check with the U.S. Trademark Office to ensure the name you want is available
Decide which state you want to file in (while you may do business in more than one state, you will typically select your ";home" state to file)
Determine the kind of corporation you will become
Make sure you have the money necessary to file all of the forms you'll need to incorporate (check your state's official website where you will be able to find a list of necessary requirements and fees for incorporation)
Determine if you will need to hire a lawyer to help you or you may file the paperwork on your own (if you choose to file on your own, any mistakes could cost you additional money and slow down the process of incorporation)
Consider if using an incorporation service company is the right choice for you
Once you've got your needs and decisions in order, you are ready to incorporate! Whether you are small, one-man operation or a multiple-employee business, there is an option for you.
Additional Resources:
USA Government Licenses by State
http://www.usa.gov/Business/Incorporate.shtml
Wikipedia Incorporation
http://en.wikipedia.org/wiki/Incorporation_(business)
Wikipedia Shares
http://en.wikipedia.org/wiki/Shares
Wikipedia S-Corporation
http://en.wikipedia.org/wiki/S_corporation
Wikipedia C-Corporation
http://en.wikipedia.org/wiki/C_corporation
Wikipedia LLC
http://en.wikipedia.org/wiki/Limited_liability_company
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