Streetwise Incorporating Your Business

From Legal Issues to Tax Concerns, All You Need to Establish and Protect Your Business

Michele Cagan

• Publisher: Adams Media
• Year: 2007
• Print ISBN: 9781598690941
• eBook ISBN: 9781440516764
• Topic: Negocios y empresa
• Subtopic: Finanzas

Incorporating your business can provide numerous legal and financial advantages - it also has long-term ramifications on how you manage and structure your organization. Streetwise Incorporating Your Business will not only educate you about the benefits of incorporating your business, but will also help you determine which corporate form and structure will be the most advantageous for your personal circumstances.

You will learn the details of many critical business issues, including:

• Whether an S corporation or a C corporation is better for your organization
• Which state and federal regulations will affect your corporation
• How to avoid hidden costs associated with incorporating your business
• Tax planning strategies and required accounting practices

Streetwise Incorporating Your Business will lead you through each decision, from choosing the best location to incorporate, deciding which information to include in official government filings, and learning how to organize board and shareholders meetings.

Getting Started

PART1

Chapter 1

Making the Choice
to Incorporate

Chapter 2

Meet the Different
Corporate Types

Chapter 3

The Best Things
About Incorporating

Chapter 4

Get Your Business
Ready to Go

How Structure Impacts Your Business

Like the foundation upon which your house is built, a business structure provides support and framework for your business. This structure, or entity, is the legal form of your company, but it comes with a wide-ranging set of implications beyond the legal ones. Among other things, the entity you choose for your company directs the following:

How many owners your business can have

The type of owners your business can have

Your (and your co-owners’) personal liability for business debts

Your company’s liability for your (and your co-owners’) personal debts

What type of funding is available to the business

How your business is perceived by others

How much paperwork you will have to do

Who pays the income taxes

How much income tax will be paid

Many novice business owners overlook the importance of entity choice; in fact, many don’t even actively make a choice before jumping into business, and they end up stuck with the most basic (and often least protective) structures. But even those entrepreneurs who have made painstaking decisions regarding their business entities may find themselves in the position of needing to make a change.

While every business entity can be changed after the fact, that often involves extra paperwork and sometimes invokes a tax consequence as well. Those pitfalls of switching can be managed with some careful planning, but choosing the best entity for your business—either at start-up or after your company has grown enough to merit a change in entity—in the first place can help you avoid potential difficulties.

A Natural Progression

When it comes to small business, there is a typical pattern of progression when it comes to structure. Many novice entrepreneurs, whether they have planned to start a business or just slid into it without really knowing what’s what, start off as sole proprietors (when they are flying solo) or as general partnerships (when at least two people are involved). These business structures are the default settings: If you do nothing, these are the entities you will have created. As you might expect, these entities are the least beneficial in virtually all ways except the simplicity of formation.

Once business owners get into the swing of things—read this as “start making money, paying taxes, and owning something too good to lose”— they begin to think about better ways to manage their companies. They may search around online for advice or talk to their CPAs, attorneys, or other professional advisors. Whichever path they take, they will likely end up transforming their companies into other entities, usually limited liability companies (LLCs) or S corporations.

The final destination comes into play when the company has grown beyond expectations, pulling in revenues measured in (at least) millions of dollars each year. At that point, most businesses become C corporations, and they live that way forevermore.

Do You Have a Business?

Sometimes, a person can be in business and not fully realize it. Sound crazy? Think about this. A man employed at a plumbing supply company does a little bit of light plumbing work on the side. That’s a business. Or a secretary types up term papers for her son’s classmates for a small fee. That’s a business.

Here’s the basic rule. If you perform a service for money, or sell something for more than you originally paid, and you are not acting as an employee for someone else, you have engaged in a business transaction … for your own business.

Before the First Transaction

The instant you complete your first transaction, you have a business. It does not matter if any money has changed hands; the simple act of agreeing to provide a product or service for money, even if that money won’t come into play for months, counts as a business transaction. Once you’re in business, it can cost extra time and money to make an entity switch.

In the absence of LLC or incorporation papers, and depending on the number of owners involved, your business will automatically be a sole proprietorship or general partnership for accounting, tax, and legal purposes. If you do want to start a business, but you want to enjoy the benefits of a more sophisticated entity (such as protection from business debts), it’s better to fill out all the paperwork and mail in the fees before you do anything else. The things you do to form the business count as entity set-up costs, not regular transactions, and will not make you an inadvertent sole proprietor or partner.

If you have already started, do not worry; you can switch to another structure. It just costs more and involves more legalities and paperwork (not to mention potential tax implications) than if you had formed the desired entity at the very start.

A Brief Look at the Choices

When you create a business, you have four basic entity choices and a few options inside those. The big four are sole proprietorship, partnership, corporation, and limited liability company (or LLC, the baby of the bunch). Sole proprietorships and LLCs come in one flavor only, but corporations and partnerships have several varieties from which to choose. Once you have a good understanding of your options, you will be better able to select the best business structure for your company right now. You should also know that as your company grows and changes, you can always switch to another.

Partnerships

Partnerships come in three basic varieties and one twist that’s currently available only in some states. The three main types, and the one twist, are the following:

1. General

2. Limited

3. Limited liability (LLP)

4. Limited liability limited (the twist)

There are vast differences among these entities when it comes to liability protection for and involvement by partners, but the differences are very small when it comes to taxation.

In general partnerships, each partner is both jointly and severally liable for all debts of the partnership. That means every single partner is 100 percent personally liable for every dime owed to anyone by the partnership, but he can sue his partners for some of the money back if he’s the only one forced to pony up at first. Wait, it gets worse! For example, you could end up responsible for a fellow partner’s personal debts. Your partner could also run up ridiculous bills, charge them to the business, take a hike, and leave you holding the bag. Just in case the point here hasn’t poked you in the eye already, a general partnership is the very worst business entity you could ever possibly form.

A limi...

Table of contents

• Cover
• Title Page
• Contents
• Dedication
• Introduction
• Part 1: Getting Started
• Part 2: Understanding Corporations
• Part 3: Creating Your Corporation
• Part 4: Maintaining Your Corporation
• Part 5: Taxes, Taxes, Taxes
• Appendix A: Glossary
• Appendix B: State Business Development Office Contact Information
• About the Author
• Copyright