Want to give your small start-up the look of a big business? One
way is to add "Inc." to your business name by choosing
incorporation as your legal form of doing business.
"Your business can appear more substantial, more
established, when you're incorporated," says Caroline
Quigley, executive vice president of Inc. Plan (USA), a Wilmington,
Delaware, company that helps businesses incorporate. "It's
one thing to do business as `Jane Smith,' but doing business as
`Smith Public Relations Inc.' gives the business added
stature."
Incorporating does more than just boost your image, however.
When you incorporate your business, you create a separate legal
entity with a life of its own. Unlike a sole proprietorship or a
partnership, a corporation can survive your death. A corporation is
recognized by local and state governments and has legal rights
and responsibilities. For example, it can buy and sell property; it
can sue and be sued; and it pays taxes.
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Probably the single most important function of incorporating is
to protect your personal assets. Should your incorporated business
fail, your personal assets are generally protected from creditors
(unless you've guaranteed a loan or done something illegal).
All the corporation's assets would go toward satisfying its
debts, but no one can attach your house, car or personal bank
account to pay outstanding claims. In effect, your personal
liability is limited to the amount of money you put into your
corporation, with the exception of any unpaid taxes.
There are other reasons to consider incorporating. When you want
to raise capital for your business, it's easier to attract
investors if you're incorporated. An investor can purchase
shares of stock in your corporation in exchange for the money you
receive. Corporations enjoy tax advantages that single
proprietorships and partnerships don't. For example, you can
set up pension, profit-sharing and stock-option plans for yourself
and other owners of the corporation.
There are, of course, some disadvantages to incorporating a
small business. Record-keeping can be time-consuming. You need to
maintain accurate financial records for your corporation and keep
them separate from your personal expenses. Depending on the type of
corporation you set up, you might have to file two tax returns,
individual and corporate, which can mean added accounting
expenses.
Second, you could encounter some personal risks. While
shareholders of a corporation are not personally liable for
corporate debts, major shareholders--yourself included--might be
asked to personally guarantee loans made to the corporation.
Probably the biggest drawback is the potential for double taxation.
A corporation's income is taxed by the federal government and
by most states. Then, when income is distributed as dividends to
shareholders, it's taxed a second time at the personal
level.
You can avoid double taxation by applying to the IRS to form an
"S" corporation rather than the standard "C"
corporation. "[An S] corporation is taxed similarly to a
partnership," explains Quigley. "Each shareholder reports
profits or losses of the corporation on his or her personal tax
return in proportion to the amount of shares he or she holds."
If your corporation incurs a loss, you can use it to offset other
tax obligations. If there's a profit, it's taxed once--at
your personal income-tax level--rather than twice, as with a
"C" corporation.
To maintain the advantages of incorporating, it's critical
you maintain what's commonly called "the integrity"
of the corporation. Requirements vary from state to state. At a
minimum, you'll need to hold a documented annual meeting of
corporate officers and submit an annual report to the secretary of
state.
You can get into trouble and lose the protection a corporation
affords you when you "pierce the corporate veil." This
typically happens when officers use corporate funds to pay personal
expenses. Creditors and others with claims against your corporation
can then sue you and go after your personal assets.
Who can help you incorporate? There are plenty of do-it-yourself
books and software programs you can use (see "Resources"
on page 22). Generic forms and filing fees could cost as little as
$200, depending on where you incorporate. You might, however, want
to hire an attorney to draft or at least review your documents.
It's good protection for your corporation.
A third option is to pay a company to draw up and file the
documents for you. Inc. Plan (USA)'s incorporation fees range
from $119 in Delaware to $1,009 in California. The process
typically takes two to three weeks, depending on the state. Two
companies providing similar services are CT Corporation System
(800-624-0909) and Corporate Agents Inc. (800-877-4224).
Carla Goodman is a freelance writer in Sacramento,
California.
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