Think Inc. Should you incorporate your business?

Want to give your small start-up the look of a big business? Oneway is to add "Inc." to your business name by choosingincorporation as your legal form of doing business.

"Your business can appear more substantial, moreestablished, when you're incorporated," says CarolineQuigley, executive vice president of Inc. Plan (USA), a Wilmington,Delaware, company that helps businesses incorporate. "It'sone thing to do business as `Jane Smith,' but doing business as`Smith Public Relations Inc.' gives the business addedstature."

Incorporating does more than just boost your image, however.When you incorporate your business, you create a separate legalentity with a life of its own. Unlike a sole proprietorship or apartnership, a corporation can survive your death. A corporation isrecognized by local and state governments and has legal rightsand responsibilities. For example, it can buy and sell property; itcan sue and be sued; and it pays taxes.

Probably the single most important function of incorporating isto protect your personal assets. Should your incorporated businessfail, 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 itsdebts, but no one can attach your house, car or personal bankaccount to pay outstanding claims. In effect, your personalliability is limited to the amount of money you put into yourcorporation, with the exception of any unpaid taxes.

There are other reasons to consider incorporating. When you wantto raise capital for your business, it's easier to attractinvestors if you're incorporated. An investor can purchaseshares of stock in your corporation in exchange for the money youreceive. Corporations enjoy tax advantages that singleproprietorships and partnerships don't. For example, you canset up pension, profit-sharing and stock-option plans for yourselfand other owners of the corporation.

There are, of course, some disadvantages to incorporating asmall business. Record-keeping can be time-consuming. You need tomaintain accurate financial records for your corporation and keepthem separate from your personal expenses. Depending on the type ofcorporation you set up, you might have to file two tax returns,individual and corporate, which can mean added accountingexpenses.

Second, you could encounter some personal risks. Whileshareholders of a corporation are not personally liable forcorporate debts, major shareholders--yourself included--might beasked 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 andby most states. Then, when income is distributed as dividends toshareholders, it's taxed a second time at the personallevel.

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 apartnership," explains Quigley. "Each shareholder reportsprofits or losses of the corporation on his or her personal taxreturn in proportion to the amount of shares he or she holds."If your corporation incurs a loss, you can use it to offset othertax obligations. If there's a profit, it's taxed once--atyour personal income-tax level--rather than twice, as with a"C" corporation.

To maintain the advantages of incorporating, it's criticalyou maintain what's commonly called "the integrity"of the corporation. Requirements vary from state to state. At aminimum, you'll need to hold a documented annual meeting ofcorporate officers and submit an annual report to the secretary ofstate.

You can get into trouble and lose the protection a corporationaffords you when you "pierce the corporate veil." Thistypically happens when officers use corporate funds to pay personalexpenses. Creditors and others with claims against your corporationcan then sue you and go after your personal assets.

Who can help you incorporate? There are plenty of do-it-yourselfbooks 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, wantto 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 thedocuments for you. Inc. Plan (USA)'s incorporation fees rangefrom $119 in Delaware to $1,009 in California. The processtypically takes two to three weeks, depending on the state. Twocompanies 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.

Supporting Roles

How can you accommodate your business's growth withouthiring in-house staffers or working with independent contractors?It's easy: Create a team of entrepreneurs with talents,experience and resources you can call on to meet the demands ofyour business.

A Web site developer, for example, might have a copywriter, agraphic designer and other technical experts on her team to handlebig projects. A greeting card and stationery designer could use amanufacturer's representative to sell his line. An interiordecorator might form an alliance with a painter, a wood refinisherand an upholstery shop owner to round out client services. Inaddition to helping with overflow work, your team can also help youget larger projects.

To recruit the best talent for your team, assess the skills youneed and look for other entrepreneurs who have those abilities. Youcan find them at industry meetings, chamber of commerce gatheringsor leads groups. Get to know people, and learn about what they doand how you can work together. Let them know you're interestedin collaborating with them.

Start with small, simple interactions to get comfortable withhow your team functions. Exchange leads, business articles ofmutual interest or information about helpful seminars andworkshops. Meet once a month for several months to let membersinteract and build a rapport with one another.

When you have a project that requires input from your team, besure to clearly define each person's role. Each team membershould be clear about when his or her contribution is due and theamount of compensation each should expect.

If members don't produce, ask them to re-examine theircommitments. Have a replacement in mind in case you need to make achange to your team.

Building your team network takes some effort in the beginning,but it's a great way to maintain your independence while yougrow your new company.

Resources

For more detailed information on incorporating in your state,check out these helpful resources:

• The Essential Corporation Handbook, by attorney Carl R.J. Sniffen (Oasis Press, $21.95, 800-228-2275), includes articlesof incorporation, bylaws, stock certificates and other vitaldocuments, plus a checklist for running an annual meeting.

• Incorporate Your Business: The National Corporation Kit,by attorney Daniel Sitarz (Nova Publishing, distributed by NationalBook Network; $19.95, or $29.95 for version with forms on PC orMacintosh disks; 800-462-6420), provides clear, straightforwardinstructions and forms for turning your business into acorporation.

• The Corporate Minutes Book, by attorney Anthony Mancuso(Nolo Press, $69.95, 800-955-4775), shows how to comply with yourstate's incorporation requirements and includes more than 80resolutions forms for common transactions.

• The Business Incorporating Guide is a Web site that offers freeinformation and articles online; visit http://www.corporate.com You canalso order a corporation kit with all the basic forms.

• Check with your secretary of state or other agency that handlescorporations. (If in doubt, contact your governor's office forthe appropriate agency.)

Contact Source

Inc. Plan (USA), (800) 462-4633.