Party of One: Setting Up Your Single-Person Corporation
If two's a bit too much company for your business, the solo route could help you maintain control while offering valuable personal-liability protection.
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People don't tend to think of a corporation as being a one-man or one-woman show. After all, corporations need to have boards of directors and hold shareholder meetings -- which sounds more like a room full of suits than a single person working from home.
However, all states do allow corporations to have just one owner. You can be the sole shareholder, director and officer for your company. Even without the suits, you still must follow all the formalities to ensure your corporation remains in good standing. It might seem crazy to record your single vote in meeting minutes, but doing things by the book will keep your personal-liability protection intact.
Documenting your activities is one of the key steps to form and maintain a single-owner corporation. Read on to learn more about creating your party of one.
Identify the basic structure.
A basic corporate structure involves three types of participants:
- Shareholders own the company via stock. They elect members to the board of directors.
- The board of directors represents shareholder interests to guide the company. Board members appoint the officers.
- Officers manage the company on a day-to-day basis.
The same structure applies to a single shareholder corporation. But in this case, the same person occupies all three positions.
Directors keep the big picture in view and make major financial decisions that affect the company and its shareholders. Such decisions include issuing stock, approving loans or acquisitions, appointing officers, setting officers' salaries and approving raises. The company's initial owners appoint directors before the business opens.
So long as a corporation has just one owner/shareholder, states allow it to have just one director as well. To appoint yourself director, you'll need to prepare meeting minutes that show you (as the shareholder) elected yourself as the sole director of the board.
File articles of incorporation.
Filing your company's articles of incorporation with your state officially forms your business entity. You'll need to prepare, sign, and file this document with the state in which your company is based. Owners can perform these tasks themselves or engage a lawyer or online legal service to assist. Either way, the sole owner signs her or his articles as the "Incorporator" or "Promoter" (depending on your state's nomenclature).
As you complete the paperwork, you'll need to designate the company's officers: president, vice president, treasurer and secretary. As a single owner, you can name yourself the president, treasurer and secretary and then simply omit the vice president role in most cases.
Related Book: The Tax and Legal Playbook by Mark J. Kohler
You also must list the name and address of one person who will act as the corporation's registered agent. This contact must be available during regular business hours to receive notices and other important paperwork from the state. You may serve as the registered agent yourself or enlist a registered-agent service to perform this function.
Record board-meeting votes.
Even a sole director must prepare minutes that document decisions made by the board of directors. If you hold all three officer positions (CEO, CFO/treasurer and secretary), your minutes need to reflect that you -- as the director -- appointed yourself to all three officer roles.
A separate and updated set of minutes is required any time you make a major decision to set your company's direction. This could range from applying for a bank loan to taking legal action against another business. It doesn't take much time to prepare meeting minutes, but it does require discipline. With only one shareholder and one director, it's very easy to overlook corporate formalities. Skipping this part of the process could cost you severely. It's not worth risking your liability protection as an individual whose assets are distinct from the corporation's own.
Related: How to Structure a Single-Member LLC
Decide how you'll file corporate taxes.
Double taxation on corporation assets also can cause trouble for single owners. The Internal Revenue Service (IRS) code taxes the corporation on its profits. An owner who takes those profits out of the company must pay taxes on that amount via his or her individual return.
To avoid this issue, a corporation can elect S Corporation tax status. In this case, the company's income, deductions and credits (also known as "tax attributes") are passed along to the owner's personal tax return. The company itself isn't taxed on its profits. The IRS does place some restrictions on persons who are eligible to elect S Corporation status. For example, shareholders must be United States citizens or permanent residents.
Related: How to Know if Your Business Should Have an S-Corp Strategy
Consider the alternatives.
The bottom line? You can have a single-owner corporation. But if these steps sound a bit like overkill for your one-person business, you might want to consider forming a Limited Liability Company (LLC) instead. The LLC structure still separates you from the business to minimize your personal liability. It also offers more flexibility in tax and economic matters than does a corporation -- with fewer corporate formalities.