Business Entity: Corporate Structure
A more complex business system is the corporate structure. It is also more expensive than other types of business structures. The definition of a corporation is an independent legal entity, separate from its owners, and requires complying with more regulations and tax requirements.
Probably the biggest benefit of incorporating for a small business owner is the liability aspect: it provides more protection.
If there is debt, it is not considered to be the debt of its owners, so if you are a corporation, your personal assets are not “in the line of fire.” And the corporation can keep some of its profit without the owner having to pay taxes on them. A corporation can also raise money; always a benefit. They can sell stock to raise funds, and if one of the shareholders dies, sells shares, or becomes disabled, the corporation continues indefinitely.
However, if there is an upside, there is always a downside.
A major downside is the costs of a corporation. Since corporations are formed under the laws according to each state which usually have their own set of regulations, it is necessary to hire an attorney(s) to guide you through the process.
A corporation also requires more tax preparation and accounting services, more so than a partnership or sole proprietorship. Another big drawback is that the owners of the corporation have to pay a double tax on the business’s earnings. Any earnings that are distributed to shareholders in the form of dividends are to be taxed at individual tax rates on their personal income tax returns, in addition to corporate income tax at both the state and federal levels.
If you want to avoid this double tax, you could pay the money out as salaries. And, corporations are not required to pay any taxes on earnings that are paid and are reasonable compensation. Corporations can deduct these payments as a business expense. But, the IRS does have their limits on what they consider to be reasonable compensation.
How To Do It
To start, you need to contact the necessary people that handle the registering of corporations. In your state, contact the state office or secretary of state, or whoever else is responsible for this.
To start, you should visit the a Secretary Of State’s website to start the registration process, and also go to this link for more information, or if you have further questions regarding the registration process.
You need to ask for fee schedules on business incorporation and any necessary forms and instructions. Sometimes, it is possible to file for incorporation without the use of an attorney; you can use software and books to guide you through the process. The costs that you will have to handle will be for any resources that help you (books, software), filing fees, and other costs that are associated with this process within your state.
A lawyer can cost anywhere between $500 to $2000, and sometimes even more, so if you decide not to use one, this is the amount that you could be saving. However, there is a downfall to not hiring a lawyer: time. It is quite possible that it could take you some considerable time to accomplish this on your own. There is also the chance of missing something small but important.
To begin, you must prepare a certificate or articles of incorporation. Some states may already have a form for this, which you or your lawyer would simply complete. The requested information includes:
- proposed name of corporation - purpose of the corporation - location of the corporation (main office) - names and addresses of parties involved.
Bylaws should also be set by the corporation. These should describe in greater depth how the corporation will run, including the responsibilities of the directors, officers, and shareholders; when stockholder meetings will be held; and any other important details that relate to the actual running of the corporation. Your certificate of incorporation will be sent to you by the secretary of state’s office once your articles of corporation are accepted. Once this has taken place, you are incorporated. Be sure to follow all rules of incorporation because if you don’t a court can “pierce the corporate veil” and hold you personally liable for the business’ debt, as well as the other owners.
Its common sense, but you need to follow all rules that are required by state law. Keep accurate financial records, showing a separation between income and expenses and that of the owners’ in the corporation.