While some owners think Incorporation is only for “big” companies, there are a number of reasons Even “small” entrepreneurs should think about incorporating their small business, mainly from the standpoint of personal liability protection.
In the U.S each state govern the corporation structure and Its own legal requirements for forming one. Generally, a Corporation is treated under the law as an individual person, with full legal standing, and may own property, sue and be sued, and enter into a contract.
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What is a corporation.
The law observes a corporation as an entity that is separate and distinct from it’s shareholders (owners). A corporation can have it’s own assets, liabilities and legal rights, which protect it shareholders from personal liability. A corporation can sue, and be sued, own and sell property, and sell ownership right via stocks. In addition to the liability protection. It is easier to transfer ownership and raise capital as a corporation, because capital and ownership are raised and managed through stocks.
To be recognized as a corporation, your company must follow the proper legal proceeding for your state, there are several types of corporations, including C corporation,S corporation and nonprofit corporation. Each corporation type has it own benefits, disadvantages and legal requirements. C corporation and S corporations are the most common.
Things to avoid when filling for corporation.
While forming a corporation or LLC is less expensive and easier than ever before, here are some things to avoid to get your corporation off the ground. If done correctly, your business. Will continue to thrive long after you’ve decided to sell your ownership stake and move onto better and evermore profitable business venture.
- Thinking that the corporation give unlimited liability:fraudulent practices or using the corporation to further your own personal interests, such as raiding corporate offers for personal expenses. In short, there’s no free ride, especially in business, and a quick glance at headlines from large corporate failures such as WorldCom or Enron show the personal and financial toll taken on corporate officers who engage in activities that go beyond the law.
- Incorporating without sufficient capital: while every owner can benefits by protecting personal asset’s from business liabilities. Owners need to be aware that a lack of capital can be detrimental to a corporation keeping it’s cooperate veil. Why? Should you be sued as a corporation and you don’t have enough revenues, asset, capital, or insurance to cover your liabilities, some courts will aggressively pursue you as a owner and holds you personally reliable-all in the name of finding assets.
- Incorporating without getting the advise of a good CPA: since every state has different requirements and tax tables for corporations, and because there are different types of corporate entities (C corporation and S corporations, in addiction to the separate category of LLCs). Forming a corporation without getting input from a good CPA can cost you money in the long run. Why? Because of the different ways corporate income and LLC income can be treated. In addiction, very few States will permits a company to change business structures once that structure is decide upon, so it’s important upfront to choose your entity wisely. Generally, you want to get the most personal liability protection with the best tax advantage for your specific situation, and only a good numbers person can look at your current situation and long term goals to give you the kind objective counsel you need yo make the best decision.
- Incorporating then operating without getting the proper local business licenses: just because you incorporate doesn’t mean you don’t have to follow the guidelines of your local municipality, when it comes to getting proper licenses of permits with local business ordinances- even if they are properly incorporated. And end up paying thousands in fines or back taxes, or worse, a combination of both with loads of additional penalties.
- Not filing periodic paperwork or taxes as required by your states: once you incorporate, a certain amount of maintenance and follow-up is needed to keep your operations in compliance typically, this means updates on ownership, any changes is the resident agents, changes in corporate officers, and of course, any tax liabilities to your particular state or municipality, failure to file current paperwork or taxes (as in the case of local resources to go to more productive our local licensing up to date) can be a costly proposition for companies that need resources to go to more productive uses than late fees or fines.
Who are the members of a corporation.
A corporations share holders (similar to the members of an LLC), are the people or legal entities who own the business. In most states, you only need one person to form a corporation, while the maximum number of shareholders varies by corporation type. For example, C corporations don’t have ownership restrictions, while S corporations are limited to 100 shareholders, who must all be U.S citizens.
Unlike other business entity types, a corporation protects each owners personal assets. When a share holder invest money into the corporation, they receive a percentage of ownership, or shares, typically in proportion to their capital contribution.
These shares entitle The shareholder to a pro share of the profit, if the business is successful and makes money. Said Williams. If the corporation loses money and is forced to liquidate. meaning they won’t get their money back, but any creditors the corporation owes money cannot go after the shareholders other asset.
How to become a corporation.
Filing for a corporation varies state by states, is terms of guidelines for becoming a corporation. So the process may look slightly different. Base on locations. So when filling for corporation you have to check the specific requirements for your state. Where your business will operate, but in general, the steps below are the basics.
- Getting a transactional attorney: as corporate formation and governance laws vary state by states and is constantly changing. So hiring a Transactional attorney who can get you through transactional process is mandatory. An experience attorney will be a valuable, part of managing the formation process and avoiding any issues.
- Hire a registered agent and file the articles of incorporation: you must have a registered agent in the state where you files your Article of incorporation. This agent is the registered corporate agent, who will accept the required noticed, know as service of process.
- Select a corporation type: determine the best type of corporation for your business; limited liability company (LLC). S corporation or C corporation. Research the advantages of each and consult with your advisors before making a choice.
- Create the corporate by laws and appoint directors: some states do not require corporations to have bylaws (rules and internal regulations under which the corporation will operate). As they declines the rights and responsibilities of your business shareholders, formalities. Additionally, banks and creditors may ask to see your corporate bylaws to establish the legitimacy of the corporation before extending loans or allowing your corporation to open accounts.
- File the statement of information and IRS forms. Every corporation must apply for an employer identification number(EIN). This is like a social securing number for the corporation, so you’ll use it when your corporation applies for bank accounts and when you file corporate tax, and also file your statement of information with you local Secretary of she.