Anyone who operates a business, alone or with others, may incorporate.
Under the right circumstances, the owner of a business of any size can benefit!
Reduces Personal Liability
Incorporating helps separate your personal identity from that of your business. Sole proprietors and partners are subject to unlimited personal liability for business debt or law suits against their company. Creditors of the sole proprietorship or partnership can bring suit against the owners of the business and can move to seize the owners' homes, cars, savings or other personal assets. Once incorporated, the shareholders of a corporation have only the money they put into the company to lose, and usually no more.
A corporate structure communicates permanence, credibility and stature. Even if you are the only stockholder or employee, your incorporated business may be perceived as a much larger and more credible company. Seeing "Inc." or "Corp." at the end of your business name can send a powerful message to your customers, suppliers, and other business associates about your commitment to the ongoing success of your venture.
Tax Advantages - Deductible Employee Benefits
Incorporating usually provides tax-deductible benefits for you and your employees. Even if you are the only shareholder and employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may now be deductible. Best of all, corporations usually provide an increased tax shelter for qualified pensions plans or retirement plans (e.g. 401K's).
Easier Access to Capital Funding
Capital can be more easily raised with a corporation through the sale of stock. With sole proprietorships and partnerships, investors are much harder to attract because of the personal liability. Investors are more likely to purchase shares in a corporation where there usually is a separation between personal and business assets. Also, some banks prefer to lend money to corporations.
An Enduring Structure
A corporation is the most enduring legal business structure. Corporations may continue on regardless of what happens to its individual directors, officers, managers or shareholders. If a sole proprietor or partner dies, the business may automatically end or it may become involved in various legal entanglements. Corporations can have unlimited life, extending beyond the illness or death of the owners.
Easier Transfer of Ownership
Ownership of a corporation may be transferred, without substantially disrupting operations or the need for complex legal documentation, through the sale of stock.
Corporations can offer anonymity to its owners. For example, if you want to open an independent small business of any kind and do not want your involvement to be public knowledge, your best choice may be to incorporate. If you open as a sole proprietorship, it is hard to hide the fact that you are the owner. And as a partnership, you will most likely be required to register your name and the names of your partners with the state and/or county officials in which you are doing business.
With a corporation's centralized management, all decisions are made by your board of directors. Your shareholders cannot unilaterally bind your company by their acts simply because of their investment. With partnerships, each individual general partner may make binding agreements on behalf of the business that may result in serious financial difficulty to you or the partnership as a whole.
GENERAL CORPORATION AKA ‘C’ CORPORATION
A general corporation, also known as a "C" corporation, is the most common corporate structure. A general corporation may have an unlimited number of stockholders. Consequently, it is usually chosen by those companies planning to have more than 30 stockholders or large public stock offerings. Since a corporation is a separate legal entity, a stockholder's personal liability is usually limited to the amount of investment in the corporation and no more.
SUBCHAPTER ‘S’ CORPORATION
A Subchapter S Corporation is a general corporation that has elected a special tax status with the IRS after the corporation has been formed. Subchapter S corporations are most appropriate for small business owners and entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners. When a general corporation makes a profit, it pays a federal corporate income tax on the profit. If the company also declares a dividend, the stockholders must report the dividend as personal income and pay more taxes. S Corporations avoid this "double taxation" (once at the corporate level and again at the personal level) because all income or loss is reported only once on the personal tax returns of the stockholders. For many small businesses, the S Corporation offers the best of both worlds, combining the tax advantages of a sole proprietorship or partnership with the limited liability and enduring life of a corporate structure.
To elect S Corporation status, your corporation must meet specific guidelines.
1. All stockholders must be citizens or permanent residents of the United States.
2. The maximum number of stockholders for an S Corporation is 75.
3. If an S Corporation is held by an "electing small business trust," then all beneficiaries of the trust must be individuals, estates or charitable organizations. Interests in the trust cannot be purchased.
4. S Corporations may only issue one class of stock.
5. No more than 25 percent of the gross corporate income may be derived from passive income.
6. Not all domestic general business corporations are eligible for S Corporation Status.
- A financial institution that is a bank
- An insurance company taxed under Subchapter L
- A Domestic International Sales Corporation (DISC)
- Certain affiliated groups of corporations
For more detailed information about these changes and other aspects regarding S Corporation status, contact your accountant, attorney or local IRS office.
LIMITED LIABILITY COMPANY (AKA LLC)
The LLC is not a corporation, but it offers many of the same advantages. Many small business owners and entrepreneurs prefer LLCs because they combine the limited liability protection of a corporation with the "pass through" taxation of a sole proprietorship or partnership. LLCs have additional advantages over corporations:
- LLCs allow greater flexibility in management and business organization.
- LLCs do not have the ownership restrictions of S Corporations, making them ideal business structures for foreign investors.
- LLCs accomplish these aims without the IRS' restrictions of an S Corporation.
LLCs are now available in all 50 states and Washington , D.C. If you have other questions regarding LLCs, be sure to speak with a qualified legal and/or financial advisor.
Advantages of a Nonprofit Corporation:
Under internal revenue Code Section 501 (c) (3) a non-profit corporation is eligible for certain federal and State tax exemptions. With income tax rates as high as 34% on income over $75,000, tax exemption status can be invaluable.
Receiving Public Funds:
Many organizations are required by law to donate a certain percentage of their funds to non-profit organizations or possible endanger their own tax-exempt status. In addition, many exemptions exist for property transferred at death to a non-profit organization.
Limited Liability for Members and Directors:
As with a for-profit corporation, directors, trustees, and officers of non-profit corporations are usually afforded the same limited liability status. Thus, creditors of the nonprofit corporation can only reach as far as the corporation's assets to satisfy corporate debts and not the personal assets of the people involved in the nonprofit corporation.
Exceptions to the Limited Liability Rule:
Personal Guarantees: Where a corporation has not yet established a credit rating, banks and other creditors will often require a personal guarantee from corporate directors before extending credit. thus, the individuals will be liable for the debt if the corporation defaults on its obligation.
Tax Obligations: State and federal governments have the power to hold corporate officers and directors personally liable for reporting and payment of taxes. Although, with proper planning and filing, your nonprofit corporation should be tax exempt for certain taxes, your corporation may still be required to file informational returns and annual reports to the state and federal governments...and don't forget about employee withholding taxes.
Membership Dues: Members of a nonprofit corporation are personally liable for any membership dues they owe the corporation
Violation of Statutory Duties: corporate officers and directors have a statutory duty to act responsibly when engaging in corporate activities. Thus, if an individual acts irresponsibly, he or she may be held personally liable for his or her actions.
Separate and Perpetual Existence A nonprofit corporation, like a for-profit corporation, is an entity with a perpetual existence that may outlive all of its founders. in addition, the corporation can act like an individual in that it can enter contracts, incur debt, and own property.
Employee Benefits: The principle of a nonprofit corporation can be employed by the corporation. As such, these employees can be eligible for fringe benefits not available to self-employed people. Examples of these benefits include, sick pay, group life insurance, accident and health insurance, and corporate pension plans.
Other Advantages: 1. nonprofit corporations under 501 (c) (3) receive lower postal rates on bulk mail 2. many organizations offer discounted advertising rates to nonprofit entities 3. many internet service providers offer discounted rates to nonprofit corporations 4. many national chains (Costco, for example) offer lower membership rates 5. nonprofit corporate employees may qualify for job-training and other work & study programs subsidized by the federal government.
Disadvantages of a Nonprofit Corporation:
Paperwork: Articles of Incorporation, Bylaws, and Minutes like an individual in that it can enter contracts, incur debt, and own property. Articles of Incorporation must be prepared and filed with the appropriate state entity. In addition, Bylaws must be prepared, minutes must be maintained, and certain federal and state tax exemption filings must be timely filed to attain a tax-exempt status. We'll make it easy. Vcorp will prepare and file your Articles of incorporation with your desired state of incorporation. In addition, IncByPro.com will provide you with a customized corporate kit with sample bylaws and minutes along with all the proper forms and instruction for Federal and State Tax Exemption filings and you can file it yourself or for an additional service fee we will file all the necessary forms (please contact us about this special service).
Federal & State Tax Filings: What forms must be completed for tax exemption? On the Federal level, IRS form 1023 must be completed to qualify for 503 (c) (3) Federal tax Exempt status. Although certain groups are NOT required to file Form 1023, it is recommended that these exempt organizations nonetheless submit the filing to ensure that the IRS view the organization as a tax exempt entity. For example, if your corporation's tax exempt status is for some reason challenged by the IRS, you could be liable for back taxes and sever penalties for the period your company operated as a corporation. Only after a corporation is approved by the IRS as a Tax Exempt Organization can it rest assured that it is in fact a tax-exempt company.
When must form 1023 be filed? IRS form 1023 must be filed within 15 months of the date your articles of incorporation were filed. If your filing is timely, the tax-exemption will be retroactive and will apply to the date your articles of incorporation were filed. Vcorp can handle form 1023 filings for non-profits entities. Please contact us to order.
How Many Directors Must My Nonprofit Corporation Have? Most states require that a nonprofit corporation maintain a minimum of 3 directors. The following states will allow less than three directors if there are less than three members:
The following states require only one director:
- New Hampshire
- South Carolina
- West Virginia
For What Purposes May a Nonprofit Corporation be Formed? Under IRS Code 501 (c)(3) a nonprofit corporation may be formed to operate for some religious, charitable, educational, literary, or scientific purpose. These five purposes are usually included as purposes accepted by the individual states as a valid nonprofit corporate purpose.
What are some of the limitations imposed upon Nonprofit Corporations? Nonprofit corporations must observe the following limitations:
- Pursuit of the following corporate purposes only: Charitable, educational, religious, literary, or scientific purposes.
- No distribution of financial gains to directors, officers or members.
- Corporate assets may only be distributed to another tax exempt organization upon dissolution of the nonprofit corporation.
- Participation in political campaigns for or against persons running for public office is prohibited.
- Substantial engagement in legislative political activities is forbidden.