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1992-04-30
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@066 CHAP ZZ
┌───────────────────────────────────────────────┐
│ INCORPORATING YOUR SMALL BUSINESS │
└───────────────────────────────────────────────┘
If the ability to limit your personal liability (should the business
fail) is an important consideration to you, then you should strongly
consider incorporating your business. While you will still be per-
sonally liable for any loans or leases of the corporation that you
have to guarantee, you will at least generally protect yourself from
other creditors of the corporation, such as vendors, if the business
should go bust.
A corporation is an artifical legal entity that exists as a separate
legal person apart from the people who own, manage, control, and oper-
ate it. It can make contracts, it pays taxes and is liable for its
debts. Corporations exist only because state statutory laws allow
these entities to be created. A business corporation issues shares of
its stock, as evidence of ownership, to the person or persons who con-
tribute the money or business assets which the corporation will use to
conduct its business. Thus, the persons who own the stock are the own-
ers of the corporation, and they are entitled to any dividends the cor-
poration may pay and to receive all the corporation's assets (after all
creditors have been paid) if the corporation is liquidated.
Unlike a sole proprietorship or partnership, a corporation has contin-
uous existence and does not terminate upon the death of a stockholder
or a change of ownership of some or all of its stock. Creditors, sup-
pliers, and customers often prefer to deal with an incorporated busi-
ness because of this greater continuity of the enterprise that is pro-
vided by the corporate form. Naturally, like other forms of business
organization, a corporation can be terminated by mutual consent of the
owners, or even by one shareholder in some instances. However, unlike
sole proprietorships, the termination and liquidation of a corporation
is always a taxable event, resulting in taxable gain or loss to the
shareholders, as though they had sold their stock in exchange for the
corporate assets they receive upon liquidation.
To set up a corporation, the prospective stockholders must make appli-
cation to the state office that grants corporate charters by filing
articles of incorporation for approval. Legal fees usually run be-
tween $500 and $1,000 for even the simplest incorporation, and, if it
is necessary to obtain a permit from the state to issue stock or secur-
ities, legal fees can be much more.
Thus, one of the disadvantages of incorporating is the cost involved,
which will be substantial even for the simplest incorporation, taking
into account legal fees and various state filing fees. In addition to
the costs of establishing a corporation, there will be recurring costs,
often including annual franchise or corporate income taxes, as well as
federal income taxes (except for most S corporations).
In addition, many corporate actions must or should be formalized by
board of directors' resolutions or shareholder meetings, and must be
recorded in written form in the corporate minute books, which takes
valuable time (or money, if the corporation's attorney assists with
such corporate housekeeping). Also, an out-of-state corporation usu-
ally must pay a "qualification fee" in each state where it does busi-
ness, other than the state in which it is incorporated.
If you do incorporate, you will have a choice, for tax purposes, of
operating as a regular ("C") corporation, or else electing to have the
corporation be taxed as an "S corporation." Some of the pros and cons
of C corporation vs. S corporation (or not incorporating at all) are
discussed below.
┌───────────────────────────────────────────────┐
│SELECT THE "XPERT" COMMAND FROM THE MAIN MENU│
│IF YOU WOULD LIKE TO HAVE A CONSULTATION AS TO│
│WHETHER OR NOT YOUR BUSINESS SHOULD INCORPORATE│
└───────────────────────────────────────────────┘