PC Computing: Best Free Software/ZDCD.iso/apps/fin/smalb.exe/F135.SBE

Text File | 1997-01-01 | 6.1 KB | 125 lines

@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
@IF115xx]you should strongly consider incorporating your business,
@IF115xx]@NAME.
@IF115xx]
@IF116xx]you should strongly consider incorporating your business,
@IF116xx]@NAME.
@IF116xx]
@IF114xx](However, if you are a LIMITED partner in a partnership, you
@IF114xx]will already enjoy limited personal liability, so this
@IF114xx]discussion of incorporation may not be particularly relevant
@IF114xx]to your situation.)
@IF114xx]
@IF121xx]you have already taken an important step in that direction
@IF121xx]by incorporating your business, @NAME.
@IF121xx]
@IF113xx]you have already taken an important step in that direction
@IF113xx]by setting up your business, @NAME, as
@IF113xx]a limited liability company, which offers the same degree of
@IF113xx]protection as a corporation.  Thus, this section, on
@IF113xx]incorporating will not be particularly relevant to you,
@IF113xx]except the discussion of limited liability.

While you will still be personally 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 artificial legal entity that exists as
a separate legal person apart from the people who own, manage,
control, and operate 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
contribute the money or business assets which the corporation
will use to conduct its business.  Thus, the persons who own
the stock are the owners of the corporation, and they are
entitled to any dividends the corporation 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 continuous existence and does not terminate upon the
death of a stockholder or a change of ownership of some or
all of its stock.  Creditors, suppliers, and customers often
prefer to deal with an incorporated business because of
this greater continuity of the enterprise that is provided
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 received upon liquidation.
@IF121xx]Keep that key fact in mind and talk to a good tax adviser
@IF121xx]before you even THINK (!!) of getting out of (liquidating)
@IF121xx]your corporation, @NAME.

@IF120xx]You are currently operating your business in the form of a
@IF120xx]@ENTITY (@NAME).
@IF120xx]
@IF120xx]To set up a corporation, the prospective stockholders must
@IF120xx]make application to the state office that grants corporate
@IF120xx]charters by filing articles of incorporation for approval.
Legal fees usually run between $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 securities, 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 are the recurring costs, which often
include state franchise taxes, as well as federal and
state corporate income taxes (except, in most cases, for
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
usually must pay a "qualification fee" in each state where
it does business, other than the state in which it is
incorporated.

@IF120xx]Since your firm is not currently incorporated, you need to
@IF120xx]weigh and balance these significant costs against the often
@IF120xx]very substantial benefits the corporate form can offer.  If
@IF120xx]you do incorporate, you may have a choice for tax purposes,
@IF120xx]of operating as a regular ("C") corporation, or else electing
@IF120xx]to have the corporation be taxed as an "S corporation."
@IF115xx]You might also want to consider the desirability of setting
@IF115xx]up your business as a "limited liability company," an option
@IF115xx]that is now available in all but a small handful of states.
@IF116xx]You might also want to consider the desirability of setting
@IF116xx]up your business as a "limited liability company," an option
@IF116xx]that is now available in all but a small handful of states.
@IF117xx]Your firm is already incorporated, and is currently set up
@IF117xx]as a C corporation. It MAY be beneficial for you to make an
@IF117xx]"S corporation" election for @NAME.
@IF117xx]
@IF117xx](However, not every C corporation can necessarily qualify
@IF117xx]for changing over to S corporation status, even if it is
@IF117xx]advisable to do so, as is explained in the discussion of S
@IF117xx]corporations below.)
@IF118xx]Your firm is already incorporated, and is currently set up
@IF118xx]as an S corporation.  Note that it MAY be more beneficial to
@IF118xx]change @NAME back to a C corporation.

Some of the pros and cons of C corporation vs. S corporation
(or not incorporating at all) are discussed below.