Why Should I Incorporate? Insider Secrets about Corporations

– "Why should I form a company? Isn't it true that I may run this firm as a sole proprietor?"

-"Isn't forming a corporation difficult and expensive?"

– "- "We're in business together, and I run my company with my wife."  Why would we require the services of a corporation?"

        These have to be the most commonly asked questions by my clients, as well as my own financial and legal advisors. The great majority of people who own small businesses or work from home are lone entrepreneurs or partners in a mom-and-pop operation. Nonetheless, prominent small business experts believe that at least 90% of all small company and home company owners would benefit from incorporating and employing a corporation as an important part of their entire business structure.

        If this is the case, why do so many business owners choose to work as sole proprietors or general partners? And why would integrate be a better option?

        The response to the first question is frequently either (1) ignorance of the enormous hazards associated with operating in this manner or (2) a lack of acquaintance with companies and other legal entities, as well as the ease with which they may be formed. I should point out that if a sole proprietorship is risky, a partnership is at least twice as risky. This is because the partnership is a general partnership by default, which means that each partner is accountable for all company acts, including those taken by the other partner in which she was not involved. That's rather terrifying!

        To respond to the second question, we must first define what a company is. In the viewpoint of the law, a corporation is an artificial legal entity that is independent of its owners/shareholders. The affluent have discovered that there are at least three significant benefits to forming a company as part of your company structure.

1. Asset safeguarding.

        The most crucial advantage of forming a company is the security it provides for your personal assets.

        When you file the proper documents—in the United States, "Articles of Incorporation"—with the relevant state legal authorities, the corporation is formed. A company cannot be founded as a result of a private agreement between the people who choose to create it. It can only be created by the state in which it is constituted, and it has the rights and duties that the laws of that state prescribe.

        The corporate veil—the screen that protects your business assets and actions from the private person and assets of the owner/shareholder—is the most significant concept here (s). Because the company is a separate legal person, if you are a consultant or translator—or run a small store—and someone claims that they have been injured by your business (for example, due to a faulty translation or a slip-on your wet floor) and brings a lawsuit, only your business' assets are at risk. If your personal house or cars are not held by your firm, the claimant cannot touch them.

        There are considerable variances in the degree of protection afforded to the corporate veil by different governments. In California, for example, the corporation veil has been breached on several occasions—far too many to count—allowing financial criminals to steal an entrepreneur's personal assets. Nevada is the state of choice for entrepreneurs seeking asset protection since this nearly never happens.

        In a future edition of our eNewsletter, we will devote a separate piece to the Nevada company. For the time being, it's worth noting that a Nevada company provides an extra benefit for many: there's no state income tax in Nevada. You may still be liable to state income tax if you utilize a Nevada corporation to do business in your own home state outside of Nevada (such as California, our own home state). However, because of the Nevada corporation's stronger asset protection, it may still be worthwhile for you to set up a Nevada corporation. For this reason, a large number of entrepreneurs from other nations as well as other states from Nevada firms.

2. S Corporation vs. C Corporation: Which Is Best for You?

        The personal service corporation is only mentioned about the C corporation. The other sort of corporation is an S corporation, which is a pass-through business like a limited liability company and a limited partnership. That is, the corporation is not taxed as an entity; rather, the net income goes through to the shareholders (such as a husband and wife) and is taxed on the shareholders'/owners' individual tax returns.

        In some circumstances, forming an S corporation rather than a C company is advantageous. An S company is the ideal option if you have a big income from a job and expect large losses in the early years of your firm and don't expect it to generate more than $150,000. However, there are restrictions on who can be members of an S company, as well as restrictions on employee perks.

        Both the C and S corporations are likely to be used in a complex business structure. However, due to the nature of corporations, you should never utilize any sort of corporation to hold real estate. Instead, you should form a limited partnership or a limited liability business. If you're a real estate investor, though, an S- or C-Corporation may still fit within your entire business structure. A corporation, for example, might be used to manage your possessions that are held by another company.

        The company might also be a component of another business entity, which is a technique that may be employed to conduct many types of business. If you want to run a limited partnership, for example, you'll need a general partner. However, the general partner is liable for all decisions taken and any liabilities that may arise as a result of those actions—in other words, the general partner has limitless liability. As a result, using an S- or C-corporation as the general partner is a wise choice. As a result, you'll have a general partner with the corporation's restricted liability.

 

3. Understand how to properly manage your corporation to maintain the corporate veil.

        Regardless of where you register your business, you must ensure that all necessary formalities are followed; otherwise, your corporate veil can be readily penetrated, undermining the entire point of forming it. Even if your bookkeeping and tax returns are handled by an accountant, it is still your job to ensure that everything is done correctly.

        Holding frequent meetings and keeping minutes in your record book, as well as issuing stock certificates and other formalities, are all part of this process.

The Personal Service Corporation is a company that provides personal services to people.

        The "Personal Service Corporation" is a final issue that may develop, especially for independent consultants, translators, and other professionals. There are two types of professions that might be impacted by this problem: Those who are obliged by their state laws to incorporate as professional companies, such as attorneys, accountants, psychologists, and health care providers. The IRS automatically classifies these businesses as personal service companies.

        In addition, the IRS has expanded the definition of "personal service" to encompass any activity performed by the owner/shareholder personally, such as translation or consultation. If you're working alone or with a partner, this is very important to consider. The corporation qualifies as a personal service company if 95 percent or more of your revenue derives from that personal service activity.

        The reason for this is because a personal service business registered as a C corporation is subject to a flat 35 percent tax rate and a reduced ($150,000) cumulative profits tax application limitation (usually $250,000). This is not, however, an insurmountable barrier to reaping the benefits of incorporation:

1. First, the additional benefits of incorporating still make operating as a C corporation preferable to operating as a sole proprietorship. It may be particularly appealing if a high-earning couple would otherwise be exposed to a higher tax bracket.

2. Second, you can organize your operations so that work outside the sphere of personal services given by the owner/shareholder accounts for more than 5% of your total activity. A translator or consultant, for example, may have a network marketing branch of the firm, much as a medical practitioner may have a health food store or other income-producing activity, causing the firm to lose its personal service status.

        As you can see, the corporation is a highly powerful instrument that the affluent have exploited to their advantage. You are most certainly handicapping yourself, restricting your profitability, and paying excessive taxes if you operate as an individual entrepreneur without employing a corporation or the popular option of a limited liability company. With today's resources, particularly those available on the internet, there's no reason why the typical person can't start using this essential tool right away. We presently have three entities that we founded ourselves, and they only cost us the cost of the different materials we acquired, as well as the filing fees and postage necessary by the State of California. And, to maintain the legitimacy of these companies, we have made sure to collect the required forms from the sources listed on our Resources page.

We are frequently asked, "Can't I start out as a single proprietor or partner and then incorporate later?"

        Certainly, if you don't mind putting all of your personal assets at risk, paying greater taxes, and increasing your chances of being audited by the IRS. Some individuals like to do things the hard way, but there's no reason why you should have to if you have the necessary information and resources.

        Even if you opt to hire a tax attorney to assist you with the paperwork, you should do so with the knowledge you need to determine if the suggestions she provides are in your best interests.

        If any "expert" you visit tells you that you "don't need" to form a legal organization to conduct your business, at the absolute least, you'll know enough to flee immediately.