Lawsuits and other legal claims are a fact of life. Don't let a lawsuit or a normal business risk threaten to bury you in debt or jeopardize your family's house and possessions. Forming a corporation is one way you can limit your personal liability, protect your personal assets from these types of threats and increase your business's potential for outside investment.
Until now, incorporation has been too expensive for many people starting small businesses. Through our A.C.E. System™, however, the process is easy and very affordable. Regardless of the size of your business, you can now afford to incorporate.
We all hope for the best, but in the end, it's smart to protect yourself against the worst. Be smart. Organize your business into a legal entity and protect yourself and your treasured belongings against the unknown.
I absolutely loved working with LegalACE to establish my LLC.
The entire process was very easy
to follow and far more user
friendly than some of the other
sites I looked into.
~ Jackie W. - Chandler, Arizona
All About Incorporation
LegalACE education center provides you with the information and resources you need when
considering an incorporation. The Incorporation Guide provides general information about Incorporation, and the FAQs answer some of the most common questions people ask. This information
allows you to make informed decisions.
Starting your own business can be one of the most fulfilling adventures of a lifetime. But you must protect your investment from liability and law suits in order to guarantee that it remains healthy and viable. Choosing the right business formation could make the difference between success and failure, for it directly affects the safety and security of your shareholders and the business itself along the way.
Businesses take many forms. Some of the most common include Sole Proprietorship, Partnerships, LLCs and Corporations. Sole Proprietorship and Partnerships are easy to create, as they do not require that you file any legal documents. But they do not offer any legal liability either. This guide addresses the three business formations that LegalACE offers:
C Corporations
S Corporations
Limited Liability Companies
If you are not sure which legal form you should choose, this guide will help you choose the most advantageous route for you and your business.
A corporation is a legal business entity that is treated like a person under the law. It exists separately from its owners and can take the form of a for-profit business or a non-profit organization.
Limited Liability
A Corporation offers its owners - also called shareholders - protection from debts and liabilities. As a result, creditors cannot pursue the owners' personal assets to pay business debts. Corporations, however, must operate under specific conditions in order to maintain this prized shield of limited liability. (Those conditions are covered later in the "Piercing the Veil" section.)
Tax Advantages
Corporations enjoy tax advantages that other business formations do not. For example, a number of expenses that are paid on behalf of owners or employees can also be deducted. Here are a few examples:
Health Insurance
Life Insurance
Self-employment Taxes
Compensation and Medicare Taxes
Another tax perk: corporate income is not subject to Social Security tax.
Credibility
Incorporating your business adds a degree of status and credibility. It says that you are serious about your business, not just here today, gone tomorrow, which ultimately will boost your ability to build relationships and make sales.
Unlimited Life
Because a corporation is treated as a unique entity, its life is not dependent upon the life of its owners. When shareholders die, or they wish to transfer their shares to someone else, the shares simply change hands, and the corporation lives on. In fact, when forming a corporation, the founders can choose whether they want the corporation to have an unlimited life or they can designate a date for the end of its life. (Not exclusive to corporations, LLCs also share this feature.)
Transferability of Ownership
Ownership in a corporation, as referenced in the previous section, can be transferred to another person quite easily. There are, however, more restrictions on the transfer of S corporation ownership.
Raising Capital
When they need to raise money, corporations simply use the built-in tools they have just for that task; they sell shares of their stock. When approaching private sources of capital, however, such as banks, all businesses - whether corporations or not - must establish credit. So, the caveat here is that while incorporating elevates your status as a business, it doesn't mean that lending organizations will start throwing money at you.
More Established Law
Since they have been in existence longer than LLCs, Corporations have clear-cut rules guiding their governance. LLCs, on the other hand, are relatively new on the scene, creating more room for interpretation in the law regarding the way they are governed.
C and S Corporations
C Corporations and S Corporations, named for the sections of Chapter 1 of the IRS Code that relates to their tax treatment, are similar in many ways. They both offer limited liability to their shareholders and some tax advantages. One difference, however, is tax treatment.
When revenue flows into a C Corporation, it is taxed, and then it is taxed again at the shareholder level. This is commonly referred to as "double taxation." S Corporations, however, do not pay taxes on revenue. Profits and losses are instead passed through to the individual shareholders and paid by them through their individual tax returns.
Criteria for S Corps
Most corporations want to avoid taxes, and S Corps are no different. However, there is a set of criteria that S Corporations must meet in order to qualify for exemption from taxes. Here are a few of them:
It cannot have more than 100 stockholders
It must have only one class of stock
Its shareholders must be U.S. citizens or resident aliens
Limited Liability - With a sole proprietorship, the owners are personally liable for any debts the business incurs, and as a result, their personal assets are vulnerable. With an LLC, the owners are not only protected from business debts, but also from legal liability, such as lawsuits against the company.
No Double Taxation - LLCs have the option of being taxed as a corporation or a partnership, depending on how they are set up. LLCs can be set up to mimic the tax treatment of S Corporations, in that earnings and losses flow through the business to the owners, who then pay taxes on the earnings through their personal income tax. Or they can be set up like a corporation and taxed separately.
Corporations and LLCs enjoy a veil of protection against law suits and confiscation of personal assets to satisfy business debts, among other things. That protection, however, is bestowed only to those businesses that can meet the criteria. In other words, businesses cannot simply pose as corporations, go through the motions, and enjoy the rewards of the business formation; they must look, act, feel and operate as limited liability companies and corporations.
Corporations and LLCs must follow many rules on the road to the “veil of protection.” Once the owners start to slip, treating the business like a sole proprietor, mixing corporate and personal funds, for example, they run the serious risk of losing its corporate status – or piercing the corporate veil.
Here are some examples of behavior that has brought about civil cases against businesses that are merely posing as LLCs and corporations – also called shell corporations:
Not filing or filing inaccurate corporate records;
Dishonesty or misrepresenting members;
Not maintaining arm's length relationships with related entities;
Not observing corporate formalities in terms of behavior and documentation;
Failure to pay dividends;
Intermingling assets from the corporation and the shareholder.
So, taking the step to creating a corporation or an LLC should not be taken lightly; it’s a serious endeavor with serious responsibilities. But with all great responsibilities come great rewards.
Limited Liability Companies or LLCs represent the business formation of choice for many looking to carve out their piece of the American dream. These business formations, mistakenly called Limited Liability Corporations, offer the limited legal liability of a corporation with the simplicity and flexibility of a partnership; that’s why they are seen as hybrids of the two.
Like sole practitioners or partnerships, LLCs may offer pass-through taxes, in which the owners report the profits or losses on their personal tax returns. Due to their relative simplicity compared with corporations, LLCs tend to be popular among companies with a single owner.
DBA -
Creating a DBA or "Doing Business As" enables you to create a new business identity or name underneath an existing one -- without having to create an additional corporation. It lets you expand your business easily and simply.
EIN -
Every new corporation and LLC must have an EIN or Employer Identification Number. You can do it yourself, or LegalACE can register it for you.
Trademark Search-
Choosing a business name, identity or domain that has already been taken can result in a law suit, financial damages, and potentially thousands of dollars - from redesigning and reprinting marketing collateral to signage to changing your domain name - it's just not worth it. LegalACE offers national searches for marks or phrases that are similar to yours, and therefore, might not pose legal problems for your business in the future. Having a trademark search done at the very beginning of the process can save you a great deal of grief. Plus, it can serve as the first step toward registering a trademark on the item - a move that will protect your logo and/or tagline from being infringed upon by others in the future.
Here are additional links to the LegalACE Web site and other sites that may be helpful along the way:
LegalACE Corporation and LLC Easy Decision Guide – LegalACE’s “Easy Decision Guide” takes you through a series of questions that will help you determine the best business formation for you. Just go to http://www.legalace.com/business_law/default.aspx, click on “Easy Decision Guide,” answer the questions and make your decision.
The only way to protect your personal assets from the risk of doing business, such as legal liability, is to start your own Corporation or LLC. Form your corporation with LegalACE, knowing you are receiving the best deal for your dollar, the best customer support in the industry and that your business has a shield of legal protection around it.
Go to www.LegalACE.com or,
Call us at (888) 939-6875, and we'll walk you through the process.
A corporation is a legal business entity which is treated as an independent legal "person." In other words, a corporation is separate and distinct from its owners or shareholders. One may be an owner or a shareholder in a corporation. Shareholders exchange property, cash, or services for stock. Corporations limit the liability of owners or shareholders for the actions and debts of the corporation. A corporation has the ability to make contractual agreements, incur debts, and pay taxes. Corporations receive certain taxation benefits not shared by sole proprietorship's or partnerships. Corporations are categorized as S or C corporations depending upon their business structure.
Summary of Corporations:
. A corporation is considered a separate legal person
. A corporation can sell stock to shareholders to raise capital
. Corporations limit the liability of owners or shareholders
. Corporations can make contracts, incur debts, and pay taxes
. S corporations and C corporations are distinct business structures
Some of the important ways in which S corporations differ from C corporations regard methods of taxation and regulations pertaining to stock. An S corporation passes its income, losses, deductions and credit directly on to its shareholders. The flow-through of income and losses are reported on shareholders' personal tax returns. Therefore, an S corporation enjoys pass-through taxation, as it is only taxed at the level of its shareholders. Partnerships and other corporations may not be shareholders in an S corporation. S corporations cannot have more than 100 shareholders, and may only have one class of stock. C corporations' profits are taxed, and then taxed a second time when distributed to shareholders as dividends. Since corporations are not able to deduct the distribution of these dividends, they are taxed twice. This is referred to as double taxation. However, unlike S corporations, C corporations can have an unlimited number of shareholders and can sell different classes of stock.
The 3 main advantages of incorporating are limited liability, stock flexibility, and taxation.
Limited Liability
Limited liability protects the owners or shareholders of a corporation from personal liability for acts and business debts of the corporation. With a sole proprietorship, or partnership, the owners are personally liable for any debts and other obligations the business incurs. As a result, their personal assets are vulnerable. With a corporation the owners are not only protected from business debts, but also from losing their personal assets dues to litigation.
Stock Flexibility
C corporations can sell an unlimited number of stocks to an unlimited number of shareholders. Additionally, the stock can be of any class.This allows the corporation flexibility for raising capital.Corporations can also retain earnings (instead of distributing them as dividends to shareholders) and use them to re-invest or pay off debts etc. It is important to note that these rules do not apply to S corporations, as they are only allowed 100 shareholders and can only sell stock of one class.
Taxation
S corporations enjoy pass through taxation and do not face the double taxation of C corporations. Earnings and losses flow through the business to the owners or shareholders, who then pay taxes on the earnings through their personal income tax. In other words, shareholders are able to directly file S corporation income as individual income and pay a personal income tax rather than having the corporation taxed.
A C corporation is considered a separate taxpaying entity for business purposes. It is able to make the same tax deductions as other entities, as well as additional deductions. Corporations earnings are taxed to the corporation, and then taxed a second time when distributed as dividends to shareholders. Also known as "double taxation," C corporations cannot receive a tax deduction for shareholder dividends. In turn, shareholders may not deduct a loss of the corporation. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.
C and S corporations are allowed considerable tax deductions for business expenses. Business owners will want to deduct as much of their expenses as possible, thereby reducing their overall tax payments. The IRS specifically allows the deduction of reasonable and necessary business expenses. Many taxpayers overlook legitimate deductions for business expenses. To the extent possible, corporations will want to deduct the following types of business expenses: Vehicle expenses, travel expenses, start-up and organizational costs, entertainment expenses, legal fees, rent, materials and supplies, interest expense and bank charges, state local and sales taxes, salaries and other compensation for personal services, insurance, and advertising costs.
There are a number of requirements for corporations in order to continue to function as legal business entities. A Board of Directors, elected by shareholders, has comprehensive management responsibility while officers have day-to-day responsibility. Regular board meetings, the taking of corporate minutes, stockholder meetings, and annual report filing requirements are also typical. One should always consult the laws of the state in which your corporation is located in regards to the specific requirements for running a corporation.
There are a number of requirements for corporations in order to continue to function as legal business entities. A Board of Directors, elected by shareholders, has comprehensive management responsibility while officers have day-to-day responsibility. Regular board meetings, the taking of corporate minutes, stockholder meetings, and annual report filing requirements are also typical. One should always consult the laws of the state in which your corporation is located in regards to the specific requirements for running a corporation.
No, there is no minimum number of shareholders required. However, S corporation are allowed a maximum of 100 shareholders. C corporations have no maximum number of shareholders.
To determine the value of ones corporate shares, take the number of shares and divide that amount by the number of total shares. Next multiply that number by the total value of the company. For example, you might own 2 shares of a company worth $100,000.00. If a total 100 shares have been issued you should divide 2 by 100, and multiply that number by $100,000.00. Therefore, in this example your ownership is worth approximately $2,000.00.
(Note: This method does not apply to publicly traded corporations).
Generally speaking, your percentage of ownership is more important than the specific number of shares you own. For example, if you own 2 shares of a company that has issued 10 shares, you have 20% ownership of the company. If you own 500,000 shares of a company that has issued 10 million shares, you only have 5% ownership of the company. Therefore it is important to pay attention to your ownership percentage, and not simply the number of shares you own.
No. Insurance can be of great benefit; however, it is not a substitute for limited liability. Insurance does not protect against all risk. There is often a limit to the amount insurance will cover, and there are many third party claims that may not be covered. Insurance should be viewed as something to complement a proper business structure, not replace it.
No. Limited liability is not absolute for a corporation. If the owner(s) of a corporation engage in illegal or intentional misconduct they can be held personally liable. Below are some examples of instances in which a corporate owner could be held liable:
personally and directly injures someone
personally guarantees a bank loan or a business debt on which the corporation defaults
fails to deposit taxes withheld from employees' wages
intentionally does something fraudulent, illegal, or reckless that causes harm to the corporation or to someone else, or treats the corporation as an extension of his or her personal affairs, rather than as a separate legal entity
If the owner(s) of a corporation treats the corporation as an extension of his or her personal affairs he or she risks the existence of the corporation. A court can rule that a corporation is non-existent if the owner(s) seem to be conducting business as individuals. The owner(s) then become liable for their debts and actions. Often referred to as "piercing the corporate veil," a corporation can be stripped of its status as a legal business entity if it fails to meet certain requirements.
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