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MAINTAINING YOUR CORPORATE IDENTITY
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ConclusionThere are many ways to structure the ownership of your business. These legal entities include sole proprietorship, various types of partnerships and various types of corporations.
There are many reasons to incorporate your business, including tax benefits. However, one of the most important benefits of incorporating your business is your insulation from personal liability as a shareholder or officer of the corporation. If your corporation is properly maintained, your personal assets will not be available to creditors of the corporation.
A corporation is a legal entity separate from its owners and managers. It has a life of its own and ends only when it is dissolved. The corporation can purchase assets and borrow money in its own name. If the corporation is maintained properly, debts of the corporation are only the liability of the corporation and not its shareholders or employees. As an owner, the debts do not become your responsibility unless the lender requires your personal guarantee.
If the corporation is not maintained properly, creditors can "pierce the corporate veil" and you may become personally responsible for corporate debt. The following are some suggestions for maintaining your corporate identity.
Use the proper corporate name. If the name of your corporation is ABC Widgets, Inc., make sure the "Inc." is on all of your business papers. The presence of that word informs people dealing with you that you are a corporation. The simple failure to show your are a corporation may result in personal liability.
If you want to use another name or use initials, register it under the appropriate law. If you do not want to put "Inc." on everything and want to be know as ABC Widget, the corporation is using an assumed name which should be registered.
Make sure all stationery, business cards, brochures and other written material identify the business as a corporation. If you have taken the steps to incorporate, let the world know. To many customers, doing business with a corporation is more professional than with a sole proprietor.
Keep separate bank accounts for the corporation. Remember, a corporation is a separate legal entity. It has its own Federal Employer Identification Number, which must be shown on all tax filings. As a separate legal entity, it should keep its own bank accounts, financial records and credit cards. Keeping only one account and one set of financial records indicates there is no difference between you and your corporation, and therefore you should be liable for the corporation's debts. It is crucial to have separate records and accounts.
Do not pay personal expenses from the corporate bank account. Personal expenses are just that. They should be paid out of your personal funds. Do not pay your personal bills directly from corporate monies. You can reimburse yourself for corporate expenses.
Pay yourself a salary or find out from your accountant the proper way to repay yourself for loans made to the corporation. You should pay yourself reasonable compensation for the services you render (if there is money to pay you). Never take a draw. You are an employee of the corporation and are paid a salary subject to Social Security, Medicare and withholding taxes.
Sign all documents as President.
_______________________, President
Signature
Hold meetings of shareholders and directors at least annually. Prepare written minutes of each of these meetings, and have them signed by the President and Secretary of the corporation. A written record should be kept for any major changes or decisions made by the corporation.
Prepare proper corporate income tax returns. Talk to your accountant about the various tax forms which should be prepared, as well as how frequently they must be filed.
File your annual report from the Secretary of State on time. Failure to do so could result in an involuntary dissolution of the corporation and leave you personally liable until the corporate status is reinstated. Every year, prior to the anniversary of your date of incorporation, the Secretary of State mails to your corporation's registered agent a request that you file an annual report and pay the annual franchise tax fee. It must be filed by the date shown on the form.
Prepare quarterly reports to the Department of Employment Security. If you have employees and are subject to the unemployment compensation laws of this state, prepare, file and pay these taxes.
Prepare Internal Revenue Service forms 940 and 941 on time. If you have employees to whom you have paid wages (including yourself), you should prepare, file and pay these taxes, some of which you withheld from your employee's wages.
For professional service corporations, follow all procedures and file all necessary forms from the Department of Professional Regulations. If you are a licensed professional, Illinois law requires that you register your corporation with the department which issued your license. There may be other requirements, depending upon your profession.
By following some simple rules, the corporation will maintain its own identity, you will be protected from any personal liability and the government will receive its reports and taxes in a timely manner. A corporation can provide many benefits to its officers, employees and owners and it is worth the time and effort to keep it operating properly.
This pamphlet is for informational purposes only. You should consult with an attorney regarding your specific situation.
© Copyright 2005 Shimberg and Crohn, P.C.
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