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GOING CORPORATE
Legal Identity
Liability
Chapter S
Other Benefits
Potential Downsides
The ProcessSo, you've finally surrendered to the entrepreneurial spirit deep inside you, and you're going to open up that record store, t-shirt emporium, musical instrument shop, hot dog stand, or clothing boutique. Well, no matter what type of business you're going into, you've got to think about what kind of business you're going to be. In other words, are you going to own it all yourself under your own name ("sole proprietorship"), have some partners, who will share in the ownership ("partnership"), or form a corporation? Besides the different types of corporations discussed in this brochure, there are various entities available to you, including Limited Liability Companies (LLC), Limited Liability Partnerships (LLP) and partnerships. All have different advantages and disadvantages which should be discussed with your advisors. They are not dealt with in this brochure.
This is a vital question that you should give a lot of thought to as you're planning your new venture.
"Going corporate" isn't just for multinational conglomerates such as Ford, General Electric, and IBM. It's an option you might want to consider as part of the first rung you'll be climbing on the ladder toward success.
First, some stock things about corporations that you need to know. You have a "legal identity" as an individual person. So does a corporation. It is considered a separate legal entity and has a life of its own. That life is perpetual, unless the owners, also called "shareholders" vote to dissolve the corporation by going out of business.
The most important thing to know is that under certain circumstances, a corporation will protect the owner(s) from any personal liability from activities of the business. It can also provide certain tax advantages for you as the owner.
Here's how a corporation will insulate its owner(s) from personal liability. If a corporation leases office or studio space, leases or purchases an automobile, office furniture, supplies, a telephone system, a photo-copier, etc., and is unable to pay, it is generally the corporation's problem ("liability") and not yours. The owner's personal assets are protected from the corporation's creditors as long as the corporation is run properly and the obligations are not personally guaranteed (for example, personally co-signing a loan or other agreement in addition to signing on behalf of the corporation).
You may also find it less taxing to be in business by electing S corporation status. Becoming an S corporation eliminates your income from being taxed twice ... once on your business' profits and once more on the salary your business pays you. Instead of paying income taxes directly to the IRS or state, an S corporation passes its profits or losses to the shareholder, who is usually taxed at a lower rate.
Despite these apparent advantages, check first with your accountant and/or lawyer to make sure S corporation status is best for your business.
Some other benefits to incorporating are the employee benefit plans that are more readily available to corporations as compared to sole proprietors and partnerships. In addition, you may find it much easier to obtain loans and other financing. Venture capitalists, family and friends may be willing to help fund your business for a "piece of the action" (which can be done through the sale of the corporate stock).
Forming a corporation can also be good for your health -- by allowing you to set up a medical reimbursement plan. In this way, your medical expenses can be completely covered by the corporation, and the corporation may take the deduction as a business expense. This avoids the problem with personal limitations on medical deductions for individuals filing Schedule A on their individual tax return.
As potentially wonderful as corporate status can be, there are limitations and some "downsides."
Certain businesses should be aware of the Professional Service Corporation Act. Anyone opening a personal service business which requires a license before being able to render that service is subject to this act. You'll still have to obtain the necessary license, even if you form a corporation. This law also provides that a person who has acted negligently or wrongfully or is guilty of misconduct will not be protected as a corporation from malpractice.
Also, corporations have some periodic filings with the IRS and state tax departments that most individuals do not face. Your corporation will also have to file an annual report to the state (usually, in most states, this just a short form to fill out as well as a modest fee to pay).
Once you decide to "go corporate," the actual legal procedure is fairly simple. But you ought to hire a lawyer to handle it.
There's a form to fill out ("Articles of Incorporation") and a filing fee ($100.00 for small corporations in Illinois) to the Secretary of State of Illinois. Assuming your application is acceptable, you'll receive a Certificate of Incorporation back in the mail from the Secretary of State in few weeks. This certificate will need to be filed with the Recorder of Deeds in your county (with a modest filing fee).
In the meantime, your lawyer will be preparing your "corporate book." This includes such things as your corporation's bylaws, stock certificates, and documentation relating to shareholders' and board of directors' meetings. It sounds complicated, but it really isn't.
Also, if you do elect S Corporation status, make sure that your attorney or accountant makes a timely filing of this election so that Internal Revenue Service deadlines are not missed.
Your attorney or accountant should also apply for a Federal Employer Identification Number (FEIN). This will identify your business to the IRS.
Legal fees for all this work are usually quite reasonable. In the long run, the value of having the incorporation done competently will be money in the bank to your business.
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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