What is a Corporation
The preferred way to structure a business is to make it a corporation. Corporations are treated as a separate entity which gives it the legal rights of an individual with the exception of voting and a few other limitations. You can choose to incorporate in the state your business is in or, you can incorporate in states that have better laws that protect your business.
If you choose to incorporate in a state other than the one you do business in, you may be subject to a fee. Check with the state to see if you have to file for a qualification.
You can do the articles of incorporation yourself, however, if you are going to incorporate in a state with better protection laws, like Nevada, you should use a Registered Agent. The advantage of incorporating in Nevada is they do not keep or store records of the individuals in the business therefore they cannot share information with the Internal Revenue Service.
Once you have incorporated, you can now designate how many shares the company will give to each owner. Prior to that, the corporation should elect a board of directors who should plan on meeting at least once per year. Take copious notes of your discussions and where the company is heading.
The board of directors typically consist of a president, secretary and treasurer. The board of directors can have more than previously mentioned like vice-president or vice-presidents. These individuals are expected to handle the day-to-day affairs. Adopting corporate bylaws is also suggested as it designates what the authority and powers the officers, directors and shareholders have.
The corporate umbrella protects the shareholders personal assets should there be a lawsuit. Incorporating in the state of Nevada if your business is in another state can actually prevent frivolous lawsuits. Any lawsuit that may be filed has to be litigated in the state of Nevada. This can be costly which many lawyers will shy away from, especially if the corporation does not have a lot of assets.
Another advantage of incorporating your business is you can give the shareholders a salary. This is not the case of a Limited Liability Company or LLC. LLC’s are looked at like a sole proprietor, so the income is passed directly to the individual. Salaries are considered an expense to the corporation and can be deductible.
The larger the corporation and the number of shareholders may require the company to register with the Securities and Exchange Commission and/or state regulatory bodies. It is better to keep the shareholders to a minimum as it is easier to cash someone out if they choose to leave the company.
Keep in mind that not only is the corporation subject to income tax, the shareholders are liable for taxes when they receive dividends. This is why many corporations choose to give the shareholders larger salaries rather than take dividends.
This article is only intended to give some information on forming a corporation. It is recommended that any business owner who is thinking of incorporating should consult their Certified Public Accountant or their Lawyer.