Should I Incorporate My Business?
What Is A Corporation?
A corporation is a separate legal entity from its owners. A corporation can be owned by one person or many people. The corporation is formed under the laws of the state in which it is operating, with Articles of Incorporation or Certificate of Formation.
The state of Texas recognizes several different types of corporate forms: a pure corporation, a limited liability company, and a professional limited liability company. Which form of corporation you choose depends on a number of factors, including how the corporation is run and if one or more of the principals in the company is a licensed professional. An attorney should guide you through the considerations in choosing the correct form for your business.
Advantages Of A Corporation
1. Your personal assets are protected.
The corporation shields your personal assets from the satisfaction of debts or liabilities of the business. But, you do have to follow corporate formalities to maintain this protection.
2. You may be able to achieve tax advantages.
The corporation allows ample opportunities to shield income through shifting of income and expenses. You also eliminate self-employment tax by using the corporation to conduct business.
Disadvantages Of A Corporation
1. Starting the business is more expensive and complicated.
Incorporation requires filing with the Secretary of State, for which you pay a filing fee. Unless you decide to try incorporating on your own, you will incur attorneys’ fees for helping you incorporate.
You must have an organizational meeting with recorded minutes. Plus, you are required to take care of other legal formalities.
2. Legal formalities must be followed during all phases of conducting business.
Annual meetings must be conducted with recorded minutes. Documents must be executed with the correct corporate designations to maintain protection of personal assets. Changes in stock ownership must be documented correctly.
3. Ceasing business is more complicated and expensive.
You must conduct appropriate meetings with recorded minutes to authorize dissolution of the corporation. You must also follow dissolution procedures and file documents with the Secretary of State and pay filing fees.
4. Filing tax returns is more complicated and expensive.
A separate tax return is required for a corporation, so you will have the expense of both corporate and personal tax returns.
If your accounting is not handled wisely, you could end up paying more in taxes than if you had not incorporated.
What Steps Should I Follow If I Do Want To Incorporate My Business?
Like so many legal processes these days, there are online guides to help you do this on your own. My standard advice is “Let the buyer beware”. You might be able to successfully follow all the legal requirements to properly incorporate. However, failure to do so can cost more in the long run than hiring an attorney to assist you in the beginning.
The first formal legal step in incorporating is filing a certificate of formation with your state’s secretary of state or like official. This is done online, but it requires that you know ahead of time which form of corporate entity you wish to select. There are other online questions that relate to the form of corporate entity you have chosen as well. Your lawyer can properly complete the online certificate of formation for you.
The next legal step is conducting your organizational meeting and recording minutes of the meeting. At this meeting, you will also adopt either bylaws for a regular company, or an operating agreement for a limited liability company. These are the rules by which you must govern your corporation going forward.
Also at the organizational meeting, you will approve issuance of stock or membership interests in your corporation to the investors, and follow up with issuing the proper certificates. You will also need to keep a record of issuance and transfer of the stock or membership interests during the life of your corporation.
Either your attorney or your accountant will also follow up with obtaining an employer’s identification number (EIN) from the IRS for reporting wages for any employees and for filing tax returns. If you are involved in sales, your business will also need to obtain a sales tax number from your state’s appropriate agency for sales tax purposes. There may be other licenses you need to obtain depending on your type of business.
Your attorney should also give you guidelines on how you should sign documents, set up a bank account, and generally conduct business going forward to preserve the benefit of protection from personal liability that is the main purpose of incorporating for most businesses.
If you are looking to incorporate, and you need help deciding if a corporation is right for you or how to do it, please call Adair M. Buckner at (806) 220-0150 to set up a free initial consultation*.
*(The free consultation does not cover actual review of documents or giving legal advice on a specific situation.)
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