A Corporation Might Be The Right Organization for Your Small Business
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Loading ...by Jason Prescott
The Corporation isn’t just for the Fortune 500
We’ve already covered the 2 types of business organizations that are easy to set up, the partnership and the sole proprietorship. A corporation requires a little more work to formally create but carries separate advantages from these. Unlike the other two,a corporation creates a separate legal entity, (corpus), and it can raise money by offering shares of stock to investors. It also can continue under new ownership if the original owners separate from the organization.
Corporate ownership protects your personal assets against advers legal action. So if a product you distribute injures someone,the damages that might result against you would not impact yourpersonal assets, such as your home. However, it will not always protect your personal assets. You generally can’t rely on this protection if you are found to have incorporated solely to shield yourself from a particular liability.
You register your corporation with a state government for a nominal fee. These forms are usually available for download — here is a list of incorporation forms by state. The forms are simple enough but there are several variant types of corporations that you can form,”stock”,”non-stock” etc. These choices impact you in many ways,and you should definitely consult a lawyer or accountant about which makes sense with your individual situation. I would strictly avoid companies that advertise on the internet to assist you with setting up a corporation. They charge just as much as an independent lawyer would, and they are essentially no better than you doing it yourself. A former business partner insisted I use one of these firms and they were expensive,unnecessary and ill-suited to an individualized situation. So learn from my mistake.
Incorporating in Delaware or Nevada is a popular notion because of a perception that they have friendly taxes, lower cost and greater protection from liability. Youdon’t really need to do this. For the most part, you will still have to register as a foreign corporation in the state where you do business,which will negate likely negate any savings you incur. And the record-keeping and compliance burden is doubled.
The corporation pays taxeson its net profit. It can hold on to some profits for expenses and then distributes the remaining profits to shareholders as a taxable dividend.
If you dealwith products that are dangerous in any way,you should incorporate from the beginning of your business. Be aware that almost any commercialproduct can be dangerous in the wrong hands. Have you ever seen the statistics on children who drown in five-gallon buckets?
A customer with a grievance is going to sue whoever is closest at hand and probably work up the supply chain as far as their attorney feels it is actionable.
A variation that might work for the independent businessperson is the Subchapter S Corporation or “S corp” The S stands for “small,” You incorporate and then you elect the S version. This variant restricts the number of owners, public stock offerings and other matters,but protects you from liability and still allows you to pay the business taxes as personal income taxes.
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