The Education Master 1994 (4th Edition)/EDUCATIONS_MASTER_4TH_EDITION.bin/files/legaegal/sba1/f1sba.exe/F135.SBE

Text File | 1993-04-11 | 5KB | 110 lines

@066 CHAP ZZ

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        │       INCORPORATING YOUR SMALL BUSINESS       │
        └───────────────────────────────────────────────┘

If the ability to limit your personal liability (should the
business fail) is an important consideration to you, then
@IF120xx]you should strongly consider incorporating your business,
@IF120xx]@NAME.
@IF120xx]
@IF121xx]you have already taken an important step in that direction
@IF121xx]by incorporating your business, @NAME.
@IF121xx]
While you will still be personally liable for any loans or
leases of the corporation that you have to guarantee, you
will at least generally protect yourself from other credi-
tors of the corporation, such as vendors, if the business
should go bust.

A corporation is an artificial legal entity that exists as
a separate legal person apart from the people who own, man-
age, control, and operate it.  It can make contracts, it
pays taxes and is liable for its debts.  Corporations exist
only because state statutory laws allow these entities to
be created.  A business corporation issues shares of its
stock, as evidence of ownership, to the person or persons
who contribute the money or business assets which the cor-
poration will use to conduct its business.  Thus, the per-
sons who own the stock are the owners of the corporation,
and they are entitled to any dividends the corporation may
pay and to receive all the corporation's assets (after all
creditors have been paid) if the corporation is liquidated.

Unlike a sole proprietorship or partnership, a corporation
has continuous existence and does not terminate upon the
death of a stockholder or a change of ownership of some or
all of its stock.  Creditors, suppliers, and customers of-
ten prefer to deal with an incorporated business because of
this greater continuity of the enterprise that is provided
by the corporate form.  Naturally, like other forms of
business organization, a corporation can be terminated by
mutual consent of the owners, or even by one shareholder
in some instances.  However, unlike sole proprietorships,
the termination and liquidation of a corporation is always
a taxable event, resulting in taxable gain or loss to the
shareholders, as though they had sold their stock in ex-
change for the corporate assets received upon liquidation.
@IF121xx]Keep that key fact in mind and talk to a good tax adviser
@IF121xx]before you even THINK (!!) of getting out of (liquidating)
@IF121xx]your corporation, @NAME.

@IF120xx]You are currently operating your business in the form of a
@IF120xx]@ENTITY (@NAME).
@IF120xx]
@IF120xx]To set up a corporation, the prospective stockholders must
@IF120xx]make application to the state office that grants corporate
@IF120xx]charters by filing articles of incorporation for approval.
Legal fees usually run between $500 and $1,000 for even the
simplest incorporation, and, if it is necessary to obtain a
permit from the state to issue stock or securities, legal
fees can be much more.

Thus, one of the disadvantages of incorporating is the cost
involved, which will be substantial even for the simplest
incorporation, taking into account legal fees and various
state filing fees.  In addition to the costs of establish-
ing a corporation, there are the recurring costs, which of-
ten include state franchise taxes, as well as federal and
state corporate income taxes (except, in most cases, for S
corporations).

In addition, many corporate actions must or should be for-
malized by board of directors' resolutions or shareholder
meetings, and must be recorded in written form in the cor-
porate minute books, which takes valuable time (or money,
if the corporation's attorney assists with such corporate
housekeeping).  Also, an out-of-state corporation usually
must pay a "qualification fee" in each state where it does
business, other than the state in which it is incorporated.
@IF120xx]Since your firm is not currently incorporated, you need to
@IF120xx]weigh and balance these significant costs against the often
@IF120xx]very substantial benefits the corporate form can offer.  If
@IF120xx]you do incorporate, you may have a choice for tax purposes,
@IF120xx]of operating as a regular ("C") corporation, or else elect-
@IF120xx]ing to have the corporation be taxed as an "S corporation."
@IF117xx]Your firm is already incorporated, and is currently set up
@IF117xx]as a C corporation. It MAY be beneficial for you to make an
@IF117xx]"S corporation" election for @NAME.
@IF117xx]
@IF117xx](However, not every C corporation firm can necessarily qua-
@IF117xx]lify for changing over to S corporation status, even if it
@IF117xx]is advisable to do so, as is explained in the discussion of
@IF117xx]S corporations below.)
@IF118xx]Your firm is already incorporated, and is currently set up
@IF118xx]as an S corporation.  Note that it MAY be more beneficial to
@IF118xx]change @NAME back to a C corporation.

Some of the pros and cons of C corporation vs. S corporation
(or not incorporating at all) are discussed below.

        ┌───────────────────────────────────────────────┐
        │SELECT THE  "XPERT"  COMMAND FROM THE MAIN MENU│
        │IF YOU WOULD LIKE TO HAVE A  CONSULTATION AS TO│
        │WHETHER OR NOT YOUR BUSINESS SHOULD INCORPORATE│
        └───────────────────────────────────────────────┘