If you understand basic business incorporation principles, you will also be better able to operate other forms of business entities, including a limited liability company, general or limited partnership, a business trust, or even the exotic hybrid forms. Why? Because the best practices used to observe corporate formalities can be easily adopted to these other forms of "companies".
This information will be very useful to you if you currently have, or are starting, a new small business or are reorganizing an existing one via business incorporation or the formation of another form of "fictitious" or "artificial" legal entity. Such artificial entities (as contrasted to a "natural" person, a flesh-and-blood human being) are created by the state which grants to the entity its lawful existence. Along with this legal existence is bestowed the capacity to own property, conduct business, sue and be sued, all in its own name, separately and distinctly from its owners and operators.
Business incorporation fundamentals are simple to learn and understand. Like anything else, it is not rocket science if you know what you are doing. And, you don't need to become a master of corporate law to understand the basic rules of company formalities, from formation to operation and proper documentation. If you learn and regularly apply the basic rules to your company, you will greatly reinforce the corporate veil of liability protection. Lawsuits, tax audits, bankruptcies, divorces, judgments, liens and seizures happen. So, help your company help you. That's largely why you formed it in the first place.
OVERVIEW: INITIAL CONSIDERATIONS
You have many options when choosing the legal form of business entity you will use to conduct your small business, professional practice, or to hold your assets and investments. Your choice will have far reaching effects on your personal life and affairs, and it will govern how your business enterprise will be transacted. Your company's form will significantly impact the way it is taxed, and the way a court will treat it – and you – in any future litigation. Each form of business organization has its own advantages and disadvantages. Each form also has its own tax and non-tax consequences. You will be married to your company of choice. Choose wisely. Don't make this decision lightly or continue on without understanding.
First, assess your own personality:
What is the general state of your tax and financial affairs?
What exactly do you want your company (not just your business) to accomplish for you?
What is your vision for your company in the short term?
What is your vision for your company in the long term?
Is your vision realistic?
What is your tolerance for personal risk should your business fail? In other words, what personal consequences of such a failure are you willing to personally bear?
What is the level of complexity or simplicity you will accept?
Then, consider your family, partners, business associates, investors, lenders.In some cases, the nationality or citizenship of a business incorporation shareholder is restricted. Foreign partners may be taxed at a higher rate or be subject to income tax withholding when you pay them dividends or profit distributions. Your banker may favor one form over another for making loans, or require personal guarantees from you and other company owners. Relative to these other folks, also consider:
What is the general state of their tax and financial affairs?
Will your business entity impact their tax or legal posture?
Will your business entity prohibitively restrict them from participating in its management, operation, or ownership?
Can you legally capitalize your company or get the funding or loans you need to operate and expand in the future?
Next, be aware there are a variety of tax and non-tax consequences. Federal, state, and sometimes local laws will directly impact your business organization. State and federal income tax will factor prominently in you choosing the most advantageous legal form for conducting your business and investment. For instance, your choice of business incorporation or other form of organization directly affects your decisions regarding issues such as:
Will you contribute assets to the company to capitalize it, or instead
Will you lease your equipment or property to the company, or loan money to the business?
Whether and who will be responsible for the business's financial, tax, legal, or other obligations?
Whether or not, and in what form, the business will continue to operate should you become incapacitated, resign, retire, become bankrupt, die, or otherwise cease to be involved in it's operation?
Will the company's ownership interest (its shares, membership interest, partnership interest, etc.) be freely transferable or will transfer be restricted, and how?
How shall new, substitute or future owners/participants be admitted into the company, or permitted to opt out of the company?
How will the income tax liability of yourself and other owners be figured?
How will your business incorporation or other organizational form fit into your optimized estate plan?
If you have partners, who will be permitted to make management decisions and sign company checks?
CHECK STATE LAW
All private (non-governmental organizations) artificial business entities are formed under state or territorial law. State laws are constantly being amended and updated so be sure to review the most current laws affecting your filings and operation. Further, states compete for fees for new business incorporation registrations and other legal entity formations by drafting their general business incorporation statutes to be attractive to certain target industry segments. For instance, Delaware is the business incorporation capital of the world, known for its ease of creation and its good judicial reputation for quickly settling corporate litigation actions. Nevada laws provide easy one-person business incorporation, strong liability protections, and no corporate income tax. Vermont is a favorable domicile for captive insurance companies.
ATTENTION
Each factor in choosing your business incorporation or other entity should be compared and contrasted to determine the appropriate form for your "company". A professional advisor, lawyer or certified public account who specializes in this area of law and taxation can be invaluable in your pre-planning, implementation, and continuation of your business incorporation or other business entity. I strongly recommend and encourage you to always seek out the counsel of competent licensed professionals before you make important legal and tax decisions.
SCOPE OF CHOICES
Don't be sold on any one promotional scheme without understanding the broader picture and your scope of choices. There is no single perfect solution, no silver bullet to resolve all of your important issues when forming your business or investment entity. Be aware of all your options. Understand, there is no substitute for your personal knowledge of your own business affairs and their structure. Seek out sound, reputable, factual advice from unbiased professionals and information sources. Reference primary and secondary authority to substantiate promoters' claims. Remember, there are advantages and disadvantages, tax and non-tax consequences, to each form of business entity.
Seek out sound, reputable, factual advice from unbiased professionals and information sources. Reference primary and secondary authority to substantiate promoters' claims. Remember, there are advantages and disadvantages, tax and non-tax consequences, to each form of business entity.
There's a myriad of options on the table for your consideration when choosing the character and make-up of your business incorporation or other business or investment entity. Consider:
Choices of Business Entity Forms:
Sole Proprietorship (SP)
General Partnership (GP)
Limited Partnership (LP)
Regular Corporation (Subchapter C)
S Corporation (Subchapter S)
Limited Liability Company (LLC)
Limited Liability Partnership (LLP)
Limited Liability Limited Partnership (LLLP)
Business Trust (BT)
Choices of Business Entity Domicile and Registration (Jurisdiction):
Your choice here can greatly affect how your business profits and losses are attributed, the tax rate applied to your business, the number and nationality of investors/owners, and your overall bottom line. The IRS can tax a business entity as either a sole proprietorship, corporation (Subchapter C or S) or partnership. An LLC may elect (depending upon its structure and ownership) to be taxed as a partnership, corporation or sole proprietorship.
Sole proprietorship (individual, IRS form 1040)
Regular corporation (Subchapter C, IRS form 1120)
S corporation (Subchapter S, income tax is passed through on IRS form 1120S)
Partnership (income tax is passed through on IRS form 1065)
Trust (usually not considered a "business entity" for federal income tax purposes, income tax is passed through to the individual "grantor's" IRS form 1040; or passed through to the beneficiary; or paid by the trust on IRS form 1041)
Choices of Business Entity Age:
New business organization (newly formed on your request)
"Shelf" or "seasoned" company (formed, named, aged, but never used - with no assets or liabilities)
Acquire an existing company from a private owner/seller
Merge your existing company with a new or existing company
Additional Considerations:
What is the state law regarding the minimum number of required incorporators, officers and directors?
Is there any state income, franchise, inventory, use and other taxes on your entity?
What information does state law require to be included in the articles of incorporation or organization?
Are the names and addresses of officers, directors or stockholders a matter of public record?
Does the state provide their own forms for articles of incorporation, articles of organization or certificate of partnership? OR
Does the state follow the Model Business Corporation Act or the Revised Model Business Corporation Act?
How do you select a Resident Agent?
What are the state requirements for registration and qualification of your "foreign" entity ("foreign" meaning from another state)?
How (if applicable to your situation) do you register your trademarks with the state?
Does the state permit company re-domiciling – can you move your company's domicile into- or out of-state?
Does the state offer expedited filing times and services (24-hour or same-day filings for an additional fee)
What are the state's annual filing requirements and annual fees?
BE PREPARED
Defining a problem can be half (or more) of the solution. Failing to plan is the same as planning to fail. There is no substitute for first hand knowledge. You do not need a Ph.D in business incorporation or structural formation to move forward. You need to know what informed, intelligent, and relevant questions to ask of your professional advisors and service providers. You will need to rely upon them for certain important legal services and advice. But at the end of the day, if your company is challenged by a lawsuit, tax audit, bankruptcy, divorce, judgment, lien or seizure, you alone will ultimately be responsible for it's success or failure.
Get a handle on your company, whatever form it has or will have. Invest some time to get to know it intimately. Learn the basics. Treat it right. Attend to it. Love and care for it. You, your family, and your business will reap the rewards for your small investment of time spent here learning, understanding and applying you newly acquired savvy. Besides, it might save you much more than money.
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