The Incorporation Guide
- A complete summary of the pros and the cons for incorporating your business as a
limited liability company.
$ 25.00

The Bookkeepers Correspondence Course
- Designed for the person entering the job market for the first time. A step by step guide to run your own business accounts, or to provide you with skills to work for an accountant.
$ 175.00

The Employee / Contractor dilemma
- The authority in determining the independent contractor / employee determination under fire from both the state and the federal government.
$ 25.00

However in our society anyone can sue anyone else for anything and has no downside risk to pursuing a legal remedy. So while you may have a valid corporate entity it does not automatically protect you from personal litigation. It will be up to you to prove to the court, at your expense, that the corporation is not a fiction, or your alter ego. And that the corporation is in fact a separate entity separate and apart from your activities.

Some liabilities incurred by the corporation in its day to day business are by statute barred from being discharged if the company fails. The most significant are Federal Employment taxes. The trust fund portion of withheld federal, FICA and Medicare taxes become the "responsible parties" liability and are not dischargeable in bankruptcy.

Once you make the decision to form a corporation you must follow the requirements diligently. You will not know when or who might initiate litigation against you. It is important that you consult with an attorney at least once a year to review your corporate minute book and ensure that the corporate records are up-to-date.

The least that you will be required to do is file a statement (and pay an annual fee) with the state agency that regulates corporations as to the Registered Agent for service of process, and have an annual shareholders meeting to review the results and approve the directors of the company for the coming year.

This basic requirement is not time consuming and the small charge an attorney would make for this update is not significant when put in context of the potential damage NOT complying with these requirements. table of contents

ADVANTAGES

1 ) Limited Liability
Generally a shareholder in a corporation risks only the sum equal to the amount of the investment. What ever amount they invested in the company is the maximum exposure the investor has in that venture. Liability does not extend to personal assets. Essentially this offers protection against suits and liabilities in excess of your equity in the business. However, you must realize that some courts have held that on occasion the corporation was a 'shell' or a 'sham' and that the owners were liable for the debts of the company.
2 ) Transferability of interest
A share or interest in a corporation is represented by stock and can be freely bought, sold or assigned with little effect on the operations of the company.

3 ) Continuous Life
Unlike a partnership, a corporation is not terminated by the death of a shareholder, or their incapacity. It is customary to regard a corporation as perpetual, and it continues to exist until dissolved, merged, or otherwise terminated, entirely independent of the misfortunes of its shareholders. The ownership of the shares in a company becomes important when evaluating a persons estate and the payment of death taxes.

4 ) Separate Entity
A corporation is a legal entity in itself and is treated separately from its shareholders.

- A corporation can take, hold, and convey property.
- It can contract in its own name with shareholders, or third parties.
- It can sue and be sue.

5 ) Financing
Easy to raise capital in larger amounts by issuance of stock or other securities. While this may seem something that only large companies can do from the public, don't overlook family and friends. With a corporate entity a family member, as a minority shareholder has numerous legal rights to protect their investment.

Flexibility because it can issue a number of classes of stock and bonds to suit its needs and investor demands.

6 ) Corporate Management
Corporations can employ management personnel who are experts in their fields of business.

Persons who manage corporations are not necessarily shareholders.

The management of a corporation is usually vested in a board of directors elected by the shareholders. Increasingly the directors of companies have been held legally accountable by the shareholders for the performance of the company. Directors are normally compensated for the time involved in the company. They should meet on a regular basis during the year and review the financial condition of the company. If there is one director, one shareholder, and one employee this requirement becomes more important. The more documentation that can be presented to prove that the actions were taken as a corporation and not the actions of an individual, the stronger the "corporate shell" becomes.

7 ) Subchapter S Corporation
The IRS treats this corporate form differently from standard corporations by providing tax relief by transferring the income each year to the stockholders (no more than 35), and taxing them individually. Additionally, earnings withdrawn from the corporation (not wages) are exempt from social security taxes.

a ) All profits (and losses) are transferred through to the shareholders at the end of the year, including all depreciation and investment tax credits. In many respects the Subchapter S Corporation is a cross between a partnership and a corporation.

b ) For many years the Sub Chapter S election was used by many professionals to shelter income from FICA and Medicare taxes. The argument was that the profits from the Sub Chapter S business were dividends and not wages and there fore exempt from the FICA and Medicare taxes. IRS has recently enforced a theory called "reasonable wages". Their argument is that a corporation must have someone in charge, and that a sole shareholder, employee of the business that generates substantial profits must have paid wages - directly or indirectly. We encourage our clients to report wages at a reasonable level when working for their own company to avoid potentially expensive disagreements with the IRS.

In order to elect Sub Chapter S status you must file Form 2553 within 75 days of the start of the new fiscal year. All Sub Chapter S corporations are on a calendar year, and a short year return may have to be filed by a full corporation that is changing to a Sub Chapter S status.

A Sub Chapter S corporation cannot have more than 35 shareholders and if the election is declined at some point the company cannot revert to Sub Chapter S status for 5 years. table of contents

DISADVANTAGES

1 ) Taxation
Tax burdens may be heavier than on individuals operating sole proprietorships because of federal 'double taxation'.
** Corporate taxation rates are up to 46% (combined individual and corporate rates)
** Distributed earnings are taxed to shareholders
** Franchise taxes and some State taxes are additional taxes
Dividends are included in the income of most corporations, (it is not a deduction from the pretax profits) and income in general is taxed at a lower level than that of individuals. (e.g. less than $25,000.00 per year pays only 15% tax. However, the fiscal year earnings stay in the corporation at the end of the year. Likewise should the company have a loss on the year then the loss is carried forward (or back), it is not transferred to the owners personal income tax. table of contents
2 ) Costs of incorporation
Because they must meet formal creation requirements.

3 ) Formal Operating Requirements
Need to comply with administrative and procedural requirements. The annual meetings and legal costs associated with the meetings is an additional expense that a sole proprietor does not have to meet.

Continuing governmental supervision.

POWERS OF CORPORATION

1 ) Inherent power is that power which is necessary for corporate existence, the power to make contracts.
2 ) Express powers are set out in the charter and by-laws at the time the corporation was organize.
3 ) Implied powers are those which are necessary to carry out the express powers and purpose of the corporation. table of contents

LIABILITIES OF CORPORATIONS

1 ) Crimes
Corporations are liable for crimes that they are capable of committing (anti-trust but not murder)
Punishment generally consists of fines or forfeiture, although recently directors have been faced with prison sentences for crimes of the corporations.

Some company officers have not been protected by the "corporate veil". Examples are in the area of toxic waste dumping, unsafe working conditions, worker safety etc. Generally in the area of public "good". In these instances the fact that the officers of the company were knowledgeable about the deficiencies of the conditions resulted in their indictment. Independent third party shareholders (who were not also officers) of the company were not held to be liable for actions of which they had no knowledge.

2 ) Torts (civil wrongs)
Corporations are liable for the damages resulting from torts committed by their officers, directors, agents, or employees within the course and scope of their corporate duties. (e.g. fraudulent deceit of a customer, or if an employee assaults a complaining customer.

3 ) Acts of Officers
The corporation is liable for ALL authorized acts.
If the act is not authorized, if the act is of the type customarily delegated to such an officer, the corporation is liable.
Corporations are generally liable on contracts made by their agents within the course and scope of corporate authority.

- Corporations are not obligated to perform illegal contracts.
- Pre-incorporation contracts must be adopted before there is liability. table of contents

CORPORATE RECORDS

1 ) Stock Certificates
Before a company can commence operations it must have shareholders. The shareholders in consideration of their investment in the company are issued shares. A share register is maintained with the corporate records that indicates, at a minimum, the dates the shares were issued, to whom the shares were issued and the number of shares.
The shares of stock must be issued for there to be a valid corporation. The company must be owned by someone at all times.

If a share certificate is lost, a replacement certificate is issued but a bond can be required that indemnifies the company in the event the lost certificate is presented.

2 ) Bylaws
The By Laws of the company are the guidelines by which the company imposes on itself as to how its business will be run. Normally a fairly standard set of By Laws are adopted at the organizing meeting. As the officers and Directors of the company become more proficient in the working of the company these By Laws can be amended and changed by a majority vote of the shareholders.

3 ) Organizing meeting
The Organizing meeting of the company will set the tone for the company in the coming years. It should be held with all the shareholders, directors and corporate officers present. Normally, corporate meetings require a notice period to the shareholders, before the meeting may begin, however a Waiver of Notification is possible if all the shareholders consent.

A president should be appointed, secretary and treasurer for the company should be appointed. The shareholders should vote on the Chairman and Board of Directors.

The By Laws should be voted to be approved and adopted by the shareholders.

The bank account and financial institution should be ratified and approved by the shareholders initially.

If the shareholders approve, a motion to seek Sub Chapter S status for the corporation should be approved.

If assets are being transferred from a sole proprietor to the corporation such a motion must be approved by the shareholders.

Minutes should be taken of the events at the first meeting and filed in the corporate record book.
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4 ) Annual Meetings
An agenda should be prepared by the Chairman or Company Secretary for the annual meeting. It should include a welcome to the shareholders present and apologies from shareholders or directors that are unable to attend.

The minutes of the previous meeting are read at this stage and if in agreement they are approved by the shareholders.

The annual accounts for the year are presented to the shareholders by the treasurer, or auditors. Questions can be answered from the floor (shareholders) on the results of the operations.

Directors normally retire upon rotation and if eligible will stand for office again. The Directors remuneration is approved by the shareholders for the coming year. The shareholders vote individually for the Directors of whom they approve.

Any new business can be brought up at this point. Acquisitions, sale of assets, change in the direction of the company and changes in the By Laws can be put to the shareholders for their vote of approval.

The company must have a meeting each year for their shareholders and adequate notice must be given to minority shareholders so that they are able to attend.

The reasonable and necessary costs of the meeting are tax deducible. However a first class ticket to the Bahamas for a sole shareholder, Director company officer would be interpreted by the IRS as "lavish and extravagant" and be denied.

Remember to document the meeting and the motions and the votes affirmative or negative by the shareholders as to what was adopted by the shareholders for the company. The annual meeting minutes become an integral part of the company records and are invaluable in proving you ran the company properly.

It may be appropriate for you to include your attorney at the annual meeting to ensure that you have met your state requirements.

DISSOLUTION

1 ) Dissolution is the termination of the corporation's status as a legal entity. Dissolution does not occur until liquidation is complete.
2 ) Creditors must be given notice of the dissolution or the corporation will remain liable on its debts.