Should I Incorporate My Business? - English Transcripts
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The traditional way of having a business form is to be a corporation…that’s where the question came from “Should I incorporate my business?” And the answer is a little bit more complicated in terms of ease of formation because you really need to create a legal organization in the eyes of the law through your state or some other state’s Secretary of State’s office. In reality, it’s a very straightforward process and there are a number of agencies that can help you do this.
Why you want to do this is because the corporation creates a legal entity of its own.
And the assets of the corporation are separated from the assets of the owners and a creditor can only come after the assets of the corporation unless the owners have also pledged their personal credit in support of the corporation.
There are two types of traditional corporations…a “C” corporation which tend to be bigger corporations…which include the so-called “double taxation” you typically hear about that people are trying to avoid. For a smaller company, you don’t want to pay the tax, so you become a Subchapter “S” corporation. Subchapter “S” corporations give you the benefits of limited liability, but it also gives you the advantage of the flow through of the business profit or loss to your personal statement. If you earn enough money through you may want to keep the money in the corporation…you’re willing to pay the corporate tax and you can build up the reserves of the corporation under the “C” corp, that’s a job for your accountant.
The more current format that we see happening over and over again today is the “LLC”. The so-called “Limited Liability Company” …it’s like a subchapter “S” corporation except it doesn’t have some of the limitations that Subchapter “S” have. Particularly in terms of ownership …in a Subchapter “S” corporation another corporation cannot be an owner. There may be a lot of reasons and circumstances where it would be valuable to have another corporation be one of the owners of the business, so an LLC allows you to do that.
So an LLC allows you to do that, it has ease of formation, it has a simplified tax structure and it really is today the organization that is used more and more frequently and the one that more and more attorneys are recommending for their clients.
The second question is you and your buddy decide to start a business together and you just do. Now, you’re a partnership in the eyes of the law. The obvious advantage is ease of formation because you’re a partnership. The big disadvantage is the same unlimited liability of the proprietorship is compounded by the fact that either partner can obligate the other partner without the other party’s direct consent. So your buddy goes out and gets a business loan or makes an agreement with somebody to deliver something you don’t agree with and yet because you’re a partnership you are both on the hook.
The creditor can now come after either partner. they can choose which partner to sue and so, of course, they’re going to choose the partner with assets.
Partnerships are very, very difficult…there are specialized partnerships called Limited Partnerships and they’re for specialized applications..But, in general, a partnership is a dangerous thing to be in.
The reality is ..do what’s more convenient for you…yeah, there may be an advantage to being a Nevada corporation versus a Delaware corporation versus your own home state corporation. But, you’re going to have to register in your own home state as a foreign corporation because that’s the primary place you’re doing business. You can’t avoid the state tax because it’s the primary place you do business, so why not make it easy and just incorporate in your own home state?
One of the tools that’s in the SME Toolkit that really will help users to understand which is the best choice of organizational structure to meet their personal circumstances is a matrix that lays out each of the primary types of business organizations.
It clearly shows the pros and cons of each…I encourage any user to go to this matrix, take a look at it. It’s in a very understandable format. Then make a decision that’s going to be best for your own personal circumstances rather than a default decision that happens just because you blundered forward.
For more information on the topics discussed in this SME Small Business Learning segment, access the following links.
1) Business Entity Matrix
2) Business Start-up Checklist
3) Small Business Registrations and Filings4) Business Filing and Registration Instructions (SPANISH)