Incorporating Your Business Incorporating Your Business Is Potentially the Single Most Is Potentially the Single Most Important Thing A Business Important Thing A Business

Owner Can Do!Owner Can Do!

Information SummaryInformation SummaryThe information set forth in this handout The information set forth in this handout is designed to provide a brief overview of is designed to provide a brief overview of certain areas of the law and is not certain areas of the law and is not intended to provide a comprehensive intended to provide a comprehensive treatment of any particular area. No treatment of any particular area. No claim is made that this information claim is made that this information attempts to offer solutions to individual attempts to offer solutions to individual situations, to provide a legal opinion or to situations, to provide a legal opinion or to substitute for the advice of legal counsel.substitute for the advice of legal counsel.

Advantages of Advantages of IncorporatingIncorporating

Anyone who operates a business, alone Anyone who operates a business, alone or with others, should explore or with others, should explore incorporating their business. The incorporating their business. The following benefits are available through following benefits are available through incorporating:incorporating:

Reduces Personal Reduces Personal LiabilityLiabilityIncorporating helps separate your personal Incorporating helps separate your personal

identity from that of your business. Sole identity from that of your business. Sole proprietors and partners are subject to proprietors and partners are subject to unlimited personal liabilityunlimited personal liability for business debt for business debt or law suits against their company. Creditors of or law suits against their company. Creditors of the sole proprietorship or partnership can bring the sole proprietorship or partnership can bring suit against the owners of the business and can suit against the owners of the business and can move to seize the owners’ homes, cars, savings move to seize the owners’ homes, cars, savings or other personal assets. Once incorporated, the or other personal assets. Once incorporated, the shareholders of a corporation have only the shareholders of a corporation have only the money they put into the company to lose, and money they put into the company to lose, and usually no more. This keeps personal assets out usually no more. This keeps personal assets out of the creditors line of fire.of the creditors line of fire.

Adds CredibilityAdds CredibilityA corporate structure communicates permanence, A corporate structure communicates permanence, credibility and stability. Even if you are the only credibility and stability. Even if you are the only stockholder or employee, your incorporated business may stockholder or employee, your incorporated business may be perceived as a much larger and more credible be perceived as a much larger and more credible company. Seeing “inc.” or “corp.” at the end of your company. Seeing “inc.” or “corp.” at the end of your business name can send a powerful message to your business name can send a powerful message to your customers, suppliers, and other business associates about customers, suppliers, and other business associates about your commitment to the ongoing success of your venture.your commitment to the ongoing success of your venture.

Tax AdvantagesTax AdvantagesIncorporating usually provides Incorporating usually provides tax-deductible benefits for you tax-deductible benefits for you and your employees. Even if you and your employees. Even if you are the only shareholder and are the only shareholder and employee of your business, employee of your business, benefits such as health insurance, benefits such as health insurance, life insurance, travel and life insurance, travel and entertainment expenses may now entertainment expenses may now be deductible. Corporations be deductible. Corporations usually provide an increased tax usually provide an increased tax shelter for qualified pensions shelter for qualified pensions plans or retirement plans (e.g. plans or retirement plans (e.g. 401K’s). Also, the potential 401K’s). Also, the potential exists for lowering the FICA exists for lowering the FICA withholdings from that withheld withholdings from that withheld while conducting business as a while conducting business as a sole proprietor.sole proprietor.

Easier Access to Capital Funding

Needed capital for your business can be more Needed capital for your business can be more easily raised with a corporation through the sale of easily raised with a corporation through the sale of stock. With sole proprietorships and partnerships, stock. With sole proprietorships and partnerships, investors are much likely to purchase shares in a investors are much likely to purchase shares in a corporation where there usually is a separation corporation where there usually is a separation between personal and business assets. Also, some between personal and business assets. Also, some banks prefer to lend money to corporations.banks prefer to lend money to corporations.

An Enduring StructureAn Enduring StructureA corporation is the most enduring of all legal A corporation is the most enduring of all legal business structures. Corporations may continue on business structures. Corporations may continue on regardless of what happens to its individual directors, regardless of what happens to its individual directors, officers, managers or shareholders. If a sole officers, managers or shareholders. If a sole proprietor or partner dies, the business may proprietor or partner dies, the business may automatically end or it may become involved in automatically end or it may become involved in various legal entanglements. Corporations can have various legal entanglements. Corporations can have unlimited life, extending beyond the illness or death of unlimited life, extending beyond the illness or death of the owners.the owners.

AnonymityAnonymityCorporations can offer Corporations can offer anonymity to its owners. For anonymity to its owners. For example, if you want to open example, if you want to open an independent small business an independent small business of any kind and do not want of any kind and do not want your involvement to be public your involvement to be public knowledge, your best choice knowledge, your best choice may be to incorporate. If you may be to incorporate. If you open as a sole proprietorship, it open as a sole proprietorship, it is hard to hide the fact that you is hard to hide the fact that you are the owner. As a are the owner. As a partnership, you will most likely partnership, you will most likely be required to register your be required to register your name and the names of your name and the names of your partners with the state and/or partners with the state and/or county officials in which you are county officials in which you are doing business.doing business.

Centralized Centralized ManagementManagement

With a corporation’s centralized management, all With a corporation’s centralized management, all decisions are made by your board of directors. Your decisions are made by your board of directors. Your shareholders cannot unilaterally bind your company shareholders cannot unilaterally bind your company by their acts simply because of their investment. by their acts simply because of their investment. With partnerships, each individual general partner With partnerships, each individual general partner may make binding agreements on behalf of the may make binding agreements on behalf of the business that may result in serious financial business that may result in serious financial difficulty to you or the partnership as a whole.difficulty to you or the partnership as a whole.

Types of Types of CorporationsCorporations

Businesses may choose from a Businesses may choose from a variety of corporate entities, variety of corporate entities, based on their needs. based on their needs. Below are useful descriptions. If Below are useful descriptions. If you have further questions, we you have further questions, we can help you decide which type of can help you decide which type of structure best suits your business structure best suits your business needs.needs.

General Corporation General Corporation (“C” corporation)(“C” corporation)

A general corporation, known as a “C” A general corporation, known as a “C” corporation, is the most common corporate corporation, is the most common corporate structure. A general corporation may have structure. A general corporation may have an unlimited number of stockholders. an unlimited number of stockholders. Consequently, it is usually chosen by those Consequently, it is usually chosen by those companies planning to have more than 30 companies planning to have more than 30 stockholders or large public stock offerings. stockholders or large public stock offerings. Since a corporation is a separate legal entity, Since a corporation is a separate legal entity, a stockholder’s personal liability is usually a stockholder’s personal liability is usually limited to the amount of investment in the limited to the amount of investment in the corporation and no more.corporation and no more.

Close CorporationClose CorporationA close corporation is most appropriate for A close corporation is most appropriate for the individual starting a company alone or the individual starting a company alone or with a small number of people. These are a with a small number of people. These are a few significant differences between a few significant differences between a general corporation and a close corporation. general corporation and a close corporation. A close corporation limits stockholders to a A close corporation limits stockholders to a maximum of 30. In addition, many close maximum of 30. In addition, many close corporation statutes require that the corporation statutes require that the directors of a close corporation must first directors of a close corporation must first offer the shares to existing stockholders offer the shares to existing stockholders before selling to new stockholders. Not all before selling to new stockholders. Not all states recognize close corporations.states recognize close corporations.

Subchapter “S” Subchapter “S” CorporationCorporation

A Subchapter S Corporation is a general corporation that A Subchapter S Corporation is a general corporation that has elected a special tax status with the IRS after the has elected a special tax status with the IRS after the corporation has been formed. Subchapter S corporations corporation has been formed. Subchapter S corporations are most appropriate for small business owners and are most appropriate for small business owners and entrepreneurs who prefer to be taxed as if they were still entrepreneurs who prefer to be taxed as if they were still sole proprietors or partners. When a general corporation sole proprietors or partners. When a general corporation makes a profit, it pays a federal corporate income tax on makes a profit, it pays a federal corporate income tax on the profit. If the company also declares a dividend, the the profit. If the company also declares a dividend, the stockholders must report the dividend as personal income stockholders must report the dividend as personal income and pay more taxes. S Corporations avoid this “double and pay more taxes. S Corporations avoid this “double taxation” (once at the corporate level and again at the taxation” (once at the corporate level and again at the personal level) because all income or loss is reported only personal level) because all income or loss is reported only once on the personal tax returns of the stockholders. For once on the personal tax returns of the stockholders. For many small businesses., the S Corporation offers the best many small businesses., the S Corporation offers the best of both worlds, combining the tax advantages of a sole of both worlds, combining the tax advantages of a sole proprietorship or partnership with the limited liability and proprietorship or partnership with the limited liability and enduring life of a corporate structure.enduring life of a corporate structure.

S Corporation S Corporation RestrictionsRestrictions

To elect S Corporation status, your corporation must meet To elect S Corporation status, your corporation must meet specific guidelines:specific guidelines:

All stockholders must be citizens or permanent resident of All stockholders must be citizens or permanent resident of the United States.the United States.

The maximum number of stockholders for an S Corporation The maximum number of stockholders for an S Corporation is 100.is 100.

If an S Corporation is held by an “electing small business If an S Corporation is held by an “electing small business trust,” then all beneficiaries of the trust must be individuals, trust,” then all beneficiaries of the trust must be individuals, estates or charitable organizations. Interests in the trust estates or charitable organizations. Interests in the trust cannot be purchased.cannot be purchased.

S Corporations may only issue one class of stock.S Corporations may only issue one class of stock. No more than 25 percent of the gross corporate income may No more than 25 percent of the gross corporate income may

be derived from passive income.be derived from passive income. Not all domestic general business corporations are eligible Not all domestic general business corporations are eligible

for S Corporation Status.for S Corporation Status.

S Corporation S Corporation Exclusions:Exclusions:

A financial institution that is a bankA financial institution that is a bank An insurance company taxed under An insurance company taxed under

Subchapter LSubchapter L A domestic International Sales A domestic International Sales

Corporation Corporation Certain affiliated groups of corporationsCertain affiliated groups of corporations

Which State to Which State to Incorporate InIncorporate In

Many small businesses prefer to incorporate in Many small businesses prefer to incorporate in their home state. Typically, it is least their home state. Typically, it is least complicated and most cost effective to complicated and most cost effective to incorporate in the state where you are incorporate in the state where you are planning to operate your business. If you planning to operate your business. If you incorporate outside your home state, you still incorporate outside your home state, you still may be required to qualify to do business in may be required to qualify to do business in your home state. The cost of a local your home state. The cost of a local incorporation will usually be less than incorporation will usually be less than incorporating in another state and then incorporating in another state and then qualifying to do business in your home state qualifying to do business in your home state as a “foreign” (out of state) corporation. Also, as a “foreign” (out of state) corporation. Also, you will avoid paying franchise taxes and filing you will avoid paying franchise taxes and filing annual reports in two different states.annual reports in two different states.

Advantages of a Advantages of a Delaware Corporation or Delaware Corporation or

LLCLLCOver 505 of the NYSE companies are Delaware Over 505 of the NYSE companies are Delaware corporations. Delaware has a long heritage as a corporations. Delaware has a long heritage as a business-friendly state and may be a good choice if business-friendly state and may be a good choice if you intend to take your company public and offer you intend to take your company public and offer publicly traded stock. Delaware has many other publicly traded stock. Delaware has many other advantages, including low incorporation fees, low advantages, including low incorporation fees, low annual franchise taxes, and no state corporate annual franchise taxes, and no state corporate income tax for corporations that operate outside of income tax for corporations that operate outside of Delaware. Be aware, however, that if you Delaware. Be aware, however, that if you incorporate in Delaware while your business is incorporate in Delaware while your business is located outside of Delaware, you may need to located outside of Delaware, you may need to qualify to do business in your home jurisdiction. qualify to do business in your home jurisdiction. This may require an extra step and fee to your This may require an extra step and fee to your home state. home state.

Advantages of a Nevada Advantages of a Nevada Corporation or LLCCorporation or LLC

Nevada has become increasingly friendly to Nevada has become increasingly friendly to corporations with its privacy and liability corporations with its privacy and liability protection status as well as certain tax protection status as well as certain tax advantages. Nevada has no state tax on advantages. Nevada has no state tax on corporate profits, no state annual franchise corporate profits, no state annual franchise tax, or no state personal income tax. tax, or no state personal income tax. Stockholders of a Nevada corporation are not Stockholders of a Nevada corporation are not public record, allowing complete anonymity. public record, allowing complete anonymity. However, if you incorporate in Nevada while However, if you incorporate in Nevada while your business is located in another state, you your business is located in another state, you may need to qualify to do business in your may need to qualify to do business in your home state. This may require an extra step home state. This may require an extra step and an additional fee to your home state. and an additional fee to your home state.

Can a Delaware or Nevada Can a Delaware or Nevada Corporation Do Business in Corporation Do Business in

Other States?Other States?Yes. As noted above, nearly half of the Yes. As noted above, nearly half of the corporations listed on the New York Stock corporations listed on the New York Stock Exchange are Delaware corporations and Exchange are Delaware corporations and numerous large businesses are relocating to numerous large businesses are relocating to Nevada. These large companies conduct Nevada. These large companies conduct business throughout the U.S. and abroad. They business throughout the U.S. and abroad. They must, of course, conform to the laws of any must, of course, conform to the laws of any jurisdiction they enter. Many states require jurisdiction they enter. Many states require that any foreign (out of state) corporation that any foreign (out of state) corporation qualify to do business in their state prior to qualify to do business in their state prior to actually conducting business there. actually conducting business there.

Doing Business in More Doing Business in More Than One StateThan One State

Many companies conduct business Many companies conduct business throughout the U.S. and abroad. A throughout the U.S. and abroad. A corporation having business locations in corporation having business locations in multiple states will typically incorporate multiple states will typically incorporate or form an LLC in a single state, then or form an LLC in a single state, then “qualify to do business” in the other “qualify to do business” in the other states. This means they formally states. This means they formally register in these other states, paying register in these other states, paying additional franchise taxes and filing additional franchise taxes and filing annual reports, as required. annual reports, as required.

Our Firm’s up-front involvement in the Our Firm’s up-front involvement in the business decisions of our clients allows business decisions of our clients allows for the for the early identificationearly identification and and minimization of potential problemsminimization of potential problems. . Through implementing our Through implementing our recommended strategies, our clients recommended strategies, our clients have saved have saved hundreds of thousands of hundreds of thousands of dollarsdollars in costly decisions and litigation! in costly decisions and litigation!

Thank You! We look forward Thank You! We look forward to helping you minimize to helping you minimize your liability exposure. your liability exposure.

Founder & Senior AttorneyFounder & Senior AttorneyKLEIN LAW CORPORATIONKLEIN LAW CORPORATION

Mark D. Klein, Esq.Mark D. Klein, Esq.