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Why
Incorporate
Tax Advantages
There are more tax deductions available to corporations
than to businesses that are not incorporated. A few
examples include medical expenses, pension plan, business
trips and entertainment. It is reported the group
with the highest percentage of tax audits is the one
that includes the Schedule “C” form filed
by the self-employed. The audit rate for corporations
is much lower than the self-employed. You may own
and be employed by your corporation at time same time,
thus, eliminating the Schedule “C” self-employment
return from your list of filed IRS tax documents.
The IRS seems to give preferential treatment to corporations
with regard to tax deduction. Deductible Employee
Benefits.
Adds Credibility
A corporation has greater credibility in the eyes
of many customers and lenders than does a sole proprietorship
or partnership. When you have taken the step to incorporate
it is perceived that you have long-range plans for
your business. Because of the added trust, his may
increase the likelihood that customers and lenders
will be willing to part with their money. In this
regard, a corporation may, indeed, increase your profits
and ability to expand.
Reduces Personal Liability
A corporation is a separate person from the one or
ones who own it. Therefore, when a corporation is
sued, there are provisions in the law to protect the
owners (shareholders) and mangers (officers and directors)
from personal liability. Once you do business with
the public or have even one employee, you are wide
open to legal liability. Year after year there are
thousands of us who lose nearly everything we have
due to personal liability with our unincorporated
businesses. In addition, once you do incorporate it
is important that your business follows certain, relatively
simple, formalities so that it looks and acts like
a corporation. It is reported that the United States
has just five percent of the word’s population
and yet 70% of the world’s lawyers. Legal experts
agree that there are literally millions of lawsuits
filed in the U.S. every year that would not be pursued
overseas. Many of these lawsuits are filed by lawyers
who must litigate just to survive. In addition to
an overabundance of lawyers, the U.S. is one of the
only civilized countries in the world that does not
have a “loser pays” legal system. In other
countries of the world, such as Canada and England,
for example, the one who loses a lawsuit pays his
or her own legal fees as well as those of the opponent.
However, in the U.S. this scenario is much different.
Even if a party to a lawsuit wins, he or she is still
out his or her own legal expenses. What this means
is that in the U.S. even if a defendant in a lawsuit
wins he or she still loses. A corporation can provide
a legal shield between your business life and your
personal life.
Deductible Employee Benefits
Forming a corporation provides for a wide-array of
tax deductions for you and your employees. Even a
one-person corporation can enjoy tremendous tax deductible
benefits such as health insurance deductions, travel
deductions, automobile deductions, entertainment deductions,
recreational facilities and many more. One of the
most beneficial deductions is the pension plan or
401K. Money placed in a properly structured pension
plan is tax deductible and the funds grow tax-free
for retirement. These outstanding benefits alone can
pay for a corporation many times over.
Anonymity
Owning an asset in your own name, such as a business,
an investment property or an automobile, provides
an easy target for one performing an asset search.
Before initiating a lawsuit, it is quite common for
an attorney to perform an asset search. If no assets
can be located in your name this may decrease the
chance that litigation will be pursued. Placing assets
in the name of a corporation or limited liability
company may provide a cloak of privacy between you
and those contemplating legal action against you.
This privacy is enhanced when “nominee”
officers and directors are listed. With the General Corporate Services Nominee Privacy Service, you retain ownership
and control of your company. However, you elect General Corporate Services representatives (who have no control
or ownership of your company) to be listed as officers
and directors in the public records.
Raising Capital
There is a greater source of capital available to
corporations than to partnerships or proprietorships.
Because the corporation is separate from the owners,
people tend to be more willing to invest money without
accepting liability or responsibility for company
business. The Forbes 400 list of wealthiest Americans
are full of individuals who hold the highest percentage
of their wealth through ownership of stock in corporations
they or their family members started. Many sole-proprietorship
or partnership businesses are sold for one to two
times annual earnings. Whereas, many corporations
are valued at between 12 to 25 times annual earnings
or more.
Broad Range of Powers
A corporation may engage in any lawful activity, including,
but not limited to the following:
Has the power to hold, purchase and convey real property
and personal property and to mortgage or lease any
such real and personal estate with its authorization.
A corporation has the power to hold real and personal
property in any state, territory or country.
Has the power to make contracts.
May exist continuously, even after the death of the
owner(s).
Has the power to borrow money when necessary for the
transaction of its business, or for the exercise of
its corporate rights, privileges or franchises, or
for any other lawful purpose of its incorporation.
A corporation can issue bonds, promissory notes, bills
of exchange, debentures, and other obligations and
evidences of indebtedness, payable at a specified
time or times, or payable upon the happening of a
specified event or events, whether secured by mortgage,
pledge or otherwise, or unsecured, for money borrowed,
or in payment for property purchased, or acquired,
or for any other lawful object.
Has the power to sue and be sued in any court of
law or equity.
Has have power to appoint such officers and agents
as the affairs of the corporation shall require, and
to allow them suitable compensation.
Has the power to make By-Laws not inconsistent with
the constitution or laws of the United States, or
of the State in which the corporation is formed, for
the management, regulation and government of its affairs
and property, the transfer of its stock, the transaction
of its business, and the calling and holding of meetings
of its stockholders.
Has the power to wind up and dissolve itself, or
be wound up or dissolved.
Has the power to adopt and use a corporate seal or
stamp, and alter the same at pleasure.
Has the power to guarantee, purchase, hold, sell,
assign, transfer, mortgage, pledge or otherwise dispose
of the shares of the capital stock of, or any bonds,
securities or evidences of the indebtedness created
by, any other corporation, while owners of such stock,
bonds, securities or evidences of indebtedness, to
exercise all the rights, powers and privileges of
ownership, including the right to vote, if any.
Has the power to purchase, hold, sell and transfer
shares of its own capital stock, and use therefore
its capital, capital surplus, surplus, or other property
or fund.
Has the power to conduct business, have one or more
offices, and hold, purchase, mortgage and convey real
and personal property in any of the several states,
territories, possessions and dependencies of the United
States, the District of Columbia, and any foreign
countries as allowed by law.
Has the power to do all and everything necessary
and proper for the accomplishment of the objects enumerated
in its certificate or articles of incorporation, or
any amendment thereof, or necessary or incidental
to the protection and benefit of the corporation,
and, in general, to carry on any lawful business necessary
or incidental to the attainment of the objects of
the corporation, whether or not such business is similar
in nature to the objects set forth in the certificate
or articles of incorporation of the corporation, or
any amendment thereof.
Has the power to make donations for the public welfare
or for charitable, scientific or educational purposes.
Has the power to enter into partnerships, general
or limited, or joint ventures, in connection with
any lawful activities, as may be allowed by law.
Small Claims Court
A corporation may send an officer, director or an
employee to represent the corporation in most small
claims courts. Unlike a sole proprietorship, this
can free up the time of the owner to operate the business
while employees take care of legal matters.
Separate Liability for Corporate Debts
A corporation is separate from those who own it. If
the corporation loses a lawsuit or has a debit it
cannot pay, the corporation itself is responsible.
The corporation can provide a strong shield to protect
the personal assets of the officers, directors and
shareholders. In contrast, with a sole proprietorship
or partnership, the owners can lose personal assets
in a business lawsuit. If the officers and/or directors
have personally guaranteed corporate debts, of course,
they can be held liable. In addition, the corporation
must be established and operated properly for the
corporate shield to remain in place. For maximum protection,
it is legally prudent to treat the corporation as
a separate legal entity. For example, it is important
to pay corporate expenses with corporate money (or
be sure the corporation promptly reimburses you for
business expenses if you have paid them personally).
Conversely, you would not pay your personal electric
bill with corporate money. Instead, the corporation
pays you a salary from the corporate checking account
(which is a tax-deduction for the corporation). You
deposit your salary check in to your personal checking
account and use those funds to pay your personal electrical
bill.
Separate Legal Entity Status
Because you and your corporation are two separate
legal entities, lawsuits brought against your business
do not need to affect you personally. When the corporation
borrows money, there are measures such that you are
not personally liable to repay the debt. A corporation
remains after the life of the owner(s). However, a
sole proprietorship ceases to exist after the life
of the owner.
Perpetual Duration
A Corporation continues its life after the death of
the owners. Hudsons Bay Company (HBC), for example,
was founded in 1670, and is still in operation today.
HBC currently operates a large chain of department
stores. General Electric Company was founded by Thomas
Edison in 1882 and is one of the world’s largest
corporations today.
Duration of Corporation Compared to LLC
Unless the operating agreement says otherwise, the
life of a limited liability company may be limited
upon the death, withdrawal or bankruptcy of a member.
The laws of many states allow a limited liability
company to have perpetual (continual) existence.
Disadvantages of Incorporating
A corporation is formed when properly drafted documents
are filed in the jurisdiction of incorporation.
Corporate Formalities
Corporations have shareholders, officers and directors.
One person can hold all positions in most states.
A corporation is also required to hold annual shareholders
and directors meetings. Personal and corporate funds
should not be commingled in the same account. If corporate
formalities are not followed (e.g.. the corporation
is not treated like a separate person from the owners),
many states allow the owners, officers or directors
to be held liable debts of the corporation. Corporate
formalities, while necessary, are typically quite
simple.
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