Gaizer.com Tips for Business Start-ups

The majority of companies that you see listed in the New York Stock Exchange, NASDAQ, and other exchanges—as well as many businesses we encounter in our day-to-day lives—are corporations. The corporation is a separate entity from its owners. In tax laws, the corporation is considered a person and pays its own taxes, enters into contracts, and has debt separate from its owners. This characteristic as an “independent entity” allows for the corporation not to have to dissolve if one of the owners leaves the business. Moreover, this limits the liability for the owners of the corporation, as they are not liable for the corporation debts.

Although the corporation is a separate entity and is treated as if were a separate “person,” if you are planning to apply for a loan you will have to personally sign the loan application form; this makes you personally liable. Financial institutions may not give a loan if the owners do not personally sign for it. If you are married, they might ask your spouse to co-sign for the loan.

Contrary to the sole proprietorship and the partnership, incorporating gives the owners liability protection. The corporation as a separate entity shelters the owners from liability for the corporation’s business debts or obligations. For example, if the corporation is sued, you only lose what you invested in the corporation.

Corporations are appealing because they have a built-in stock structure, which makes it attractive to investors and key employees by offering ownership interests in the corporation (either stock options or stock).

Corporations also have a set management structure—shareholders (owners)—who elect the board of directors. The board of directors is responsible for the management of the corporation and sets the policy and strategy. Its members elect the officers—CEO, vice president, treasurer, and secretary. They, in turn, implement the policies set by the board and manage the corporation.

Ownership of the corporation is freely transferable; the existence of the corporation does not depend on who owns it at any particular time or whether the owner sells his or her shares or dies. The shares are freely transferable unless there are restrictions such as buy/sell agreements or securities laws

You would want to discuss the incorporating process with your accountant because she will be doing the tax filings and should feel comfortable with your business structure.

Other considerations

In order to keep the limited liability feature, you will have to follow all the corporate formalities, such as holding regular meetings, keeping records, and filing tax returns in a timely fashion. You must record all corporate actions, including meetings with shareholders and the board of directors.

If you decide to form a C Corporation, you will have potential double-tax consequences—when the company makes money and when the dividends are disbursed to you.