If you are looking to start a business or want to know your business organization options for an existing business, you should seek counsel from an experienced business and tax lawyer. You have many business entity options available to you, and determining which option is best for you will depend largely on your long and short term goals.
In most cases, individuals starting a business will want to select from the following: Sole Proprietorship, Partnership, S Corporation, C Corporation, Limited Liability Company (LLC) or Limited Liability Partnership (LLP). Each business entity has some advantages, some limitations and some disadvantages.
This blog will focus on Corporations (future blogs will focus on other business entities).
Of all the business entity choices, corporations are the most complex and expensive. Corporations have several advantages over some of the other business entity choices. First, and foremost, they offer personal liability protection so your personal assets are not at risk for business losses or liabilities. Corporations are separate entities under the law, and treated as such.
Another advantage of forming a corporation is your ability to raise money. Corporations issue stock, which can be sold or traded to raise capital. Moreover, a corporation is perpetual, and lives on even if one of its shareholders dies or becomes disabled.
A corporation also has some major disadvantages, including taxes. A corporation pays taxes on it profits, and then shareholders pay taxes on dividend distributions, which equates a double tax on the same money. However, it may be possible to minimize the impact of the double taxation if the shareholder is working for the company. Money taken out as salary is not taxed to the corporation, as it would be considered an ordinary expense of doing business. Please note that the amount of money taken as salary must be reasonable and is scrutinized by the IRS. The tax impact cab also be minimized by utilizing various tax elections. A business and tax attorney can help you set a reasonable salary and assist you with evaluating tax elections.
Corporations also have several formalities they must follow, including:
- Regularly scheduled corporate meetings and written documentation (corporate minutes) of such meetings
- A minimum of one Directors Meeting every year
- A minimum of one Officers Meeting every year
- Meetings should be held and documented for any significant corporate action, including major purchases or sales of corporate assets, corporate loans made to shareholders or officers
- Adequate capital to meet current and foreseeable corporate debts
- Any corporate loans or assets provided to individual officers or shareholders must be approved and authorized by the Board of Directors
- Sign all corporate correspondence as a corporate officer, not as an individual
- Ensure any loans or contracts are with the corporation and not you as an individual (or you must be aware that you will personally be responsible for the loan or contract liability)
- Cannot comingle corporate and individual funds; maintain separate accounts for the corporation and you as an individual
- Maintain proper levels of liability insurance for your business
- Do not personally offer to pay any corporate debts, rather, consider making a loan to the corporation and have it pay the debt; if that is the way you want to proceed
The above list does not cover everything. You should consult with a skilled business attorney and tax lawyer to ensure you are following corporate formalities and discuss any current or potential issues. Corporations can be a good choice for certain businesses. Make sure you fully understand your options before forming an entity.
In New Jersey and Pennsylvania, individuals with questions or requiring assistance with business planning, entity selection or business organization, including corporate organization, are invited to contact the Dopkin Law Firm to consult with a skilled business planning attorney and tax lawyer. Please call us at 215-519-4269 or fill out our intake form online.