Last year, we brought you an article entitled “Seven Reasons to Incorporate” in which we described some of the basic reasons that favor incorporation of a small business. Since then, we have received many calls and follow-up questions on the subject, prompting us to revisit this topic and address some of the issues that have been raised.
Benefits of Incorporation. The primary reason to incorporate is to limit your liability to the amount of your investment in the business. For example, if you sell widgets in a corporate enterprise, a purchaser who is injured by a defective widget might be able to sue the corporation but generally would not be able to reach your personal assets such as your home, your car, personal savings and investments. This would not be the case if you had sold your widgets as a sole proprietor. Generally, a sole proprietor is potentially answerable to claimants and creditors to the full extent of his or her personal assets.
Another reason people often seek to incorporate is to separate their business existence from their personal existence, creating the possibility of having legal relationships with your corporation. For example, if you own an office building, either personally or through a partnership, your corporation could lease office space from you. There are often tax advantages in this type of arrangement.
The corporate form makes it easier to bring additional investors into the business. This is because shares of corporate stock are freely transferable and can be issued in virtually any percentage you desire. This free transferability of interests also enhances estate planning opportunities since precisely calculated shares of the business can be transferred to younger generations in an orderly fashion.
Costs of Incorporation. There are various costs associated with setting up and operating a corporation, but most are modest. The current fee payable to the Pennsylvania Department of State to incorporate a business is $100. In addition, you will be required to advertise the creation of your corporation, which will run anywhere from $75 to $125 depending on the locality. Preparation of your corporate minute book and printing of stock certificates will cost another $100 or so, and if you use an attorney to prepare your by-laws, organizational minutes and tax elections, you will incur fees of around $300 to $500 for that. Thus, for less than $1,000, you will have an “up and running” corporation ready to do business.
After you Incorporate. Most small businesses that operate in the corporate form do so as S-corporations. In general, an S-corporation is not separately taxed on its income, and most tax attributes (income, loss etc.) pass through to its shareholders in proportion to their investment. Accountants familiar with personal tax matters will also be familiar with the accounting and filing requirements for S-corporations and the accounting costs should be modest enough that the corporate form of operation is not overly burdensome.
Over the life of your business, you will prepare and maintain corporate records, at least on an annual basis. Both state law and the tax laws encourage maintenance of separate books and accurate and timely recordkeeping. Officers (president, secretary, treasurer etc.) and directors should be elected at annual intervals, and these events should be documented by written corporate resolutions. Your attorney will be familiar with these formalities and their cost should be fairly reasonable.
In summary, the benefits of incorporation of a small business almost invariably outweigh the risks of conducting business as a proprietorship. Because the costs of operating in the corporate form are relatively modest, it becomes difficult to justify continuing to operate a business without the corporate protection. In a society as litigious as ours, the protections afforded by the small business corporation make it an attractive proposition worth considering.
Benefits of Incorporation. The primary reason to incorporate is to limit your liability to the amount of your investment in the business. For example, if you sell widgets in a corporate enterprise, a purchaser who is injured by a defective widget might be able to sue the corporation but generally would not be able to reach your personal assets such as your home, your car, personal savings and investments. This would not be the case if you had sold your widgets as a sole proprietor. Generally, a sole proprietor is potentially answerable to claimants and creditors to the full extent of his or her personal assets.
Another reason people often seek to incorporate is to separate their business existence from their personal existence, creating the possibility of having legal relationships with your corporation. For example, if you own an office building, either personally or through a partnership, your corporation could lease office space from you. There are often tax advantages in this type of arrangement.
The corporate form makes it easier to bring additional investors into the business. This is because shares of corporate stock are freely transferable and can be issued in virtually any percentage you desire. This free transferability of interests also enhances estate planning opportunities since precisely calculated shares of the business can be transferred to younger generations in an orderly fashion.
Costs of Incorporation. There are various costs associated with setting up and operating a corporation, but most are modest. The current fee payable to the Pennsylvania Department of State to incorporate a business is $100. In addition, you will be required to advertise the creation of your corporation, which will run anywhere from $75 to $125 depending on the locality. Preparation of your corporate minute book and printing of stock certificates will cost another $100 or so, and if you use an attorney to prepare your by-laws, organizational minutes and tax elections, you will incur fees of around $300 to $500 for that. Thus, for less than $1,000, you will have an “up and running” corporation ready to do business.
After you Incorporate. Most small businesses that operate in the corporate form do so as S-corporations. In general, an S-corporation is not separately taxed on its income, and most tax attributes (income, loss etc.) pass through to its shareholders in proportion to their investment. Accountants familiar with personal tax matters will also be familiar with the accounting and filing requirements for S-corporations and the accounting costs should be modest enough that the corporate form of operation is not overly burdensome.
Over the life of your business, you will prepare and maintain corporate records, at least on an annual basis. Both state law and the tax laws encourage maintenance of separate books and accurate and timely recordkeeping. Officers (president, secretary, treasurer etc.) and directors should be elected at annual intervals, and these events should be documented by written corporate resolutions. Your attorney will be familiar with these formalities and their cost should be fairly reasonable.
In summary, the benefits of incorporation of a small business almost invariably outweigh the risks of conducting business as a proprietorship. Because the costs of operating in the corporate form are relatively modest, it becomes difficult to justify continuing to operate a business without the corporate protection. In a society as litigious as ours, the protections afforded by the small business corporation make it an attractive proposition worth considering.
-Kevin Palmer