HOW AND WHY SHOULD YOU INCORPORATE YOUR SMALL BUSINESS
by Charles D. Scott, Esquire
Deciding how a business is structured is one of the most important decisions you will make for your new or existing business. Incorporation may be essential, however for some, it may be an unnecessary decision, and so each business should carefully assess the benefits of incorporation before filing corporation papers.
A businesses, whether large, small, new, or existing, can benefit from incorporating. Corporations and LLCs are both separate legal entities (business structures) that enjoy certain protections under the law and important benefits. Most people form a legal business structure to safeguard their personal assets. There are several advantages of forming a corporation or Limited Liability Company (LLC) which include:
- Perpetual Existence - Corporations and LLCs have perpetual existence, even if the owner dies or management changes, however a sole proprietorship or partnership ends if an owner dies or leaves the business. As a separate entity, the corporation exists independent from the shareholders/owners and its employees. Regardless of what happens to the shareholders, or the directors, or the employees, the corporation continues to exist in perpetuity until a time the directors and shareholders decide to dissolve the corporation. Incorporation also prevents the ability of a minority shareholder from dissolving a business without cause.
- Personal asset protection - corporation and LLC companies allow owners to separate and protect their personal assets. If the corporation is properly structured and managed, the owners should have limited liability for business debts and obligations. Incorporating or forming a Limited Liability Company (LLC) allows you to conduct your business without worrying that you might lose your home, car, or personal savings because of a business liability. Any debt or liability against a corporation does not open the doors of shareholders' assets to the creditor(s). The shareholder's liability in any corporate debt or liability is limited to what the shareholder invested (unless there is fraud). This is contrasted to a sole proprietorship or general partnership, in which the owner(s) and/or general partners remain completely liable for any debt or liability placed against the business. If a business is unable to pay a debt, the creditor can attack the assets of an owner or partner until the debt is satisfied. In a corporation, a creditor can only go after the share holder to the extent the shareholder invested into the corporation (unless there is fraud). This allows the corporation to make business decisions without the risk of endangering the personal assets of its shareholders beyond what was invested.
- Protects Your Business Name - once you have registered a corporation in the name of your business, others may not file the exact corporation name or LLC name in your state.
- Credibility - when your business has "Inc." or "LLC" at the end of your business name it adds credibility and tells others that they are doing business with an incorporated company and not just an individual.
- Tax Considerations - In a sole proprietorship or partnership, the taxable income of the business flows directly to the owner and/or partners and are taxed based upon the individual's income tax bracket. However, because a corporation is considered a separate entity, the taxable income of a corporation is taxed first under a corporate tax. If the corporation then distributes the remaining income to the shareholders, that income is taxed again at the individual's income tax bracket, hence, double-taxation. A small businesses can avoid double-taxation by incorporating as an S-corporation or filing as a Limited Liability Company (LLC). These options allow the taxable income to flow directly to the shareholders/members without being taxed twice, while at the same time, maintaining the benefits of incorporation. Because corporate returns tend to be more accurate than sole proprietors, the IRS has typically audited a much higher percentage of sole proprietor tax filings than corporate filings.
- Expense Deductions - Corporations and LLCs can deduct normal business expenses, including salaries, before profits are passed through to the owners.
- Liquidity - when an owner or partner needs to leave the business, incorporation allows the free transferability of interest from one person to another. In contrast to a partnership, a partner cannot transfer his/her interest in a business to another without the express consent of all other partners. If a partner still decides to leave the partnership against the will of the other partners, the partnership is automatically dissolved. Incorporation removes this limitation by allowing shareholders/owners to freely transfer his interest to another without the unanimous consent of all other shareholders.
How to Incorporate?
Once you decide to establish a corporation of LLC, in Florida the Division of Corporations serves as the state´s central location for business entity filings. The Division renders two broad functional services: (1) formalizes the legal standing of a business or activity by accepting and indexing the filing or registration, and (2) supplies information and certification regarding the filings and activities of record. Florida´s Division of Corporations is the most active corporate filing entity in the country.
If you elect a corporation, then you must first select a name and find out if your desired corporate name is available, then submit "articles of incorporation" or "articles of organization" if you want to set up an LLC company, to the Florida Department of State with the appropriate fee. The articles must follow a specific format, and contain certain minimum required elements, not limited to the name of the corporation or LLC, the address that will be the principal place of business, the name and address of the registered agent, the name and address of each manager or managing member (if an LLC), the purpose of the corporation, the number of shares of stock that the corporation is authorized to issue, the names and address of the officers and directors of the corporation, the name and address of the incorporator, and the effective date of the corporation or LLC company. You must also submit a cover letter and the required filing fee.
The State of Florida operates a web site that is very helpful in learning more about establishing a corporation or LLC company, and will allow you to check and see if a particular corporate name is available. That web site is www.sunbiz.org.
Charles Scott has been practicing law in St. Petersburg Florida since 1993 and is the managing partner of Scott and Fenderson, PA, a family owned and operated law firm since 1997. For more information visit www.scottandfenderson.com