Feb
20
Incorporating… Too Many Options
February 20, 2007 | 4 Comments
To me, the main advantage of incorporating is to create a separate entity from my personal life. If my business really goes badly, then it will not destroy my life and that of the partners that may have joined me in my venture. There are mainly three options to do so:
- C-Corporation
- S-Corporation
- Limited Liability Corporation (LLC) – The chosen one.
The C-Corporation is the one most people are familiar with. One or multiple owners have shares in the corporation and share the profits it may have. The C-Corporation has to fill out its own tax returns and pay taxes as an individual entity, and then if it passes any dividends (earnings) to its owners the owners have to pay taxes on it, again – just like you do when you receive ordinary dividends from big, blue chip companies. You also have to worry about making annual meetings, taking minutes, and paying state excise taxes (which are something similar to income taxes in the case of my home state Taxachusetts). The C-Corporation is easy to sell to other people (just sell shares), and easier than the other options to bring to an IPO – choose it if you have such an innovative idea that you will be selling the company at great profits.The S-Corporation is similar to the C-Corporation except for the fact that it has a limited number of owners, and it does passes the earnings directly into its owners: no double taxation. The S-Corporation is a regular corporation that has been granted “S” status by the government upon complying with some specific criteria that most small business can meet.
The Limited Liability Corporation (LLC) also provides pass through taxation like the S-Corporation, limits the liability like all of the previous options, and offers simplicity and flexibility. Partners (members) may share profits and investment in arbitrary ways, and there is a lot less paperwork and meetings to have. They do have to fill an annual report, though – which costs money just to fill out, but so does most of the other incorporation methods paperwork requirement.
The Mechanics
The actual mechanics of incorporating a corporation or LLC can be started in a fairly straightforward way in Massachusetts. The process start of an LLC set me down for $520 – my first business expense and I didn’t even had a signed contract for my first gig. The Corporations Division of the Secretary of the Commonwealth of Massachusetts provides a one page application to relieve you of your initial fee. The service actually takes a very short 10 business days and in exchange you will be able to get, from the same website, a fully authorized Articles of Incorporation two page document signed by the Secretary himself (or the computer programs that handles it). I got my articles downloaded in PDF on line – everyone can see that you just joined the corporate world with a click of a mouse. Was actually painless.
The administrative pain will sure come in the next following months, especially since I am using neither a lawyer nor an accountant yet – something I feel compelled to advice against, even if it is to protect myself from you complaining about my own advice.
If you want to use one of the online intermediaries, I did considered using Intuit’s MyCorporation.com website. They pad the actual filing costs, but make sure it is an even painless process and hopefulle less filled with future complications. In the end, there is probably no match for the expertise of a trusted lawyer’s services, something you should consider using.
What Happens If I Do Not Incorporate?
Nothing. You still live a happy life. You can make an Sole Proprietor business or a Partnership. You still get income to report and pay taxes on them and you can still open accounts for the business. The only difference may come if you need some personal legal protection from debts or claims/lawsuits.
Plus there is another advantage in avoiding incorporation: cheaper (almost free), and simpler.
Other Small Business Posts:
- Limited Liability Corporation (LLC) Annual Report in Massachusetts
- Do I need insurance for my LLC ?
- Employer Identification Number (EIN) – Social Security or Taxpayer ID (like) number for companies.
- Incorporating Options
- Setting up a Corporation, Overnight
- Trademark Application
- LLC Partnership Taxes: 1065 and K-1
Related Posts:
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[...] The main issue is that being a foreign entity they can’t really issue W-2 or even 1099 tax forms. They can’t just employ me either, since I would be a foreign national if they employ me directly. Essentially I had no choice but to form a corporation that will enter into a paid agreement with them to provide professional services: my services. This is how the Limited Liability Corporation had to be done. [...]
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