Understanding Ownership and Business Entity Structures 5

Do I need an attorney or accountant to incorporate?

Technically you could incorporate without outside help, but it is not advisable. Because of the complexity of corporate law, you should get help and advice from an accountant and/or attorney. But not just any accountant or attorney. Look for one who has experience dealing with small corporations. Nadine Keilholz, a newsletter publisher, learned that lesson the hard way. Explains Nadine:

Before we incorporated, all we had to worry about was a quarterly state sales tax form and payment and a Schedule C along with our personal federal filing. As soon as we incorporated, I started getting forms I'd never heard of, from taxing authorities I didn't even know existed. I was buried up to my ears in 940s, 941s, state unemployment taxes, state intangibles taxes (on the value of stock), and about twenty other things. It seemed that every week I got two or three new forms to fill out. And that doesn't even count the environmental impact statements and other nontax-related things.

Unfortunately, the accountant we had been using was fine for personal taxes and a small personal business—but after about two years, when 1 started getting notices from the IRS, FICA, the state of Florida, et cetera, that we had unfiled returns and unpaid taxes, I found out that he didn't know how to handle a corporation.

The problem, Keilholz eventually discovered, was that although the accountant had actually mailed in their tax forms and checks for payment, he hadn't submitted the proper transmittal forms with the returns. "All that money was sitting there with the IRS instead of having been forwarded to FICA, or with one state agency instead of having been sent on to another."

Keilhoz has since found another accountant and says, "The peace of mind of just being able to throw all of our receipts, our check register, and the myriad forms that we receive each month into an envelope and send them to him and know that it'll be done—and done right—are well worth his fee."

How do I keep corporate minutes?

There are companies that sell incorporation kits with fill-in-the-blank forms you can use to record corporate minutes (which are a record of shareholders' meetings). These kits generally have sample articles of incorporation, bylaws, notices of meetings, stock ledgers and transfer ledgers (for recording names and addresses of stockholders), and bank stock certificates. A kit put out by a company called E-Z Legal Forms is available for under $15 at discount office supply stores.

Not surprisingly, there are also online service such as BizMinutes.com that offer minutes-writing and minutes-keeping services.

When is it advantageous to form a nonprofit corporation?

Nonprofit corporations may offer certain tax advantages to corporations formed for charitable or other kinds of work. They may be eligible for certain grants, research money, reduced postage costs, and other benefits. Directors and executives of the corporation can be paid decent salaries and get reimbursed for expenses. The rules covering nonprofits are even more complex than those covering C or S corporations and should be discussed with an attorney or accountant familiar with nonprofit management concerns.

How do I choose a board of directors?

Your board of directors will generally be responsible for determining corporate policy and deciding how to conduct the business. The directors are elected by your stockholders; the corporate officers are chosen by the directors. Thus, if you are the only stockholder, you might appoint yourself director, then, as director, appoint yourself, or whoever else you choose, to each of the corporate officer positions required by law in your state (generally, president, vice president, and treasurer), unless your state requires that different people hold those positions or requires corporations to have more than one director.

The bigger you grow your business, the more important your choice of directors. If you are looking for outside capital, investors are likely to want to see that your directors and officers are qualified to run the business. If you should have the type of business capable of attracting venture capital, the investors may also become directors.

Can I start the business as a sole proprietor and incorporate later?

Yes. In fact, it is often advisable to do that since a sole proprietorship is the easiest form of business to start. You simply run the business as a sole proprietorship until it grows big enough to warrant the time and expense of incorporating. Can I switch back and forth between a regular corporation and an S corporation?

You must incorporate first as a regular (C) corporation. Then, if the shareholders agree to do so, you may elect S corporation status. If you choose to terminate S status for tax or other reasons, you can do so at any time. However, once you have terminated your S status you may not elect it again for 5 years. There may be other tax consequences as well, so be sure to consult your accountant.

What is a Limited Liability Company?

A limited liability company (LLC) is a form of organization that has some advantages of a corporation, and some of a partnership, A relatively new form of business, LLCs have only been available as a form of business since 1977, What they offer is the same type of liability protection corporations offer, but with income passing through to shareholders as it does in a partnership. Thus, they are similar in many ways to S corporations. The primary differences between S corporations and LLCs is that S corporations are limited to 75 shareholders, while there is no limit on the number of shareholders an LLC can have. Furthermore, S corporations, like any corporation, are perpetual. They are considered a legal entity of their own. LLCs are not, and technically dissolve when a partner leaves or dies.

LLCs can be more complicated than S corporations to set up, and in some localities cost more than corporations to form. The tax status can vary from state to state, as well, a factor that could cause problems if you plan to operate in more than one state. If you form an LLC, be sure to seek the advice of an attorney and an accountant to be sure everything is set up properly.

Is there any other way of working with someone else?

If you don't want to form a partnership or corporation, the other way to work with other people is to hire them as employees or retain them under an independent contractor or subcontractor agreement. In either case, the individuals are just working in return for money.

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