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INCORPORATE YOUR BUSINESS OR FORM AN LLC?
The most common options of a business structure are a sole
proprietorship, a partnership, or a corporation / LLC. You may
lean toward the corporate route because you like the sound of
having "Inc." after the company's name, but there are some more
practical, business-like considerations to take into account.
More so than with some of the other structures for a business,
starting a corporation means complying with formalities required
by state laws. Once the shareholders (owners) of the business
agree on some basic matters, such items are embodied in articles
of incorporation that must be filed with the appropriate state
agency. These essentials usually include:
* a corporate name;
* the number of shares that can be issued;
* the number of shares each owner will buy and for what
contribution of cash or property;
* the nature of the corporation's business; and
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* the identity of the directors and officers of the corporation
who will handle day-to-day operations.
The fledgling corporation will also need bylaws, which
constitute a procedural rule book for the company.
Decision making
The bottom line here is that whoever holds a majority of the
shares of a corporation has ultimate control over it. Usually it
takes a majority of the shares to elect the board of directors,
which is charged with making the "big picture" decisions. If a
decision is momentous enough for the company's future, such as a
change in the articles of incorporation or whether or not to
merge with another company, the shareholders usually have a more
direct role in that they themselves must approve the decision by
a certain margin of votes.
The board elects the officers of the corporation, typically
including a president, vice-president, secretary, and treasurer.
The officers may or may not be salaried employees or
shareholders, and in some cases one person may hold more than
one office.
Accountability
At or near the top of the list of characteristics favoring the
corporate structure is the fact that, since the corporation is
treated as a legal "person" separate from the people who own and
run it, the shareholders as a rule are not personally liable for
the corporation's debts. Instead, their risk is confined to
their investment in the company. To every rule there is an
exception, however, and here the exception has the colorful
legal name of "piercing the corporate veil." If the owners do
not comply with the statutory requirements for running a
corporation, or if they blur the lines too much between
corporate and personal finances, the legal fiction of the
corporation as a separate entity is ignored and the owners are
on the hook for the corporation's losses.
Transitions
As a separate entity in the eyes of the law, a corporation does
not go out of existence if one or more of its owners dies.
Instead, a corporation stays alive until its owners decide
otherwise. Transfer of the ownership of the corporation is
accomplished by selling its stock. New owners are added either
when existing owners sell some of their stock or the corporation
itself sells more shares of stock. The smaller the enterprise,
the more likely it is that the owners, for whom the corporation
may be both their property and their employer, may agree to
restrict the sale of the stock in order to maintain control.
The particular circumstances of each new business and the
differences in the governing laws of the states make
generalities difficult. That said, the factors on the debit side
of the ledger for corporations include the costs of setting up
the corporate entity, the need for a separate tax return, and
the burden of "double taxation." Double taxation means that the
corporation is taxed on its profits, and the shareholders are
then taxed on their dividends. On the credit side are limited
liability for the owners and easy transfer of ownership.
Making the appropriate choice for a business form is one of the
first, and one of the most important, decisions a new business
will make. Whether choosing a corporate structure or some other
form, make sure to consult with a
qualified attorney.
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