I no longer incorporate businesses or set up LLCs. But I retain this information on my web site to inform the public.
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Incorporation is a good decision for many businesses. A corporation is a distinct legal entity, separate and apart from its owners and managers. As a distinct entity, the corporation can sue and be sued, own property, and convey property in its own name. In addition, owners (shareholders) and managers (directors and officers) of the corporation are not generally liable––as is the owner of an unincorporated business––for the corporation’s debts and judgments.
The corporate entity permits centralized management and facilitates raising capital. The typical small business will be shut down when the owner retires or dies, but a corporation can be sold gradually, before death, to a selected employee. This motivates the employee to work hard and stay with the business, and it increases the value of the business to the owner's heirs.
The shareholder-employee of a small corporation may be able to save significantly on self-employment taxes during start-up years. The savings is accomplished by paying out part of company profits as wages and a reasonable part as dividends, which are not subject to self-employment tax. A shareholder employee who takes out $30,000 in salary and $30,000 in dividends will save approximately $4,000 in self-employment taxes. Bear in mind, however, that reducing the amount of Social Security taxes you pay will have an impact on how much Social Security benefits you will receive at age 62 or 65. If you are approaching retirement age, you should not take advantage of this procedure but should pay the maximum amount into your Social Security account. On the other hand, if you are younger, you can benefit from such a procedure.
Certain formalities need to be observed when operating as a corporation, but our small business clients believe that the benefits far outweigh the burdens.
There are other entities which can be used to own businesses and real estate. The limited liability company has become popular in recent years. With a limited liability company, owners can structure their arrangement in almost any reasonable way, whereas with a corporation, certain procedures mandated by statute must be followed. There are times when a limited partnership is appropriate. For example, with an LLC the members can divide profits any way they please. With a corporation dividends must be paid in proportion to shares owned.
Copyright
© 2008 James Robert Deal.