Forming a corporation is beneficial to average business owners in many ways. Creating a separate entity for your business helps you to keep track of your business growth and to project your business to the public. Incorporations are designed to do that – create a separate legal entity from that of the business owner. All depends on where you stand on the average business owner scale. If you are on the lower half of the scale and your business is more of a hobby than a way of earning your bread, incorporations are not too appealing. Forming a corporation is relatively expensive and entails tedious formalities and procedures to maintain and operate. A sole proprietorship or a partnership will suffice in conducting a hobby as a business if your business does not give rise to serious risks and potential liabilities.
Small business incorporations are necessary when your business has grown from a hobby to that of a serious business concern. As your business transactions rise in volume, your business risks increase proportionately. The main disadvantage of a sole proprietorship or partnership is that the business owner’s personal liability is unlimited for all business debts or obligations. Forming a corporation will protect the business owner from the unlimited liability issue. In a corporation, the business owner’s liability is limited to the stock held by that owner.
Forming a corporation is not too difficult but do involve serious formalities and procedures. Incorporations are done under the state laws. Each state has its corporation’s code, which governs the formation and operation of business as a corporation. You can form a corporation by filing an Articles of Incorporation with state agency dealing with incorporations. Generally incorporations are handled by the Secretary of State’s or Corporations Commissioner’s offices. The fees for filing Articles of Incorporation also vary from state to state. Some states stipulate that the corporation bylaws be filed along with the Articles and a public notice issued regarding the intention to form a corporation. The Articles should contain all relevant facts about the corporation such as the purpose for which it is formed, names and addresses of the promoters and incorporators, principle place of business, authorized capital etc. You will have to designate a person to act as your resident agent for handling all paper work with state agencies and other institutions. Most states actively encourage small business incorporations in their territory and have simplified the procedures and formalities for ease of operations. State websites carry a sample of Articles of Incorporation as is needed to file in that state.
The limited liability company formation does not allow you to form a LLC corp. The reason for this is that an LLC is a separate business structure. The LLC is a hybrid of a partnership and a corporation. When you are forming a LLC, you are choosing the LLC business structure because it provides you with the taxation benefits of a partnership, but provides you with the protection of a corporation.
The closet that you can come to forming LLC corporations is choosing to have your LLC taxed like a corporation. By choosing to have your LLC taxed like a corporation, you will be receiving the protection that is available to corporations and receiving the same tax benefits that corporations receive, but your business will be an LLC instead of a corporation.
One of the benefits of forming your LLC this way is that it saves you time on paperwork, but it can also save you money. Forming a corporation is more expensive than forming an LLC because of the filing fees and the amount of paperwork that has to be filed. With an LLC, the only paperwork that you have to file is your articles of organization, which usually costs around $100 to file. With a corporation, you will need to file articles of incorporation, bylaws, and numerous other forms. You can use sample articles of incorporation to help prepare your articles of organization so your LLC is similar to a corporation instead of a partnership.
When forming LLC corporations you will need to decide if you want to run your LLC as a C corporation or an S corporation. The structure for both is quite similar, but there are some differences that you will need to keep in mind. Choosing the S corporation for tax purposes allows you to benefit from pass through taxation, where as a C Corporation suffers from double taxation. The double taxation is why some people prefer to form an LLC, they can choose to have their LLC taxed like a corporation, but still benefit from the protection that are provided to corporations.
LLC businesses are protected in a way that is similar to the corporate veil. This means that the LLC member’s personal assets are protected, just like shareholder’s assets are protected in corporations. Protecting the personal assets of members offers the members protection from any business debts and liabilities that are incurred by the business. If the personal asset protection wasn’t available then creditors could come after the members’ house or car to help settle any business debts or liabilities. The one thing that you need to remember is that a personal protection that is offered to LLCs and corporations is not iron clad. The protection is considered null and void if any personal guarantee is signed on behalf of the business.
When it comes to forming LLC corporations, one choice you have to make is where you will be forming your corporation. While most people will choose forming LLC corporations in the state that they live in, others choose NJ incorporation because of the benefits it provides. Incorporating in a state like NJ offers you the chance to incorporate your business in a business friendly state. For example, NJ does not have the extra annual tax that other states charge when forming an LLC.
