Run Your Own Corporation. Garrett Sutton

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СКАЧАТЬ almost instantly. With a sole proprietorship, you are your business, which means that if a creditor sues your business, that creditor sues you, and you’re liable. When you set up your business as a sole proprietor, you put your house, your bank account, your car and all your assets on the line.

      Quick and easy isn’t always the best way.

       General Partnership

      A general partnership is the ugly entity. Unlike a sole proprietorship, a general partnership requires two or more owners, or partners, which means it could work for Sherri and Alana. Unfortunately, like a sole proprietorship, a general partnership, as Tom and Nancy learned, offers no asset protection. Again, there is no charter from the state, no legal separateness and, accordingly, no protection.

      In a general partnership not only are you personally responsible for your own mistakes as in a sole proprietorship, but you are also personally responsible for your partner’s mistakes. It is liability times two.

      A partnership can be formed with a simple handshake between two or more people who agree to work together. You don’t need a partnership agreement or any sort of written document. Such a loose agreement also leaves no paper trail for the partners to go back to when things go south. When partners become adversaries and there’s no written partnership agreement in place, the laws of the state in which the partnership was formed take precedence, and the partners are left without any choice in the matter. Similarly, if one partner leaves, dies or goes bankrupt, the partnership is terminated and the partners are liable for the company’s debts and obligations.

      I will not set up a general partnership, ever. Not only is there too much liability but it requires a great deal of document drafting. A general partnership agreement includes, at a minimum:

       • Type of business.

       • Finance requirements (the amount each partner is expected to contribute to finance the company up front).

       • Rights and duties (what is expected of each partner).

       • Dispute resolution procedures.

       • Compensation (the method of sharing profits and losses).

       • System authorizing cash withdrawals and salaries.

       • Termination procedures (how the partnership will be dissolved if it becomes necessary).

      For all the time and energy it takes to set up an ugly entity, you might as well set up a good one.

       Corporations

      Now let’s get into the good entities, the ones that limit your liability and offer asset protection. Corporations, first chartered by the English Crown in the 1500’s, are the oldest good entities, so we will start with them.

      When you set up a corporation, you are creating a new legal person. Upon being chartered by the state, a corporation establishes its own legal identity. No matter how passionate you feel about your business, no matter how personal it is to you, you are not your corporation. This separation offers a big benefit. Because a corporation has its own legal presence and its own tax identity with the IRS, the corporation acts as a shield for the owners, whose liability is limited to the money they invested to start the corporation. If the corporation is sued, it is the corporation itself, as a separate legal entity, that is sued, not the owners, whose personal assets are not part of the company and are protected by the corporate veil. (That is, unless you sign a separate Personal Guarantee agreeing to be personally responsible for the debt if your entity doesn’t pay it.) And because the corporation is its own separate legal entity the death of a shareholder doesn’t mean death of the corporation. In a corporation, ownership comes in the form of shares, and those shares can be transferred.

      Starting a corporation (whether taxed as an S or a C corporation) requires some paperwork preparation, including:

       • Organizational documents filed with the Secretary of State’s office in the state in which you wish to incorporate. For a corporation these are called Articles of Incorporation, which set out the company name, initial Board of Directors and authorized shares of the company.

       • Because Articles of Incorporation become a public record, nothing proprietary or confidential should be included.

       • In some states, a list of corporate officers (which may just be you) are filed with the Secretary of State.

       • Bylaws of the corporation are the rules of the corporation and are not filed with the state. (They really don’t want all that much paperwork.)

       C Corporations

      Incorporating offers protection of your business and personal assets. However, a regular C corporation does feature double taxation. (Both the C and the S refer to the IRS code sections on corporate taxation.) In fact, the main drawback of a C corporation is that earnings are taxed twice. When the corporation makes a profit the corporation pays tax on the gain; when dividends are paid to shareholders (owners) they’re taxed as well. As such, you are taxed twice on the same dollar of income.

      One way around this is to choose a corporate structure that allows for flow-through taxation, as illustrated here:

       S Corporations

      By filing IRS Form 2553, Election by a Small Business Corporation, right after setting up your corporation, you can become an S corporation. The advantage to the S corporation is that it’s a flow-through taxation entity. Essentially, when profits are made by the corporation, they are not taxed at the corporate level but rather flow through to the shareholder’s personal tax return, meaning they are only taxed once.

      There are a few drawbacks to an S corporation. If you’re interested in taking your company public and publicly trading shares, you’ll have to be a C corporation, but you can always elect to switch from S corporation to C corporation status once you’re ready to go public. Another drawback is that once a corporation has elected to convert to a C corporation, there’s no way to revert back to an S corporation again for five years. An S corporation can’t have more than 100 shareholders or any nonresident shareholders. As well, an S corporation can’t be owned by a traditional C corporation, a multimember LLC or many types of trusts.

      But for minimizing payroll taxes, as discussed ahead, S corporation taxation is superior. And know that you can have an LLC taxed as an S corporation.

       Limited Liability Companies (LLCs)

      The LLC is a newer entity that combines the flow-through taxation of a partnership with the limited liability aspects of a corporation. Like an S corporation, LLCs offer flow-through taxation. They also offer superior asset protection benefits.

      LLCs are chartered with the state and thus provide limited liability to the owners (known as “members”). Like a corporation, members are protected from personal liability for business debts or legal claims against the business (unless, as with any other entity, they sign a personal guarantee). And, as in a corporate structure, members must remember to sign contracts СКАЧАТЬ