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Guide To Business Incorporation < Business Articles By Mast Business Directory

When you want to begin and decided what your business requirements are and prepared a rough plan to start a business, a major question you might face is what kind of company you should establish. The form of the business you establish and develop decides what and how much paperwork needs to be filed in order to complete the paperwork. It also determines to what extent you are responsible for the liabilities in your business. The tax structure that should be applicable to your business is decided by the business incorporation. You have to contact the federal agencies involved as well as state your business type to business entity registration office. In the article to follow, we shall see how to go about the incorporation of your business, what is the procedure involved, what all do you need to consider before incorporating your business etc.

Informal business structures

You formally decide on a business structure when you incorporate. Before that happens, you run a type of business that has default business structure. It is very important to review your business structure for personal liabilities and the responsible person, the tax structure levied, employee benefits and other aspects before you incorporate. The options you get to register your entity are sole proprietorship, partnership, Corporations or a Limited Liability Company (LLC). Sole proprietorship need not be incorporated. This is the default business structure and is applicable by default if you transact your business alone. This being default provides us with a simplest form of business organization structure. Sole proprietorship is a single owner conducting business activity; it does not however mean that that owner cannot keep employees under him.

What to incorporate

The crucial factors that you need to consider before you start with incorporating are liability protection, taxation structure, your personal income and situation, ownership of the business and what kind of transferability is available in the present and the future. Your personal liability towards your business is decided by your business type, your business liability exposure, your employee structure, etc. Remember that you should not follow any individual for a business. This is because his business requirements, personal situation, liability, employee structure may be different which must have to compelled him to incorporate his business as a particular type. Let us compare the situation of LLC vs. a Corporation. Cases of Corporations entering courtrooms to protect themselves with a claim of a victim are not rare. When a corporation is established and operating formalities have been completed, there isn’t anything better to do other than protecting your personal assets and escaping liabilities. Corporations are known to be more formal in structure that the LLCs hence some additional formalities need to be completed when you incorporate.

Tax considerations after incorporating

Limited liability companies get the flexibility of being more flexible than corporations. By default, the tax structure for an LLC is same as that for sole proprietorship. It does not matter if that LLC is run by a single individual or two or more partners. Corporations are taxed differently. Taxes are levied on a corporation’s revenue as well as their shareholders’ income. However, S corporations have freedom to pass through this taxation structure that is implied on corporations by default. This pass through is applied to shareholders’ income. Primary focus of incorporating should on the tax benefits of each taxation structure. Each taxation structure comes with its own benefits. It is our job to exploit each taxation structure and select the best one. Even a single loophole in a taxation structure when exploited can save you millions of dollars and great relief for future investments. The deductions provided for employee benefit plans differ for LLCs and Corporations. The same is applicable for retirement plans and health care benefits. A classic example of that would be: Shareholders of a corporate business house can deduct health plans from officers. But it is considered as an income for LLC members for which they have to pay taxes. Hence it is necessary that you arrive at a decision that suits taxation structure for your business requirements. It is by default that all profit or loss in the business is passed to the business owners through the business. This can easily be reported as a personal tax return. If viewed from an angle, it can be considered as a sole proprietorship or even as a partnership. This becomes very simple taxation. However, the LLC opt for taxation structure to be levied as a corporation. This is also applicable for LLCs choosing to be taxed as a sub corporation or S corporation.

The C corporations are taxed on whatever the accumulated profits are at the end of the financial year. However, the rate at which income tax is levied on a corporation differs from that levied on an individual. Hence it is used as a tool for protection of assets. It protects the company if a lawsuit is filed against its member. A corporation can chose its fiscal year when it should get incorporated. Changes to this can be brought by some paperwork at a later stage. It is a month and the tax year that is applicable to you for filing your tax returns is applicable on the very last day if that particular month.

Ownership

Before you incorporate, it is very much essential to take into consideration your future plans. Now we shall discuss the transferability of your business and your options for the same. Not incorporating a business implies that the business is transacted by a single individual or partners. Hence it ceases to exist if the sole proprietor or partners stop their interest or activity in the business. In short, the business terminates upon if the owner dies or files bankruptcy. After you incorporate your business, if can continue to exist and get transacted even if one of those above mentioned even occurs to its owners. A corporate is treated as a citizen and exists as a separate legal person. Most of the states that register a business allow LLCs to select the duration of it perpetual duration. You have to consider transferability of your business in case you wish to sell it entirely or retain some part of its ownership and sell a small/ significant portion out of it. You may wish to hand over the responsibility of your business to a family member of a close friend/ relative of yours.

Corporations till now, are easiest to handle when it comes to transferability. This is applicable to transferring a part of the business or the business as a whole. There is no limit on the number of types of shareholders that a corporation can have legally. This is however, not applicable to S corporations. Shareholder agreement regulates shareholder cooperation. This is a contract that regulates the rights of the shareholders from taking certain management decisions. There are provisions for transfer of shares. This can protect the business from those shareholders who intend to take the control of management of the business.

Management structure

Be it corporation or an LLC, every business has a predefined management structure which is usually well organized and comes with some formalities to be completed. If you incorporate your business as an organization which is owned by a single individual, it means that still you have to fulfill each unit in the organizational hierarchy. When you incorporate, or in other words form a business organization registered as a corporate, you should have an organizational structure in the form of a three tier system of hierarchy. The different levels in the hierarch are the shareholders who own the business and are the ultimate authority, the appointed directors who make key management decisions and the officers who are appointed by the director who run the day to day activities in the transactions of the business. It is very important to look into the states’ rule book if you are an individual and want to incorporate your business. More than one shareholder in a business molds the hierarchy such that it invokes the appointment of more than one director. There is a variety seen in the level of participation and the activity of the each shareholder. This depends upon the amount of shares that are available to each of these shareholders.

Thus in this article we have seen what are the prerequisites and what all should be taken into consideration when you wish to incorporate your business. Remember that in the long run, not incorporating your business could eventually turn out to be the most expensive choice which could significantly impact your business and problems to invoke future investments. It happens rarely that there is a very limited liability in your business and hence priceless. Learn to tackle the business obligations and somehow protect your personal assets.

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