Why Incorporate
There is lot of risk attached in business. It is also said by many that the higher the risk, the greater the benefit. Discretion is the better portion of the valor, as the potential downfall might lead to complete financial crunch and recovering could be a huge task. It is quite mandatory to know how much money you should risk, and incorporating a business venture reduces the risk and the personal liability.
There are plenty of benefits to incorporating a business. They can be termed as personal liability, tax advantages, anonymity, perpetuity, easier access to capital and transfer of ownership. A Corporation in an ideal scenario is made up of a group of persons called shareholders. All of them have limited investment in the venture. The advantages they accumulate are in the form of salaries if they are employees, as well as dividends and capital appreciation if the shares are listed. If the business incurs any loss because of some reason, the shareholders are liable only for their investments. There is no impact on their personal assets as they are protected.
Corporations enjoy many tax benefits when compared to proprietorship and partnership. Lots of expenses like rents, insurance plans and retirement plans can be claimed for deductions. In proprietorship and partnership, debt is the only method to raise capital. And that too comes at a higher interest due to unlimited liability. But fact remained that corporations can raise capital by selling shares and can borrow money from institutions because of the credibility. As ownership is held more or less in the form of shares, it is easy to transfer ownership by selling the shares. Theoretically speaking, corporations exist on their own by their legal entity status. This more often than not makes the corporation livelonger and provides the founders anonymity, as they are separate from the corporation.
It is crucial to note that incorporating a business allows for public scrutiny, and the founders have a responsibility to society to file returns properly and follow laws set by the state. It is pivotal to understand that incorporated business is not their alter ego, but a separate legal entity.
Hard work, good business sense to spot opportunities and of course a little bit of luck are the key ingredients for success in business. Equally, there are many parameters for failure that are out of ones control. Business structure judges the level of risk one is exposed to and is the ultimate facture for the failure of the business. One can opt for being a sole proprietor, partner with others, and form a limited liability company or a corporation. The first two doesnt require any registration with the state.
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The methods to incorporate a business require certain steps. One has to come to the conclusion regarding the type of corporation, name of the corporation, state of incorporation and the filing of the papers.
As you are already aware that the corporation is a separate legal entity, the identification has to be unique. It is of utmost importance to check with the authorities as to whether the name for the business already exists. If it is the case, some other name has to be chosen. Few names can be appended with the name of the business like ABC bank. The type of corporation is decided by judging whether or not one has to raise capital through the public, the duration of the corporation, the management structure and control and the type of corporation like LLC or corporation. There exists an S form of corporation that has a special tax structure so that double taxation of the income is avoided.
The routine for filing papers for all types of corporation remains the same. By law, it is quite mandatory to register the corporation in the state the business is operating. Whats more, it is also possible to incorporate in one state where the tax structure and other conditions are favorable and operate in another state. For that to happen, the corporation should designate a registered agent with a physical address in the state. This is implemented to facilitate communication between authorities and the corporation.
Lastly, the incorporation is done by filing papers that contains details about the business along with the registration fees. Normally registration is about $400. It takes some time to finish the routine. In case if one needs to expedite, an additional fee is required.
LLC or limited liability Company offers the advantages of liability protection and pass through taxation features of sole proprietorship or partnership. Large chunk of small business owners prefer this form of corporation as it provides greater flexibility in management. The general features of LLCs are partial duration of existence, no double taxation and member or owner managed business.
The best part about all this is that LLCs can be incorporated by filing with the state authorities. The general routine is that of incorporating a corporation. The benefits over a corporation are that there is no need to get the consent of shareholders, no need to issue shares and no need for the board of directors. When opting for the name of the business, it should end with LLC. Since the existence of LLC is limited in nature, the duration has to be mentioned. As LLCs are run by member-owners, remember that they have their own operating agreement. Once these are decided, the LLC can be incorporated with the help of filing in support with the state authorities.
Before that it is quite crucial that LLCs have to comply with state laws and regulations. In that regard the tax on LLC is passed on to the members. In addition a Federal Employer Identification Number (EIN) has to be obtained by filing Form SS-4 under IRS, if there is intent to employ people. There is no requirement to get federal licenses except for certain businesses. To incorporate LLC, one has to take the help of a lawyer or an intermediary agency to help file or do it by themselves. This is because the LLC lets the income flow through the owner and it doesnt mean that the owner can siphon money to their account.
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