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        How to Incorporate Your Business Online and Why You Should

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        Another AHBBO Article
        Incorporating You

        © 2017 Elena Fawkner

        Running a business involves risk - the risk that the business
        may either succeed brilliantly or fail miserably.  Or neither. 
        The upside is high -- financial and (perhaps) time freedom;
        independence; unlimited earning capacity.  The downside
        is equally steep, just in the wrong direction -- potential
        financial ruin if you've staked everything you own on your
        business's ultimate success and thrown your career down
        the proverbial to boot.  If you're running your business as
        a sole proprietorship or a general partnership, make no
        mistake -- everything you own is on the line.

        There's a lot that can go right and wrong in a business.  A
        lot of it out of your control.  But the extent of your personal
        financial liability for what goes wrong is one thing you can
        and should control.

        The answer is to form an entity separate from yourself to run
        the business. 

        WHICH BUSINESS ENTITY?

        As you probably already know, you have several choices
        when it comes to your business entity.  The most basic is a
        sole proprietorship, followed by a partnership (general or
        limited), a limited liability company ("LLC") and a corporation
        (either a general "C" corporation or an "S" corporation - more
        about these later).

        Although sole proprietorships and general partnerships are
        relatively straightforward and inexpensive business entities
        to establish and maintain, hence their popularity, neither
        of them protects you from personal liability. 

        If you're a sole proprietor, you've probably made this election
        by default - by doing nothing other than starting a part-time
        Internet business out of your spare bedroom, most likely.

        A limited partnership will protect the limited partners from
        personal liability beyond the extent of their capital
        contribution to the partnership, but limited partners cannot
        participate in the management and control of the business
        so that's not a good option for most of you reading this
        article.  Needing to control and manage your own business
        is most likely non-negotiable.

        As an attorney, I generally recommend that small business
        owners, including (especially!) home-based and Internet
        entrepreneurs, incorporate at least as soon as they are
        generating sufficient profits from the business that the
        amount of tax payable on such profits equals or exceeds the
        minimum franchise tax payable in the state in which the
        business is being conducted.  In California, for example,
        one of the most onerous states in the U.S. when it comes to
        taxes, the annual minimum franchise tax is $800 per year. 
        Therefore, as soon as you're generating profits the tax
        on which is $800 or more in a year, there is no tax
        disadvantage to incorporation and every advantage.

        HOW DOES INCORPORATION PROTECT AGAINST PERSONAL
        LIABILITY?

        Quite simply, when you form a corporation (or an LLC),
        you're forming a separate legal entity.  This separate legal
        entity has the power to enter into contracts, own and
        dispose of assets, hire and fire employees and generally do
        anything that a sole proprietor could do.  The difference
        between the corporation and the sole proprietorship, however,
        is that only the corporation's assets are at risk, not the
        owner/shareholder's (beyond the shareholder's contribution
        to share capital, that is).

        Let's take an example.  You run a part-time Internet
        business.  You're still working a day job and this is really
        just a way to make a little money on the side to save
        for your annual Hawaiian vacation and even more expensive
        spa stay for your dog while you're away.  To you, this is
        only a pocket-money venture and so you don't really think
        of it as a business at all, really.  So you don't give a
        second's thought to the fact that you're running a business
        as a sole proprietor.

        You register a domain name that, unbeknown to you,
        violates a Macrohard trademark.  You create a website
        for that domain and, lo and behold, overnight (of course,
        because this is the Internet) your business becomes
        successful beyond your wildest dreams due, in no small
        part, to site visitors mistakenly believing they are doing
        business with Microsoft's arch-rival. 

        Macrohard, meanwhile, sees all of this and figures your
        gain is its loss and sues you for an account of profits
        based on your misuse of its trademark.  And wins.  It
        gets a judgment for $100,000.  Then it executes on its
        judgment.  And you lose your house, your savings and
        your business.

        Now let's look at a slightly different scenario.  You're
        fortunate enough to have read this article before you
        established your business and formed an S-corporation,
        Hawaii Here We Come, Inc.  The only asset of HHWC, Inc.
        is the domain name and website.  So, when MarcoHard
        gets its judgment against HHWC, Inc., the only asset
        it can touch is the domain name and website.  That's
        bad enough, of course, but you did, after all, violate
        their trademark.  But get this.  Because they're in your
        name, not HHWC, Inc.'s, you still have your house
        and your savings.

        HOW LIMITED PERSONAL LIABILITY CAN BE LOST

        Merely incorporating is not enough to avoid personal
        liability, however.  As a director and shareholder, you
        must run your corporation or company (if an LLC) as
        a separate legal entity, NOT your alter ego!  This
        means you can't just siphon off cash from the
        corporation's bank account to pay your house mortgage.

        Do that, and the court will "pierce the corporate veil"
        in a heartbeat, thereby exposing you to full personal
        liability on the grounds that the corporate structure is
        nothing but a sham designed to unfairly protect you from
        personal liability.

        It is also particularly important that you follow all
        corporate formalities such as those set out in the by-laws,
        passing board and/or shareholder resolutions for major
        decisions and holding annual meetings of the shareholder(s)
        to elect the directors and directors' meetings to elect
        the officers.

        Also, don't think the "corporate veil" will protect you
        from criminal acts such as filing a false income tax
        return, because it won't. 

        SO HOW DO I GET MONEY OUT OF THE BUSINESS?

        You are paid by the corporation as an owner/shareholder
        in the form of dividends and/or as an employee in the form
        of a salary.

        CORPORATION OR LLC?

        While both corporations and LLCs limit your personal liability,
        there are differences between states when it comes to
        how other states' LLCs are treated in this regard.  By
        contrast, corporations are treated uniformly when it comes
        to personal liability.  Especially if you're operating an
        Internet-based business where you can be transacting
        with people from pretty much anywhere, for the greatest
        certainty concerning your personal liability, a corporation
        is preferable to an LLC.

        One of the advantages of an LLC as a business entity is that
        the profits and losses of the LLC "flow through" to the
        personal income tax return of the members.  However, if you
        make a "subchapter S" election when forming the corporation
        (thereby forming an S-corporation), you can achieve the
        same result. 

        S-CORPORATION or C-CORPORATION?

        Although the S-corporation's profits and losses flow through
        to the shareholders (rather than the S-corporation being
        taxed as a separate entity as in the case of a C-corporation),
        S-corporations are limited to 75 shareholders and, generally,
        those shareholders must be U.S. citizens or resident aliens. 

        You would therefore not be able to have foreign shareholders
        with an S-corporation (but you can with a C-corp), which may
        be an issue, particularly for Internet-based businesses with
        shareholders from various countries. 

        Also, you cannot have multiple classes of shares with an S-
        corporation so this will not work if you want to issue preferred
        shares, for example.  You'd need to form a C-corporation
        instead.

        WHAT'S INVOLVED?

        Forming a corporation is a relatively straightforward matter
        (at least for an attorney) and shouldn't cost you more than a
        few hundred dollars depending on the complexity of the
        corporate structure.  Most attorneys would charge between
        $500 and $1,000 for a straight C or S-corporation.

        At its simplest, a corporation can have a single director and
        shareholder with that same individual holding each of the
        three required offices (president, secretary and treasurer).
        (If a corporation has three or more shareholders it must have
        a minimum of three directors but if it has fewer than three
        shareholders, it may have the same number of directors.)

        Your attorney will prepare and file articles of incorporation
        with your State's Secretary of State, and then prepare
        by-laws and organizational minutes.  You'll need a Federal
        Employer Identification Number (SS-4) from the IRS and,
        if you have more than one shareholder, a buy-sell agreement
        to ensure that the shares do not pass to shareholders
        unacceptable to the other shareholders. 

        Your attorney will also attend to annual filings with the
        state (a statement of officers and directors is usually required
        to be filed every one or two years) and make sure you stay in
        compliance with state corporate requirements (such as annual
        minutes etc.).

        Taking the time and trouble to think about the legal
        structure of your business may seem like overkill when
        all you're doing is running a fun little business out of your
        spare bedroom in your spare time.  But fun little businesses
        have a way of becoming very unfunny major headaches
        when things go wrong.  No matter how small or fledgling
        your business is, do yourself and your family a big favor
        and at least think about incorporating.  What may seem
        like a pleasant past-time today could be anything but
        tomorrow.

        _________________________

        For more information about incorporating your business, please visit:
        incorporate your business for only $25 plus state fees.

        _________________________

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        ** Reprinting of this article is welcome! **
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        Elena Fawkner is editor of Home-Based Business Online. Best business ideas and opportunities for your home-based or online business.

        Copyright 1998-2017, AHBBO.com. All rights are reserved. Thursday, 21-Jan-2021 03:53:58 CST

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