SHOULD YOU
INCORPORATE YOUR BUSINESS?
Following fast
on the heels of a decision to go into a
particular kind of business is the
decision about what kind of legal form
it should take. The most common options
are a sole proprietorship, a
partnership, or a corporation. You may
lean toward the corporate route because
you like the sound of having "Inc."
after the company's name, but there are
some more practical, business-like
considerations to take into account.
More so than
with some of the other structures for a
business, starting a corporation means
complying with formalities required by
state laws. Once the shareholders
(owners) of the business agree on some
basic matters, such items are embodied
in articles of incorporation that must
be filed with the appropriate state
agency. These essentials usually
include:
* a corporate
name;
* the number of
shares that can be issued;
* the number of
shares each owner will buy and for what
contribution of cash or property;
* the nature of
the corporation's business; and
* the identity
of the directors and officers of the
corporation who will handle day-to-day
operations.
The fledgling
corporation will also need bylaws, which
constitute a procedural rule book for
the company.
Decision
making
The bottom line
here is that whoever holds a majority of
the shares of a corporation has ultimate
control over it. Usually it takes a
majority of the shares to elect the
board of directors, which is charged
with making the "big picture" decisions.
If a decision is momentous enough for
the company's future, such as a change
in the articles of incorporation or
whether or not to merge with another
company, the shareholders usually have a
more direct role in that they themselves
must approve the decision by a certain
margin of votes.
The board
elects the officers of the corporation,
typically including a president,
vice-president, secretary, and
treasurer. The officers may or may not
be salaried employees or shareholders,
and in some cases one person may hold
more than one office.
Accountability
At or near the
top of the list of characteristics
favoring the corporate structure is the
fact that, since the corporation is
treated as a legal "person" separate
from the people who own and run it, the
shareholders as a rule are not
personally liable for the corporation's
debts. Instead, their risk is confined
to their investment in the company. To
every rule there is an exception,
however, and here the exception has the
colorful legal name of "piercing the
corporate veil." If the owners do not
comply with the statutory requirements
for running a corporation, or if they
blur the lines too much between
corporate and personal finances, the
legal fiction of the corporation as a
separate entity is ignored and the
owners are on the hook for the
corporation's losses.
Transitions
As a separate
entity in the eyes of the law, a
corporation does not go out of existence
if one or more of its owners dies.
Instead, a corporation stays alive until
its owners decide otherwise. Transfer of
the ownership of the corporation is
accomplished by selling its stock. New
owners are added either when existing
owners sell some of their stock or the
corporation itself sells more shares of
stock. The smaller the enterprise, the
more likely it is that the owners, for
whom the corporation may be both their
property and their employer, may agree
to restrict the sale of the stock in
order to maintain control.
The particular
circumstances of each new business and
the differences in the governing laws of
the states make generalities difficult.
That said, the factors on the debit side
of the ledger for corporations include
the costs of setting up the corporate
entity, the need for a separate tax
return, and the burden of "double
taxation." Double taxation means that
the corporation is taxed on its profits,
and the shareholders are then taxed on
their dividends. On the credit side are
limited liability for the owners and
easy transfer of ownership.
Making the
appropriate choice for a business form
is one of the first, and one of the most
important, decisions a new business will
make.
