Corporations are the longest standing business structure leading the pack in the amount of protection and flexibility for shareholders. We examine the top reasons to form a corporation for your business. These benefits are provided by the corporate veil, which is the legal definition of the separation between the business and its owners.
Top Reasons to Form a Corporation
Limited Liability For Shareholders
Corporations offer the strongest protection from business liability for the business owners, or shareholders. This means that there are provisions in the law such that your personal assets are not in jeopardy to satisfy corporate obligations, specifically from creditors. Legally, corporations are separate entities from those who own them. Corporations will pay their own taxes, can own property, enter contracts, sue and be sued independently of those who own them and are responsible for their own debts and actions. As long as your corporation is operated as a true separate entity, shareholders are not personally liable for business obligations. There are exceptions to this and shareholders can assume personal liability if the corporation is improperly established, if any individual personally guarantees debt or credit or funds are commingled where the shareholder and business is acting as one in the same. In order to truly benefit from the liability protection offered by corporations, they must be organized, managed and maintained as true separate entities. Corporations have hundreds of years of court-proven performance protecting shareholders from business liability. If the corporation was used as a tool to defraud any creditor or was undercapitalized as an attempt to defraud a lender, the corporate veil could be pierced by the court. Therefore the corporate structure could be disregarded and the business owners face could be held personally liable for the actions, debts and obligations of the business. It is important that your company is properly established and that you follow formalities and maintain separate status when operating a corporation.
If your business endeavors include seeking financing from external sources, a corporation offers the most flexibility of ownership. There are several types of stock that can be issued and sold to finance the business. This aspect of the business structure makes corporations attractive to businesses with big plans for growing through raising capital. You can sell non-voting shares of stock, which means a shareholder is entitled to profit distributions based on their share of ownership, but have no control over the business activity. This creates silent partners, or more specifically capital partners of the business. Using the structure of the corporation you can create different types of owners, those who have control, those who are entitled to profit distributions or both. The corporate structure is attractive to outside investors and selling stock is easy.
Flexibility of Ownership
“C” Corporations have great flexibility of ownership. Shareholders can be individuals, foreign or domestic. Other corporations or legal entities can own stock in a corporation. Corporate stock can be held in a trust, partnership or other legal tool. Simply put, almost anything and anyone can be a shareholder of a C corporation. This affords the business opportunities to seek partners and capital from sources that other business types cannot.
Fiscal Year / Income Splitting
Pass through tax entities, such as S Corporations and, by default, LLC’s will typically have fiscal year ends of December 31st, the same as our personal tax year. C Corporations can set fiscal year end dates which allow one to choose their tax year ends. This flexibility opens the doors to financial management opportunities where you can save money on taxes by moving the income between entities from one tax year to another and utilize your corporation to make your money work better for you. As a shareholder of a corporation with a personal tax year end of December 31st and a corporate fiscal year end of March 31st, you can split your personal income into 2 calendar years. If you have $100,000 remaining in the corporation before the end of its tax year, you can pay yourself $50,000 in December and $50,000 in January – which could keep you in a lower personal tax bracket and you pay less taxes. You can only do this when you have the ability to set your business’ fiscal year end date. The $100,000 total payment to you is a tax deduction to the corporation. There are additional benefits to this as well, if you have multiple corporations, you can pay profits to a second corporation as management fees and roll those profits into another corporation with a different fiscal year end date as an even greater financial management asset. There are “controlled group” issues when utilizing this technique, so consult a tax advisor. Corporations are the most flexible in this regard. Pass through tax entities, in very rare cases, can set a fiscal year end date, however it is close to a miracle to get it passed, where corporations can set and change their year end dates at any time.
Corporations have perpetual existence, which means that unlike other forms of business that cease to exist in the event of bankruptcy or the withdrawal or death of the owners, their continuity remains. The oldest corporation, still in business today, is the Hudson’s Bay Company which was formed in the 1670. Corporations are true separate entities from those who own them and will outlive shareholders, as long as they are maintained and operated properly.
Corporations can offer deductible employee benefits, employee and officer health plans, medical reimbursement plans and a number of other benefits that LLC’s cannot. A corporation can pay medical expenses and offer health care plans to organization members, where other business types cannot deduct those as business expenses. Corporations offer the most benefits with regard to corporate business deductions. Seeking a CPA or financial advisor’s assistance with how to properly establish these types of plans is advisable.
When any business is incorporated, you gain instant credibility. Operating your business as a corporation shows that the business is viable, which is more attractive to creditors and investors. Your customers also will recognize the “Inc” in your corporate identity as a factor that demonstrates credibility.
Transferability of Ownership
Corporations offer the most flexibility when transferring ownership of the business. Passing a business down within a family, selling it in part or whole and bringing in new owners is a component of the corporate structure. By far, this is the easiest with a corporation.
Central Management and Corporate Structure
The corporate structure, by far, is the most formal out of the alternatives, and offers the strongest management structure. Shareholders who are the owners of the business elect a board of directors. Voted in by the shareholders and re-elected annually, the board is responsible for executing the vision of the shareholders. The board of directors will select and hire the corporate officers which are the individuals who enforce corporate policy and run the day-to-day operations of the business.
Lower IRS Audit Probability
The highest audited group are individuals deducting business expenses on their personal tax returns. It is reported that Corporations with less than $2 million a year in revenue are the lowest audited group claiming business deductions.
Corporations can be used as excellent asset protection vehicles. By leveraging the legal statutes, you can structure your assets within these legal tools so that you can maximize the protection offered through corporations.
1800Company.com has formed tens of thousands of corporations for our satisfied clients. We have a highly-trained sales staff that can help explain these, and other, benefits and how they apply to you. Complete corporation formation support is at your fingertips.