Incorporating a Small Business

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Advantages

1. Ability to accommodate investors – Corporations have stock and you can easily issues those shares to investors and potential employees and contractors who provide you with services. This can be a great way to get things done without spending any of your critical seed money. Also, corporations have an edge over Limited Liability Companies (LLC) in that they are more flexible in this capacity.

2. Limited liability - A properly set up and administered corporation should protect you personally from lawsuits and credits should anything adverse happen. In terms of financing, a new corporation is like a person just entering the workforce; eventually the banks will start to offer the corporation credit cards, credit lines, loans, etc. Once you build up a credit history for the corporation the limits will grow.

   However, do not expect this to happen like it does in the aggressive consumer credit card market, where they send you unsolicited offers with high credit limits. Even if you are a already a successful entrepreneur you may not have bankers falling over themselves for you. I remember a situation where an extremely successful entrepreneur with hundreds of millions of dollars personally earned in his ventures was totally unable to get a credit card for a company he seed-funded without his own personal guarantee. Boy was he aggravated.

Disadvantages of Incorporating a Small Business

1. Incorporating costs money to set up – Actually the setup is not so bad anymore because of the web-based services that exist to make this happen for you. I would estimate you can incorporate a small business online for less than $500 including all government fees.

2. Corporations require a lot of administration – This is really the big deal to me. The amount of paper work that you are "supposed" to maintain for a corporation and the amount of formality you are supposed to go through. The paper work I’m referring to are the board meeting minutes, annual officer elections, separate tax returns, and more.

   Yes, you are supposed to hold board meetings regularly and have minutes of what has been decided, etc. Seems pretty silly if it’s just you running the business and maybe one or more partners but you need to keep it formal. If you do not administer the corporation properly in terms of this paperwork and other matters, you could be deemed to not be "truly" operating as a corporation, and therefore the limited liability protections are negated. This becomes a major issue in a lawsuit when the opposition will be gunning for you and looking for reasons to hold you personally liable. (This is called "piercing the corporate veil".)

   Final note about administration is that you must be sure to keep a separate bank account. You should do this for all forms of ownership in my mind to keep everything clean. The idea is not to commingle your assets.

3. Corporation taxes are high - Even if you don't make any money in a year, you will have to pay a minimum tax in states like California where it's almost $1,000.

   Also, there is the matter of double taxation where profits are taxed when the corporation earns them and then you get taxed when you take the profit. The workaround here is to file an election to be a "Small" corporation, a.k.a. "Sub chapter S" corporation with the IRS. This just means that for tax purposes you will be taxed like a sole proprietorship or partnership with the income flowing to you and/or your partners for taxation. (The downside to the sub chapter S election is that the number of shareholders you're allowed to have is limited.)

   Before you decide on incorporating a small business, be sure that's your best choice. Switching corporate forms or changing from S Corp to C corp, etc. is difficult to do.

• Incorporate in Nevada or Delaware?
• Partnerships
• Sole Proprietorship

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