Should i inc

Liability A primary reason given to incorporate is to limit liability. A corporation is a separate and distinct entity from its owners, but it has the same rights and obligations as an individual. For instance, a corporation can own property, carry on business, incur liability, and it can be involved in litigation.

However, there are two primary exceptions to this general rule. The first is if the shareholder provides a personal guaranty. A personal guaranty is often required by lenders, vendors, landlords or other key creditors.

The second primary exception is for tort liability. For instance, if an owner of a corporation is negligent and causes damage, then the owner is personally liable for the damage even if the owner has incorporated its business.

Because an owner of a small corporation is actively involved in the business, the tort liability exception can be a significant exception. Nevertheless, if the business has employees, it is necessary to incorporate to shield the owner from the negligent acts of employees. Accordingly, if a business has employees, it is generally a good idea to incorporate or form a limited liability company. In addition to the two primary exceptions to limited liability, a shareholder may become personally liable for corporate debts if the corporation is not formed in compliance with, or operates in violation of, applicable statutes, or if the corporation is operated as a mere front for its shareholders rather than for corporate purposes.

The business affairs of a corporation are managed by its board of directors and its officers. The directors are elected by the shareholders. While shareholders have the ultimate control of a corporation because of their stock ownership, the day-to-day management lies with the board of directors through its officers. When a corporation has a large number of shareholders, such day-to-day centralized management by the board of directors and officers can be an advantage. This division of responsibility and possible conflicts of interest between the shareholders and directors can also create the risk of dissension.

In small corporations, the shareholders, directors and officers are often the same person or persons. The first step toward incorporating your business involves preparing and filing the required formation documents. This is done with the secretary of state or comparable governmental agency in the state where the corporation's primary place of business will be situated or where the majority of business transactions will occur.

Although the incorporation forms and the process to be followed may be slightly different in each state, corporations must typically file articles of incorporation and pay certain incorporation fees at the time of filing.

After the incorporation documents have been filed and processed, the corporation will be required to nominate a board of directors and, normally, a CEO and other corporate officers. It will also establish and vote on bylaws that set forth how the corporation will be operated and managed—such as the procedure for issuing stocks, dividends, bonuses, and similar financial concerns.

Additionally, the corporation must apply for an employer identification number EIN through the IRS so that annual corporate taxes can be paid, set up corporate bank accounts, and select a registered agent to receive and process correspondence, notices, and lawsuits. Once up and running, corporations may purchase or sell property, enter into contracts, and engage in a number of other business activities.

If the corporation is formed as a stock corporation, it's permitted to issue and distribute "shares" of stock to its shareholders, officers, and directors. LLCs, on the other hand, are not incorporated.

They are "formed" or "organized. These documents generally include the certificate of formation or articles of organization. Each document offers general information concerning the LLC, including the name, address, nature of the business, number of members, and similar topics.

And, instead of being guided by corporate bylaws, LLCs are normally governed by an operating agreement. The operating agreement provides the details regarding the company, including each member's initial financial contribution to the LLC, the voting rights afforded to each member, as well as the percentage of interest each member holds.

Finally, unlike corporations, LLCs don't issue shares; instead, the members of the LLC hold a percentage of "interest" in the company. So if the setup, rigid bylaws, and overall operation of a corporation seem too onerous, perhaps the simplicity and flexibility of an LLC is a better fit.

The primary benefit and most attractive feature shared by both corporations and LLCs is the fact that both entities remain separate and distinct from the owners. This is important because it allows the owners to avoid incurring personal liability for the corporation or LLC's business debts.

For instance, in the event of a bankruptcy or a legal dispute with the business, the owner's personal assets like bank accounts, homes, and cars are not typically viewed as assets of the company. In the case of a corporation, the shareholders, officers, board members, and employees are all shielded from the threat of taking on personal liability in the event a lawsuit is filed against the corporation, or if the corporation incurs a debt, expenses, or other liabilities or losses.

Similarly, the members of an LLC are protected against becoming personally liable for the LLC's losses, liabilities, or debts, just as they are immune from individual liability in the event a lawsuit is filed against the LLC, or if a collection action is pursued against the LLC. All corporations must file an annual report and convene an annual shareholders' meeting.

During the annual meeting, minutes are kept and records of any significant matters discussed or decided upon are maintained. Chief among the issues discussed at the annual meeting is the framework for issuing dividends, bonuses, and other forms of compensation. On the other hand, LLCs are not obligated to convene annual meetings or to maintain minutes of any company meetings.

Additionally, except in some states, annual reports are not required to be filed. In many cases, it's the flexibility of the LLC which makes it such an appealing entity choice, especially among individuals who wish to operate a business and small businesses. Corporations can be less attractive if you are someone who is not interested in keeping up with the rather onerous corporate requirements.

When it comes to the differences between corporations and LLCs in terms of their tax structure, it's important to recognize that income that the corporation generates is subject to so-called "double taxation. The first thing to do is to work out your net pay currently.

After crunching the sums, the result might look something like this:. Salary : many company owners choose to pay themselves a small salary. By paying this tax free, NIC free, salary one reduces the corporate tax bill which makes it more efficient than drawing dividends.

This is on top of the tax-free personal allowance. Dividend Rates : appear lower than rates for non-savings income e. So in reality the rate for dividends ignoring personal and dividend allowances once one factors in the corporation tax is in fact slightly higher, Were they to reinvest profits, make significant pension contributions, etc.

Some additional things to think about include:. Reinvesting : A business may be looking to reinvest profits in other ventures. For example, a buy-to-let business might be saving up to purchase another property, adding to its portfolio. This would allow the company owner to purchase much more quickly than a sole trader, allowing the business to accelerate its growth and increase profits over a shorter timeframe. Income Splitting : There is scope to gift your non-working spouse shares in the business to utilise another personal allowance, dividend allowance and basic rate band.

Income Smoothing : Unlike sole traders, who pay tax whenever income is earned, owners of companies can time when they extract dividends. By smoothing income across years, or spiking income up and down strategically, they can realise gains. One might want to smooth income to avoid tipping into higher rate bands.

For larger families this can be a significant amount of money to lose. Over a two year period the same amount is paid but, by spiking income, the individual is entitled to child benefit every other year whereas the sole trader would receive nothing. Capital Gains : In certain instance it is possible to extract value in a company at GGT rates, as opposed to income tax rates.

If the plan is to grow a company then sell it, this is definitely worth considering. Annual Allowances : If one is imminently planning to sell the business, incorporation can in certain circumstances offer CGT planning potential. Shares : The creation of shares opens up a new avenues for raising capital. Such investment can be crucial in taking your business to the next level.