There are many ways to structure the ownership of your
business. These legal entities include sole
proprietorship, various types of partnerships and various
types of corporations.
There are many reasons to incorporate your business,
including tax benefits. However, one of the most
important benefits of incorporating your business is your
insulation from personal liability as a shareholder or
officer of the corporation. If your corporation is
properly maintained, your personal assets will not be
available to creditors of the corporation.
A corporation is a legal entity separate from its
owners and managers. It has a life of its own and ends
only when it is dissolved. The corporation can purchase
assets and borrow money in its own name. If the
corporation is maintained properly, debts of the
corporation are only the liability of the corporation and
not its shareholders or employees. As an owner, the debts
do not become your responsibility unless the lender
requires your personal guarantee.
If the corporation is not maintained properly,
creditors can "pierce the corporate veil" and you may
become personally responsible for corporate debt. The
following are some suggestions for maintaining your
Use the proper corporate name. If the name of
your corporation is ABC Widgets, Inc., make sure the
"Inc." is on all of your business papers. The presence of
that word informs people dealing with you that you are a
corporation. The simple failure to show your are a
corporation may result in personal liability.
If you want to use another name or use initials,
register it under the appropriate law. If you do not
want to put "Inc." on everything and want to be know as
ABC Widget, the corporation is using an assumed name
which should be registered.
Make sure all stationery, business cards, brochures
and other written material identify the business as a
corporation. If you have taken the steps to
incorporate, let the world know. To many customers, doing
business with a corporation is more professional than
with a sole proprietor.
Keep separate bank accounts for the
corporation. Remember, a corporation is a separate
legal entity. It has its own Federal Employer
Identification Number, which must be shown on all tax
filings. As a separate legal entity, it should keep its
own bank accounts, financial records and credit cards.
Keeping only one account and one set of financial records
indicates there is no difference between you and your
corporation, and therefore you should be liable for the
corporation's debts. It is crucial to have separate
records and accounts.
Do not pay personal expenses from the corporate
bank account. Personal expenses are just that. They
should be paid out of your personal funds. Do not pay
your personal bills directly from corporate monies. You
can reimburse yourself for corporate expenses.
Pay yourself a salary or find out from your
accountant the proper way to repay yourself for loans
made to the corporation. You should pay yourself
reasonable compensation for the services you render (if
there is money to pay you). Never take a draw. You are an
employee of the corporation and are paid a salary subject
to Social Security, Medicare and withholding taxes.
Sign all documents as President.
Hold meetings of shareholders and directors at
least annually. Prepare written minutes of each of
these meetings, and have them signed by the President and
Secretary of the corporation. A written record should be
kept for any major changes or decisions made by the
Prepare proper corporate income tax returns.
Talk to your accountant about the various tax forms which
should be prepared, as well as how frequently they must
File your annual report from the Secretary of State
on time. Failure to do so could result in an
involuntary dissolution of the corporation and leave you
personally liable until the corporate status is
reinstated. Every year, prior to the anniversary of your
date of incorporation, the Secretary of State mails to
your corporation's registered agent a request that you
file an annual report and pay the annual franchise tax
fee. It must be filed by the date shown on the form.
Prepare quarterly reports to the Department of
Employment Security. If you have employees and are
subject to the unemployment compensation laws of this
state, prepare, file and pay these taxes.
Prepare Internal Revenue Service forms 940 and 941
on time. If you have employees to whom you have paid
wages (including yourself), you should prepare, file and
pay these taxes, some of which you withheld from your
For professional service corporations, follow all
procedures and file all necessary forms from the
Department of Professional Regulations. If you are a
licensed professional, Illinois law requires that you
register your corporation with the department which
issued your license. There may be other requirements,
depending upon your profession.
By following some simple rules, the corporation will
maintain its own identity, you will be protected from any
personal liability and the government will receive its
reports and taxes in a timely manner. A corporation can
provide many benefits to its officers, employees and
owners and it is worth the time and effort to keep it
This pamphlet is for informational purposes only. You
should consult with an attorney regarding your specific
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