So, you've finally surrendered to the entrepreneurial
spirit deep inside you, and you're going to open up that
record store, t-shirt emporium, musical instrument shop,
hot dog stand, or clothing boutique. Well, no matter what
type of business you're going into, you've got to think
about what kind of business you're going to be. In other
words, are you going to own it all yourself under your
own name ("sole proprietorship"), have some partners, who
will share in the ownership ("partnership"), or form a
corporation? Besides the different types of corporations
discussed in this brochure, there are various entities
available to you, including Limited Liability Companies
(LLC), Limited Liability Partnerships (LLP) and
partnerships. All have different advantages and
disadvantages which should be discussed with your
advisors. They are not dealt with in this brochure.
This is a vital question that you should give a lot of
thought to as you're planning your new venture.
"Going corporate" isn't just for multinational
conglomerates such as Ford, General Electric, and IBM.
It's an option you might want to consider as part of the
first rung you'll be climbing on the ladder toward
First, some stock things about corporations that you
need to know. You have a "legal identity" as an
individual person. So does a corporation. It is
considered a separate legal entity and has a life of its
own. That life is perpetual, unless the owners, also
called "shareholders" vote to dissolve the corporation by
going out of business.
The most important thing to know is that under certain
circumstances, a corporation will protect the owner(s)
from any personal liability from activities of the
business. It can also provide certain tax advantages for
you as the owner.
Here's how a corporation will insulate its owner(s)
from personal liability. If a corporation leases office
or studio space, leases or purchases an automobile,
office furniture, supplies, a telephone system, a
photo-copier, etc., and is unable to pay, it is generally
the corporation's problem ("liability") and not yours.
The owner's personal assets are protected from the
corporation's creditors as long as the corporation is run
properly and the obligations are not personally
guaranteed (for example, personally co-signing a loan or
other agreement in addition to signing on behalf of the
You may also find it less taxing to be in business by
electing S corporation status. Becoming an S corporation
eliminates your income from being taxed twice ... once on
your business' profits and once more on the salary your
business pays you. Instead of paying income taxes
directly to the IRS or state, an S corporation passes its
profits or losses to the shareholder, who is usually
taxed at a lower rate.
Despite these apparent advantages, check first with
your accountant and/or lawyer to make sure S corporation
status is best for your business.
Some other benefits to incorporating are the employee
benefit plans that are more readily available to
corporations as compared to sole proprietors and
partnerships. In addition, you may find it much easier to
obtain loans and other financing. Venture capitalists,
family and friends may be willing to help fund your
business for a "piece of the action" (which can be done
through the sale of the corporate stock).
Forming a corporation can also be good for your health
-- by allowing you to set up a medical reimbursement
plan. In this way, your medical expenses can be
completely covered by the corporation, and the
corporation may take the deduction as a business expense.
This avoids the problem with personal limitations on
medical deductions for individuals filing Schedule A on
their individual tax return.
As potentially wonderful as corporate status can be,
there are limitations and some "downsides."
Certain businesses should be aware of the Professional
Service Corporation Act. Anyone opening a personal
service business which requires a license before being
able to render that service is subject to this act.
You'll still have to obtain the necessary license, even
if you form a corporation. This law also provides that a
person who has acted negligently or wrongfully or is
guilty of misconduct will not be protected as a
corporation from malpractice.
Also, corporations have some periodic filings with the
IRS and state tax departments that most individuals do
not face. Your corporation will also have to file an
annual report to the state (usually, in most states, this
just a short form to fill out as well as a modest fee to
Once you decide to "go corporate," the actual legal
procedure is fairly simple. But you ought to hire a
lawyer to handle it.
There's a form to fill out ("Articles of
Incorporation") and a filing fee ($100.00 for small
corporations in Illinois) to the Secretary of State of
Illinois. Assuming your application is acceptable, you'll
receive a Certificate of Incorporation back in the mail
from the Secretary of State in few weeks. This
certificate will need to be filed with the Recorder of
Deeds in your county (with a modest filing fee).
In the meantime, your lawyer will be preparing your
"corporate book." This includes such things as your
corporation's bylaws, stock certificates, and
documentation relating to shareholders' and board of
directors' meetings. It sounds complicated, but it really
Also, if you do elect S Corporation status, make sure
that your attorney or accountant makes a timely filing of
this election so that Internal Revenue Service deadlines
are not missed.
Your attorney or accountant should also apply for a
Federal Employer Identification Number (FEIN). This will
identify your business to the IRS.
Legal fees for all this work are usually quite
reasonable. In the long run, the value of having the
incorporation done competently will be money in the bank
to your business.
This pamphlet is for informational purposes only. You
should consult with an attorney regarding your specific
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