• Forming a Corporation can give your business credibility and presence as well as give your customers a sense of security.

• Owners, Directors or Members can be protected from personal liability in the event of litigation involving the company.

• A corporation, especially limited liability companies and sub-chapter S corporations have very attractive tax advantages.

• The business can raise capital through the sale of shares of stock or membership certificates.

• Corporations can be used to own property including real estate, aircraft, or yachts for certain tax advantages or to protect personal assets and/or liability

Not sure which type of entity to form? Here are key points on the most popular entity types -- Sole Proprietors, S Corporations & Limited Liability Companies -- as they relate to common business functions:

• Ease of and cost to form/maintain
• Record keeping requirements
• Board meetings/resolutions
• Relative ease of adding partners
• General tax implications

Sole Proprietor
♦ Easy to start
♦ No cost to form other than a business license
♦ Minimum record keeping (potential pitfall for those with poor business habits)
♦ No board meetings or resolutions
♦ Can not add partners, limited to an individual owner
♦ No annual filings or annual franchise taxes other than business license renewals
♦ Regardless of what money the owner takes out of the company (salary/distributions) they will pay Social Security, Medicare, federal and state taxes on every dollar of profit.
♦ “Office in the home” tax deduction advantage

Limited Liability Company (LLC)
♦ Easy to start
♦ Cost: $90 State of Delaware formation fee. Annual LLC tax is $250 and all corporate filings/amendments are more expensive at $200 each
♦ LLC must have a separate bank account from individual LLC members
♦ Single member LLC records are similar to a Sole Proprietor in that a single member LLC will file a tax return along with the owner’s personal tax return. However a multiple member LLC will be similar to an S Corporation where multiple members must file separate tax returns just like shareholders of an S Corporation.
♦ Board meetings – LLC members must have regular meetings and official corporate resolutions for proper record keeping to maintain the LLC’s liability protection (a/k/a “corporate veil.”
♦ Should use a corporate kit for proper meeting minutes and resolutions to have formal record of proceedings to avoid piercing of the “corporate veil.”
♦ Easy to add partners/members by internal resolution, no formal filing required
♦ Must name a Registered Agent for annual notices and service of process
♦ General Tax Implications: LLCs mimic that of a Sole Proprietor where owners are not on payroll. All income goes to the individual member(s).
♦ Single member LLCs can take a salary as a draw (subject to personal taxation matters and rates.)

S-Corporation
♦ Easy to start
♦ “S” status is an IRS designation for tax purposes. You first form a regular C-corporation and an application must be filed with the IRS to convert the C-corp to an S-corp.
♦ Cost: $89 State of Delaware formation fee. Annual minimum corporate franchise tax is $75 + $50 to file the annual report ($125). All other corporate filings vary but average between $100-$200 each.
♦ IRS requires a separate bank account for corporation (more stringent about co-mingling of funds).
♦ Formal accounting systems must be in place and properly maintained to preserve the integrity of the legal and tax structure
♦ A multiple member LLC is similar to an S Corporation where multiple members must file separate tax returns just like shareholders of an S Corporation.
♦ Board meetings and resolutions are required for all major decisions in the organization.
♦ Easy to add partners by sale/issue of stock through internal resolution
♦ Must name a Registered Agent for annual notices and service of process
♦ Should use a corporate kit for proper meeting minutes and resolutions to have formal record of proceedings to avoid piercing of the “corporate veil”
♦ General Tax Implications: Owner operators are required to withdraw a salary, but revenues above a reasonable compensation can be taken out in the form of shareholder distributions, free from social security and Medicare tax. The IRS watches for officers of S-corporations with zero salaries paid. A tax professional should be consulted on this issue!
♦ Can be costly to administer separate payroll systems

Recommendations*:
• Both S-Corporations and LLCs enjoy the same general tax deductions as business expenses: mileage, advertising company logo on clothing and marketing materials regardless of the LLC/ S-corp status.
• The traditional mom and pop starting the corner store may have more ease in operating a single member or family owned LLC given the salary issues.
• S-corporations are better suited for professional operations like lawyers, engineers doctors, accountants etc…
• Corporate Kits with sample minutes, bylaws and resolutions are helpful in urging entrepreneurs to properly maintain their records.
• Registered Agents offer many valuable services that help entrepreneurs manage annual filing requirements to help keep them from going Void by forgetting annual filings.
• Domain Names should be searched for at the same time the entrepreneur is considering a company name. Even if the company does not plan to do business over the Internet, customers want to find a business on the Internet.

*Recommendations are not meant to be interpreted as legal or financial advice. Please consult a legal or tax professional for specific advice.

If you are not sure if you want to incorporate, please consult with your lawyer for legal advice or accountant for tax and financial advice. Incorporating Services, Ltd. cannot offer legal or financial advice to its customers. After you have had all your questions answered, please return to the Incorporate Now link on our website and let us help you through the rest of the process.