What does Incorporation mean?
The term Corporation or Incorporation refers to the establishment of a business entity. The California and Nevada Secretaries of State refer to a corporation or a limited liability company as an "artificial person". People are referred to as "natural persons". You may hear the terms "artificial entity" and "natural entity" in the same context.
Indemnification?
Incorporating is often used to protect a natural person from litigation as a result of the conduct of the company. Both California and Nevada provide indemnification of the shareholders, directors, officers and employees of the entity. If an unincorporated company (sole proprietor) is involved in a lawsuit, the personal assets of owner would most likely be in jeopardy, even if that person wasn't directly responsible.
Past History…
Getting a fresh start for your business is another good reason to incorporate. A former partnership may have left your company with debt or a bad reputation. By forming a corporation, you won't erase the past history but at least you won't have to carry it with you into your future business dealings.
Taxes Strategies
Hundreds of tax strategies and advantages that have been eliminated for sole proprietors since the 1987 Tax Reform Act and the 1993 Tax Simplification Act still exist for corporations today. Here are just a few:
100% full deductibility of medical premiums and medical expenses (no floor).
Rent and Leaseback arrangements designed within IRC guidelines allow the corporation to generate passive income to a variety of individuals, including owners, employees and family members.
Take advantage of the 15% tax rate for small corporations on the first $50,000 in profits.
Regulate wages to older family members involved in the business allowing them to qualify for social security benefits, legally.
The audit rate for corporations is among the lowest of all forms of business.
"C" Corp or "S" Corp
All Corporations begin as "C" Corps. Class "C" Corporations are responsible for paying Income Tax, however, at a lower rate than the average natural person. Currently, the rate is 15% for the first fifty thousand dollars. Class "S" Corporations do not pay income taxes directly. Instead, the earnings are passed on to the shareholders on a schedule K-1, much like a partnership. A consultation with a tax expert is highly recommended, before deciding to change your "C" Corp into an "S" Corp. A Limited Liability Company also passes the earnings on to the owners (or members) on a schedule K-1.
Estate Planning
Gifts of Stock over a period of years can substantially reduce estate taxes, especially when combined with other legitimate estate planning techniques.
Will you need an "Exit Strategy"?
There may come a time when it is in the best interest of a stockholder to withdraw from a corporation. For this eventuality, a pre-planned exit strategy shouldn't be neglected. An attorney, or other legal professional, should be able to assist you with this document.
