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 | Incorporate or Not to Incorporate In upgrading your Sole Proprietor, DBA, or even an LLC, should you choose to incorporate your business or not? | |||||||
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Which is Best--Business Insurance or Incorporation? Business liability insurance is an absolute necessity for every business, even if you do not feel you are a candidate for a lawsuit. However, the possibility always exists--businesses are sued every day and not just major corporations, but mom and pop and small business enterprises, too. All it takes is for a client to slip and fall on an icy sidewalk or uneven steps, or a customer did not get his order delivered on time, or an employee is involved in an auto accident running an errand for the business, or a disgruntled competitor files an unfair practices claim. Any number of things can be the cause of a lawsuit, some you have control over and others you do not. Many small business owners rely on business insurance to protect them from such claims for damages or injury. The question always arises--is that enough? What is not always understood by small business owners is that if you operate your business as a sole proprietor, or under a DBA (fictitious name) your liability for claims against your business is unlimited. If a claim exceeds the amount of your business insurance and business assets, the injured party can sue you personally to recover damages, and those claims can be taken from your personal assets—your savings, your home, and whatever else you have socked away. Consider, then, the importance of operating as a Limited Liability Company, or better still, as a Corporation. These entities offer you greater protection and claims against either entity are limited. In such cases of a lawsuit, a creditor, customer, or injured party can reach only your business assets and not your personal assets (unless you were personally at fault). The key understanding is in how you operate your business on a day-to-day basis. One problem is that many small business owners neglect to put on their “corporate hats” when dealing with customers and clients. They may sign contracts in their own names, without making it clear that they are acting as agent of their corporation or LLC. To properly protect yourself, all paperwork for the business—contracts, checks, stationery, forms, etc.—should be in the name of the corporation or LLC. When signing a contract for a corporation or LLC, the best approach is to make it clear that the contract is being signed “by” an officer/agent on behalf of the entity. For example, Robert Fowler, owner and president of Fowler Enterprises, Incorporated, would sign as "Fowler Enterprises, Inc., by Robert Fowler, President." It is also important to make sure that you or other employees who act on behalf of your business are expressly authorized to do so. Your corporate (or LLC) documents should spell out the actions that you and your employees are authorized to take on behalf of your corporation or LLC. Frequently, you will need to adopt a corporate resolution to authorize specific actions such as entering into a contract, leasing equipment or borrowing for the business--even if it is a one-person entity. New Tax Law Makes the Corporate Structure Even More Attractive A new tax law makes the corporate form of business organization a better way to do business than ever. There are numerous benefits to the corporate structure —and a few drawbacks. The new law all but eliminates one of the biggest drawbacks: the double taxation of business profits. Under the tax code, corporate profits can be taxed twice. The corporation pays an income tax on the profits but gets no deduction when the profits are paid out as dividend. You pay a personal income tax when the dividends are paid out. This is where the new law comes in. The recently enacted Tax Increase Prevention and Reconciliation Act substantially reduces the personal income tax on dividends, at least through 2010. So even though the double taxation is still in place, it’s a lot less painful. Traditionally, dividends have been taxed at the same rate as salary, interest, and other ordinary income. Depending on your income level, ordinary income can be taxed at up to 35 cents on the dollar. But, under the new law, dividends will be taxed like capital gain, not ordinary income, through 2010, which makes a very big difference. Capital gain is the favorable tax treatment afforded taxpayers who sell stocks and other assets that have been held for more than one year. For most people, capital gain is taxed at a flat rate of only 15% (the capital gains tax rate is only 5% for taxpayers in the bottom tax brackets). So the new law can reduce the tax on dividends by more than one half. As an example, taking Robert Fowler, who is the sole shareholder of Fowler Enterprises, Inc., has a profit for the year of $50,000 before taxes, and he plans to have the corporation pay out the after-tax profit to him as a dividend. In this case, the corporation owes $7,500 in income tax, leaving $42,500 to be distributed to the sole shareholder (Robert) as a dividend. Under ordinary circumstances, this money would be taxed at the 35% rate, or $14,875 of taxes on dividends. As a result, Robert would net only $27,625 after taxes. Now, enter the new tax law. Instead of being taxed at the 35% income rate, the dividend is taxed at the 15% capital gains tax rate, resulting in a tax to be paid of only $6,375. This leaves Robert with a net dividend income of $36,125, which means he pockets an extra $8,500. Which, again, is another reason to incorporate. Source: The Tax Increase Prevention and Reconciliation Act. You can download a PDF 75-page file of this new tax law at by clicking on the link below. Tax Increase Prevention and Reconciliation Act NOTE: CMT, International, Form-llc-corporation.com or its affiliate businesses, such as Centab Systems, cannot and does not provide legal advice or advice otherwise tailored to individual specific requirements. We provide documents and entity papers suitable for most situations in the corporate and limited liability company structure. The Customized Minutes & Bylaws, Organizational Agreements, and Articles Packages includes many of the internal documents necessary to operate your business. However, if you need legal advice, contact a licensed attorney; and if you need accounting advice, contact a licensed accountant or CPA. What we provide is general information, compiled for easy use, and available for you to complete and establish your chosen entity. | ||||||
Minimum LLC Do-it-Yourself CDs for a Corporation Secretary of State Office in Each State Free Offer for Home Based Business Booklet | ||||||
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DISCLAIMER: The information provided on this site is for informational purposes only and is NOT to be relied upon as legal advice. This service is not a substitute for the advice of an attorney and we encourage users to have all documents created on our site reviewed by an attorney. No attorney-client relationship is established by use of our online forms system and the user is not to rely upon any information found anywhere on our site. THESE FORMS AND ENTITIES ARE SOLD ON AN "AS IS" BASIS WITH NO WARRANTIES OR GUARANTIES. If you wish personal assistance in deciding whether the document or entity found on our site is right for you or desire representations and warranties upon the legality of the document you are purchasing in the jurisdiction you will be using it, contact an attorney licensed to practice law in your state | ||||
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