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Frequently Asked Questions |
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Incorporating a Business
Types of Corporations:
Advantages and Disadvantages
Incorporating a Business: Advantages and Disadvantages
One of the earliest and most important decisions entrepreneurs
must make is about the form that their new business will take.
The following is a description of the various business forms
and some of their characteristics, advantages and disadvantages.
You should also consult the SBA's Small Business Startup Kit
as it may help you decide which structure works best for your
business.
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| Company Type |
Description |
Advantage |
Disadvantage |
Sole Proprietorship |
When you are starting
a company on your own, you are probably best off going
with a sole proprietorship. With this type of Company,
you need only two things: a business license, and a fictitious
name statement or “dba” (doing business as),
unless you are using your own name and this is filed with
your state. You don’t have to register your company
either. Sole proprietorships should only be used if your
business is owned by one person. |
The most simple, swift and least expensive ownership to
organize as well as dissolve.
Within the law, able to make all decisions and have complete
control.
Obtain all income produced by the business to keep or
reinvest and the profits are claimed on owner’s
personal tax return. |
Legally responsible for all debts against the business
and with unlimited liability and assets, both business
and personal are 100% at risk.
Limits to use the monies received from personal savings
or consumer loans.
Employee benefits premium costs are not deductible from
the business income (only a partial deductible as an adjustment
to income). |
Corporation |
A corporation is
a separate legal and tax entity from the owners. This
type of general, for-profit corporation is referred to
as a “C” corporation (referring to Chapter
C in the IRS code). To be incorporated an Incorporator
must draft legal documents and, file the documents with
the appropriate government agency and pay the required
fees and taxes. A corporation is owned by shareholders
and is managed and controlled by the board of directors
who elect the president and determine the policies and
actions to be taken by the corporation. In order to maintain
corporate status (included limited liability and favorable
taxation) certain simple formalities must be observed
in order to keep the corporate shield in tact. These formalities
include, but are not limited to; annual meeting of the
board of directors, the issuing of stock, keeping of corporate
minutes and the appointing of corporate officers |
Shareholders have limited liability for the corporation's
debts or judgments against the corporations.
Shareholders can only be held accountable for their investment
in stock of the company. (Officers can be held personally
liable for their actions.)· |
Corporation process is more expensive and timely.
Monitored by federal, state and some local agencies, and
as a result may have more paperwork to comply with regulations.
Can result in higher overall taxes. Dividends paid to
shareholders are not a deductible form business income
and can be taxed twice. |
S-Corporation |
An “S”
corporation begins as a “C” corporation. After
the initial filing an additional form (form 2553) is filed
with the IRS to change to “S” corporation
status (referring to Chapter S in the IRS code). There
may be additional state filings required. Once this process
is complete, the corporation is taxed like a partnership
or sole proprietorship rather than as a separate entity.
This would result in shareholders’ individual tax
returns reflecting income generated or losses accrued
by the corporation. Converting to an “S” corporation
affects the tax status but does not generally effect the
legal protection offered by the corporation. Often a reasonably
small salary is paid and a large Schedule K-1 distribution
is paid to the employee/owner to help lower Social Security
and Medicare taxes. |
Can raise additional funds through the sale of stock.
Can deduct the cost of employee and officers benefits. |
|
LLC (Limited Liability Company) |
The limited liability
company or LLC is not a partnership or a corporation.
An LLC is a distinct type of business that offers an alternative
to partnerships and corporations, by combining the corporate
advantages of limited liability with the partnership advantage
of pass-through taxation. |
Easy establishment, but a partnership agreement should
be drawn up between the parties.
Ability to raise funds is improved with having more than
one owner.
Profits from the business flow directly through to the
partners’ personal taxes.·
Enticement
to prospective employees to becoming a partner in the
business |
Both are liable for the actions of each partner as well
as possible disagreements can occur since the decisions
are shared.
Profits must be shared with others.
Some employee benefits are not deductible from business
income on tax returns.
Possible dissolution of partnerships either from one withdrawing
or death. |
Non-Profit Corporation |
A non-profit organization
is an organization registered with the IRS on form 1023
declaring federal and state tax exemption under the Federal
Tax code Section 501(c)(3). It is an organization formed
as a corporation for purposes other than generating a
profit, and in which no part of the organization's income
is distributed to its directors or officers. |
Being tax-exempt under IRC Section 501(c)(3) has the ability
to accept contributions and donations that are tax-deductible
to the donor.
Exemption from federal and/or state corporate income taxes
and possible exemption from state sales and property taxes
(varies by state)
Ability to apply for grants and other public or private
allocations
Potentially higher thresholds before incurring federal
and/or state unemployment tax liabilities
The public legitimacy of IRS recognition
Discounts on US Postal bulk-mail rates and other services
|
A non-profit organization is NOT able to issue shares
and is NOT able to pay dividends.
When a non-profit organization is dissolved, any assets
must be distributed to other non-profit organizations |
How do I register a business name?
As a Sole Proprietor or Partnership, you can get a Certificate of Assumed Name or
DBA form through the County Recorder's office. As an LLC or
Corporation, you automatically register your name when you organize
or incorporate your business through the Secretary of State
office. To fully protect a name and prohibit others from using
it, you need to get a Federal Trademark. We suggest using a
patent attorney for this process. You may call the Patent and
Trademark Office in Washington for a recorded message at (703)
557-3158 or visit their web site: http://www.uspto.gov. Don't
forget to look into website ownership and register your domain
name if the internet will be important to your business or customers
at any point in the future. If you are going to give your business
a brand new name, it might make sense to have a matching internet
domain, i.e., "yourcompanyname.com". |
Insurance
Do I need special insurance for my business? It is
wise for any business to possess a general business insurance
policy, which includes liability and other standard coverage.
Your place of business, if you own it, should be insured; and
if you rent, you still should possess your own coverage. Don't
rely on the landlord's insurance.
If you have one or more employees, you are required to have
worker's compensation insurance. Depending on your industry
-- for example, food service requires product liability insurance
-- you may need additional types of insurance. If you already
have insurance coverage, begin investigating coverage options
and requirements with your present agent. Obtaining quotes
from several agencies is also recommended, being sure to compare
both coverage recommendations AND price.
|
Legal
Patents & Trademarks
Where can
I learn more about patents and trademarks? We
suggest using a patent attorney for this process. If you would
like to learn more this process, please check out the
Patent and Trademark Office website or contact the Assistant
Commissioner for Trademarks, Patent Applications in Washington,
D.C. at (800) 786-9199.
Where
can I learn more about Copyright law? For information
and frequently asked questions about copyright law and usage,
check out the U.S.
Copyright website or contact the U.S. Library of Congress
in Washington, D.C. information line at (202) 707-3000.
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Taxation
Federal, state and local tax responsibilities
Which business expenses can I deduct for income tax purposes?
Generally, all the expenses you incur to start and operate your
business are deductible. However, many are subject to various
IRS rules. For example, start-up costs, vehicle expense, meals
and entertainment, and use of a home office are subject to various
guidelines.
There is a section of the IRS web site devoted especially
for Tax
Information for Businesses or you may call them at 1-800-829-3676.
A local CPA (certified public accountant) office is also typically
a valuable resource on this topic.
It is very important to set up a good bookkeeping system
immediately upon going into business. Depending on the size
of your operation, a manual bookkeeping system can be a productive
approach. You will be able to find some great resources at
an office supply store. It is highly recommended that you
become familiar and stay in tune with the bookkeeping characteristics
of your operation before you consider outsourcing this function
to a local or Internet-based bookkeeping service.
Federal Employer Identification Number
What is a Tax ID number? Do I need one?
A Business tax I.D., also referred to as a Federal Employer
Identification Number (EIN), is issued by the Internal Revenue
Service for the purpose of identifying employers. If you have
employees, you will need an EIN. Many small businesses obtain
a tax I.D. for use in purchasing merchandise and supplies
at wholesale prices. To obtain an EIN, you will need to fill
out Form SS-4, which can be obtained online at http://www.irs.gov/pub/irs-pdf/fss4.pdf.
For online access to multiple IRS forms, go to http://www.irs.ustreas.gov/formspubs/.
You may also call your local IRS office or contact your CPA
or tax preparer's office. For more detailed information
about why you may require an EIN, refer to IRS publication:
Starting
a Business & Keeping Records, which is page 3 online.
Permits & Licensing
Where
can I find out if I need any special licenses or permits for
my business?
There is NO one license that you get to go into business.
It all depends on the type of business that you are thinking
about. Here are some places to check with:
Local/County Issues
City Planning Department (Zoning Information)
City Controllers Office (local permits)
City Code Enforcement (Signs & Inspections)
Country Health Department (food related business)
County Recorder (to register a business name)
For State & Federal-level permits & licenses, call
the State Information Center at (800) 457-8283 or check on-line.
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Miscellaneous
Do I really
have a good idea that will make me money?
Great ideas address problems, needs or aid in improving an issue
where your customer base deems it significant enough to spend
their money on to fix. Test your ideas to your consumers to
ensure profitability before you jump into something that would
not fit into the above criteria.
What makes
your product or services stand out from your competition?
You need to position your product/service to the consumer in
an innovative way. First, you will want to learn everything
that you can about your own service or product field and then
position your product or service in a way to take advantage
of your competition's weakness. Visit your local library
to compile local and county statistics on the size and makeup
of your market. (While you are at the library, check out some
books on marketing research so you will know what you are getting
into.) Also, check those of the following resources that might
have data about your product or service or the people who would
use it:
Encyclopedia of Associates. 17th Edition. Gale Research Company,
Book Tower, Detroit, MI 48226.
Ayer Directory of Publications. Lists trade publications by
subject matter. Contact the sales, marketing, or research departments
for buying patterns among their readers.
"Survey of Buying Power." Sales, Marketing, Management
Magazine. July issue each year.
Thomas' Register. Lists companies by product and service line,
organized geographically and alphabetically.
Directory of Business, Trade, and Public Policy Organizations.
U.S. Small Business Administration, Office of Advocacy.
Department of Commerce Publications. Data User Series Division,
Bureau of the Census, Washington, D.C. 20233.
County Business Patterns. U.S. Department of Commerce, Bureau
of the Census. Available for each state.
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What financial
responsibilities do I have for my employees?
Here are five tasks in which you must perform for your employees,
but you also may consult with local state sources or the Small
Business Administration offices since there are some laws that
vary from state to state. First, you must pay your employees
and there are many resources you can use to define a fair-market
salary range for each position in your company but keep in mind
that there is a minimum wage set by federal law for most jobs.
You must then withhold federal and state income taxes as well
as contribute to unemployment and workers compensation systems.
Last, you must match Social Security holdings. Depending on
the size of your company and if it is financially feasible,
you may also decide to offer other employees benefits as well,
such as health, dental and life insurance to name a few.
If I can't
find a job or have been laid off, should I start a business?
Starting a business involves much more than creating a job for
your self. You must make a commitment to paperwork, record keeping,
financing, marketing, planning and a host of other issues involved
in operating a business. In addition, revenues may or may not
come quickly. And ultimately, of course, you must have a product
or service about which you feel passionately and which you can
deliver. In some cases, starting a business may be a good alternative
if you cannot find other employment, but lack of employment
alone is not a good reason to start a business.
Are those "inventor submission companies" I
hear about in advertising a good idea?
Many of these types of inventor submission companies are not
a good idea. These companies often prey on the excitement of
the entrepreneur/inventor by placing high pressure sales tactics
to extort high fees. They often do not deliver results, valid
patents and can even cause you to lose ownership and control
of your idea and intellectual property. For many companies,
intellectual property is the key to your success, so good advice
early on is important. Please talk to your local patent attorney
for direction. Obtaining a patent is not cheap and may run $5,000
-10,000 for the process of searching and filing. If you need
to control your costs while you explore the market potential
of your idea while keeping it protected, please talk to your
attorney about provisional patents and non-disclosure agreements.
I came up with an idea that involves an invention I made.
How do I get it to market?
Your best bet is to sell your idea or product outright rather
than try to start a company to market it. Depending on your
business skills and experience, you may be better off selling
your idea to a manufacturer or company.
Where can I register to get a website for my business?
You can register a website name at a number of places including
a Domain Name Registrar or the Internet Service Provider (ISP)
you choose to host your website. You can also do a search
for domain name registration companies through your internet
browser or try anyone of the following: www.domainit.com,
www.register.com,
www.godaddy.com,
www.networksolutions.com
Where can I find demographics research?
There are a variety of sources for this information. Your
first option is data from the 2000 US Census which can be
accessed at www.census.gov.
For additional resources that will better fit your needs,
contact your local SBDC.
What is OSHA?
The U.S. Department of Occupational Safety and Health Administration
(OSHA) is a federal agency that oversees workplace safety.
All employers are required to provide a safe and healthy workplace
and are subject to safety and health inspections by OSHA without
prior notice. Employers with more than ten (10) employees
are required to maintain a record of injuries on the OSHA
200 form, which must be made available for inspection for
a period of five years. For more information about workplace
safety and OSHA requirements, go to www.osha.gov
where they will provide specific links to a variety of regulations
and compliance information.
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