If You Are Starting Your Own Business, Some Things You Should Know

by Lisa Godfrey

  • Should I incorporate?
    • There are three reasons why you might want to incorporate your small business.
    • First, if you have one or more partners, it is advisable to own a business as a corporate entity.
    • Second, a corporation will limit your personal liability for contracts entered into on behalf of the business and for negligent acts by employees of the business. Limitation of personal liability is the primary reason most people incorporate.
    • Finally, some tax advantages may be obtained by operating your business as a corporate entity.
    • Each particular type of business has its own tax issues, and you should consult your accountant as to whether incorporating your business could gain you advantages on your income tax.
  • What form of incorporation should I use?
    • In North Carolina, there are two main forms of corporate existence.
    • The traditional form is a “corporation”. Most people who incorporate their businesses use this form.
    • Under IRS rules, an incorporation may be an S-corp or a C-corp. An S-corp pays no taxes itself. It is a “flow-through” entity. This means that all of the income (or losses) of the corporation “flow through” to the individual shareholders.
      • S-corps can only be owned by individuals, and cannot be owned by other corporations, trusts or other entities.
      • They can have many tax advantages for their owners depending on the particular circumstances of the business.
  • The other type of entity used by many small businesses is the “limited liability company”.
    • A limited liability company is also a “flow-through” entity.
    • The limited liability company (or LLC) does not pay taxes on its income, but passes the profit (or loss) through to its owners.
    • Unlike subchapter S corporations, limited liability companies can be owned by other companies, trusts or corporations.
    • Limited liability companies are frequently used if the company is going to own or trade real estate.
  • The decision to form a business as a subchapter S corporation or limited liability company should be made in consultation with both your attorney and your accountant.
    • They can guide you as to the best form of business entity for your particular needs.
  • Should I try to incorporate my own business?
    • In most cases, this is not advisable. The costs to incorporate your business are relatively small compared to the costs to you and/or your business if the corporate work is not handled properly from the start.
    • If you fail to observe the proper corporate formalities, your corporation may not be valid as against a creditor.
    • Also, if more than one owner is involved, an attorney can create a “Shareholders Agreement” which will control the parties’ rights and responsibilities in the event one shareholder dies or wishes to leave the business.
    • It is much better to have this type of arrangement decided on the front end when the parties are friends.
    • All in all, the money spent for an attorney’s advice in an initial incorporation is money well spent.

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