Business Law:
Corporations

What does it mean to form a corporation?

A corporation is considered a separate legal entity and has a life of its own.  That life is perpetual, unless the owners, called "shareholders," vote to dissolve the corporation by going out of business.  The most important thing to know is that under certain circumstances, a corporation will protect the owner(s) from any personal liability from activities of the business.  It can also provide certain tax advantages to the owner(s).

What procedures are required to form a corporation?

A corporation is formed by filing "Articles of Incorporation" with the Indiana Secretary of State along with payment of a filing fee of $90.00.  Assuming your application is acceptable, you will receive a Certificate of Incorporation back from the Secretary of State in a few weeks.  In the meantime, your lawyer will prepare your "corporate book."  This includes such things as your corporation's bylaws, stock certificates, and documentation relating to shareholders' and board of directors' meetings.  The corporate book is where you will keep all records, often referred to as "minutes" or "resolutions," which document your corporation's activities.

Also, if you elect "S" corporation status for tax purposes, make sure that your attorney or accountant makes a timely filing of this election so that Internal Revenue Service deadlines are not missed.  Your attorney or accountant should also apply for a Federal Employer Identification Number (FEIN).  This will identify your business to the IRS.

What are the advantages to incorporating?

1. Limiting your legal Liability.

Here is an example of how a corporation will insulate its owner(s) from personal liability.  If a corporation leases office or studio space, leases or purchases an automobile, office furniture, supplies, a telephone system, a photo copier, etc., and is unable to pay, it is generally the corporation's problem ("liability") and not yours.  The owner's personal assets are protected from the corporation's creditors as long as the corporation is run properly and the obligations are not personally guaranteed (for example, personally cosigning a loan or other agreement in addition to signing on behalf of the corporation). 

2. Tax Savings.

You may also find it less taxing to be in business by electing "S" corporation status.  Becoming an "S" corporation eliminates your income from being taxed twice --- once on your business profits and once more on the salary your business pays you.  Instead of paying income taxes directly to the IRS or state, an "S" corporation passes its profits or losses to the shareholder, who is usually taxed at a lower rate.  Despite these apparent advantages, check first with your accountant and/or lawyer to make sure "S" corporation status is best for your business.

3. Other Benefits. 

Some other benefits to incorporating are the employee benefit plans that are more readily available to corporations as compared to sole proprietors and partnerships.  In addition, you may find it much easier to obtain loans and other financing.  Venture capitalists, family and friends may be willing to help fund your business for a "piece of the action" (which can be done through the sale of the corporate stock).

Forming a corporation can also be good for your health --- by allowing you to set up a medical reimbursement plan.  In this way, your medical expenses can be completely covered by the corporation, and the corporation may take the deductions as a business expense.  This avoids the problem with personal limitations on medical deductions for individuals filing Schedule A on their individual tax return.

What are the disadvantages of incorporating?

As potentially beneficial as corporate status can be, there are limitations and some "downsides." Certain businesses should be aware of the Professional Corporations Act.  Anyone opening a professional business (i.e. accounting or law) which requires a license before being able to render that service is subject to this act.  You will still have to obtain all of the necessary licenses, even if you form a corporation.

Also, corporations have periodic filings with the IRS and state tax departments that most individuals do not face.  Your corporation will also have to file a report with the Indiana Secretary of State every other year and pay a modest fee and at least annual updates of your corporate book are required.

Legal fees for all of this incorporation work are usually quite reasonable.  In the long run, the value of having the incorporation done properly will be money in the bank to your business.  At Kent A. Jeffirs, Attorney at Law, we offer a FREE half hour consultation to discuss whether incorporation is right for you. You can call, email or fill out the Request Form for Free Consultation to request this FREE half hour consultation.