Incorporate Your Business: When To Do It And How

CHAPTER 1 Why Should I Incorporate My Business? 1

What a Corporation Is, and What It Is Not 3

Who Starts and Who Owns a Corporation? 4

Reasons to Incorporate Your Business 5

Limiting Your Liability for Business Debts 5

Liability of Stockholders Who Are Also

Employees of Small Corporations 7

Save Payroll Cash by Incorporating 9

Tax Savings 10

Prestige of a Corporation 10

Ease of Transferring Ownership 10

Reasons Not to Incorporate Your Business 11

Corporations and Other Business Forms Are

Too Complicated 11

Corporations Cost Too Much to Set Up and Operate 12

My Business Is Too Small to Incorporate 13

A Corporate Form Does Not Entirely Protect Professionals 13

CHAPTER 2 How Incorporating Can Result In Tax Savings 15

Tax Savings In a Corporation? Maybe 15

The Organization of this Chapter 16

An Example of Tax Saving from a Corporation 16

Some Background, Concepts, and Explanations 17

How Your Business Tax Picture Changes When You Incorporate 18

How a Sole Proprietorship Is Taxed 18

How a Corporation Is Taxed 21

Double Taxation of Corporate Profits 23

How to Cope with Double Taxation of

Your Corporation 24

Pay Dividends Between May 6, 2003 and December 31, 2008 24

Keep Earnings in the Corporation 24

Pay Salaries to Stockholders/Employees 25

The IRS Position on Salary Levels for Stockholder/Employees 26

Pay Interest to Stockholders 28

Alternative Minimum Tax on Corporations 29

What If the Corporation Has a Net Loss Instead of Net Taxable Income? 30

S Corporations 31

How Stockholders Take Profits out of an S Corporation 32

The Disadvantages of an S Corporation 33

Type of Stockholders 33

Number of Stockholders 34

Use of the Corporation’s Loss, If It Has a Bad Year 34

Flow-through of Certain Tax Attributes to the Stockholder 35

S Corporations Are Limited to One Class of Stock 36

When to Use an S Corporation 37

CHAPTER 3 The Alternatives to Forming a Corporation 41

Sole Proprietorship 41

General Partnership 42

Limited Partnership 43

Limited Liability Company (LLC) 43

Other Entities With Limited Liability of the Owners 45

Passive Losses 46

Which Business Form Best Attracts Investors to Your Enterprise? 47

CHAPTER 4 How to Structure a Corporation 51

The Basic Corporation 52

Assets, Liabilities, and Equity 52

How to Invest In Your Corporation 54

Debt versus Equity 58

The IRS Position on Debt versus Equity 60

How to Invest In Your S Corporation 61

Keep Control of Your Corporation If Possible 62

CHAPTER 5 Planning Your Corporation 65

Do-It-Yourself Incorporation 65

Using Professionals 66

Choosing an Attorney 67

Choosing an Accountant 67

Planning the Specifics of Your Corporation 68

Decide on the Size of the Initial Investment in the Corporation 68

Size Your Investment to Qualify for Treatment as a Small-business Corporation 70

Who Will Be the Owners (Stockholders) of Your New Corporation? 71

Determine How Many Shares of Stock Will Be Authorized and Issued 72

Determine What the Price per Share of Stock Will Be 74

Determine Who Will Be the Directors and Officers, and Assign Duties 77

Prepare a Pre-incorporation Agreement 79

Determine Who Will Be the Incorporator(s) 79

Select a Resident Agent for Your Corporation 80

Have All Prospective Stockholders Sign a Stock Subscription 81

Determine the State in Which You Will Incorporate 82

Choose a Name for Your Corporation 85

Determine If You Can Use a Simplified Procedure 88

Prepare a Pre-incorporation Agreement 89

Prepare a Stockholders’Agreement 90

CHAPTER 6 Steps to Create and Run Your Corporation 93

Steps to Forming Your Corporation 93

Initial Action the Incorporator(s) Should Take 93

Hold Organizational Meetings 99

Organizational Meeting of the Stockholders 100

Organizational Meeting of the Board of Directors 100

Register Your Corporation with the Internal Revenue Service (IRS) 100

Register Your Corporation with Your State’s (and Any Foreign State’s) Tax Authorities 101

Elect S Status for Your Corporation If That Is Your Decision 102

Pay Particular Attention to the Initial Corporate Income Tax Return 102

Steps to Keep Your Corporation Alive 103

Hold the Annual Stockholders Meeting Every Year 104

Hold an Annual Board of Directors Meeting Every Year 104

Special Meetings of the Board of Directors (or of Stockholders If There Is No Board
of Directors) 105

Live Your Corporate Life as If You Meant It 105

Nonprofit Charitable Organizations 106

APPENDIX A Useful Forms 107

APPENDIX B Useful Addresses 213

APPENDIX C Short Course in Corporate Finance Terms 227

APPENDIX D Glossary 231

INDEX 239