Reduces Personal Liability
A corporation is a separate person from the one or ones who own it. Therefore,
when a corporation is sued, there are provisions in the law to protect the
owners (shareholders) and mangers (officers and directors) from personal
liability. Once you do business with the public or have even one employee, you
are wide open to legal liability. Year after year there are thousands of us who
lose nearly everything we have due to personal liability with our
unincorporated businesses. In addition, once you do incorporate it is important
that your business follows certain, relatively simple, formalities so that it
looks and acts like a corporation. It is reported that the United States has
just five percent of the word's population and yet 70% of the world's lawyers.
Legal experts agree that there are literally millions of lawsuits filed in the
U.S. every year that would not be pursued overseas. Many of these lawsuits are
filed by lawyers who must litigate just to survive. In addition to an
overabundance of lawyers, the U.S. is one of the only civilized countries in
the world that does not have a "loser pays" legal system. In other countries of
the world, such as Canada and England, for example, the one who loses a lawsuit
pays his or her own legal fees as well as those of the opponent. However, in
the U.S. this scenario is much different. Even if a party to a lawsuit wins, he
or she is still out his or her own legal expenses. What this means is that in
the U.S. even if a defendant in a lawsuit wins he or she still loses. A
corporation can provide a legal shield between your business life and your
A corporation has greater credibility in the eyes of many customers and lenders
than does a sole proprietorship or partnership. When you have taken the step to
incorporate it is perceived that you have long-range plans for your business.
Because of the added trust, his may increase the likelihood that customers and
lenders will be willing to part with their money. In this regard, a corporation
may, indeed, increase your profits and ability to expand.
There are more tax deductions available to corporations than to businesses that
are not incorporated. A few examples include medical expenses, pension plan,
business trips and entertainment. It is reported the group with the highest
percentage of tax audits is the one that includes the Schedule "C" form filed
by the self-employed. The audit rate for corporations is much lower than the
self-employed. You may own and be employed by your corporation at time same
time, thus, eliminating the Schedule "C" self-employment return from your list
of filed IRS tax documents. The IRS seems to give preferential treatment to
corporations with regard to tax deduction. Deductible Employee Benefits.
Deductible Employee Benefits
Forming a corporation provides for a wide-array of tax deductions for you and
your employees. Even a one-person corporation can enjoy tremendous tax
deductible benefits such as health insurance deductions, travel deductions,
automobile deductions, entertainment deductions, recreational facilities and
many more. One of the most beneficial deductions is the pension plan or 401K.
Money placed in a properly structured pension plan is tax deductible and the
funds grow tax-free for retirement. These outstanding benefits alone can pay
for a corporation many times over.
Owning an asset in your own name, such as a business, an investment property or
an automobile, provides an easy target for one performing an asset search.
Before initiating a lawsuit, it is quite common for an attorney to perform an
asset search. If no assets can be located in your name this may decrease the
chance that litigation will be pursued. Placing assets in the name of a
corporation or limited liability company may provide a cloak of privacy between
you and those contemplating legal action against you. This privacy is enhanced
when "nominee" officers and directors are listed. With the General Corporate Services Nominee Privacy Service, you retain ownership and control of your
company. However, you elect General Corporate Services representatives (who have no
control or ownership of your company) to be listed as officers and directors in
the public records.
There is a greater source of capital available to corporations than to
partnerships or proprietorships. Because the corporation is separate from the
owners, people tend to be more willing to invest money without accepting
liability or responsibility for company business. The Forbes 400 list of
wealthiest Americans are full of individuals who hold the highest percentage of
their wealth through ownership of stock in corporations they or their family
members started. Many sole-proprietorship or partnership businesses are sold
for one to two times annual earnings. Whereas, many corporations are valued at
between 12 to 25 times annual earnings or more.
Separate Legal Entity Status
Because you and your corporation are two separate legal entities, lawsuits
brought against your business do not need to affect you personally. When the
corporation borrows money, there are measures such that you are not personally
liable to repay the debt. A corporation remains after the life of the owner(s).
However, a sole proprietorship ceases to exist after the life of the owner.
Broad Range of Powers
A corporation may engage in any lawful activity, including, but not limited to
Has the power to hold, purchase and convey real
property and personal property and to mortgage or lease any such real and
personal estate with its authorization. A corporation has the power to hold
real and personal property in any state, territory or country.
Has the power to make contracts.
May exist continuously, even after the death of the
Has the power to borrow money when necessary for the
transaction of its business, or for the exercise of its corporate rights,
privileges or franchises, or for any other lawful purpose of its incorporation.
A corporation can issue bonds, promissory notes,
bills of exchange, debentures, and other obligations and evidences of
indebtedness, payable at a specified time or times, or payable upon the
happening of a specified event or events, whether secured by mortgage, pledge
or otherwise, or unsecured, for money borrowed, or in payment for property
purchased, or acquired, or for any other lawful object.
Has the power to sue and be sued in any court of law
Has have power to appoint such officers and agents as
the affairs of the corporation shall require, and to allow them suitable
Has the power to make By-Laws not inconsistent with
the constitution or laws of the United States, or of the State in which the
corporation is formed, for the management, regulation and government of its
affairs and property, the transfer of its stock, the transaction of its
business, and the calling and holding of meetings of its stockholders.
Has the power to wind up and dissolve itself, or be
wound up or dissolved.
Has the power to adopt and use a corporate seal or
stamp, and alter the same at pleasure.
Has the power to guarantee, purchase, hold, sell,
assign, transfer, mortgage, pledge or otherwise dispose of the shares of the
capital stock of, or any bonds, securities or evidences of the indebtedness
created by, any other corporation, while owners of such stock, bonds,
securities or evidences of indebtedness, to exercise all the rights, powers and
privileges of ownership, including the right to vote, if any.
Has the power to purchase, hold, sell and transfer
shares of its own capital stock, and use therefore its capital, capital
surplus, surplus, or other property or fund.
Has the power to conduct business, have one or more
offices, and hold, purchase, mortgage and convey real and personal property in
any of the several states, territories, possessions and dependencies of the
United States, the District of Columbia, and any foreign countries as allowed
Has the power to do all and everything necessary and
proper for the accomplishment of the objects enumerated in its certificate or
articles of incorporation, or any amendment thereof, or necessary or incidental
to the protection and benefit of the corporation, and, in general, to carry on
any lawful business necessary or incidental to the attainment of the objects of
the corporation, whether or not such business is similar in nature to the
objects set forth in the certificate or articles of incorporation of the
corporation, or any amendment thereof.
Has the power to make donations for the public
welfare or for charitable, scientific or educational purposes.
Has the power to enter into partnerships, general or
limited, or joint ventures, in connection with any lawful activities, as may be
allowed by law.
Small Claims Court
A corporation may send an officer, director or an employee to represent the
corporation in most small claims courts. Unlike a sole proprietorship, this can
free up the time of the owner to operate the business while employees take care
of legal matters.
Separate Liability for Corporate Debts
A corporation is separate from those who own it. If the corporation loses a
lawsuit or has a debit it cannot pay, the corporation itself is responsible.
The corporation can provide a strong shield to protect the personal assets of
the officers, directors and shareholders. In contrast, with a sole
proprietorship or partnership, the owners can lose personal assets in a
business lawsuit. If the officers and/or directors have personally guaranteed
corporate debts, of course, they can be held liable. In addition, the
corporation must be established and operated properly for the corporate shield
to remain in place. For maximum protection, it is legally prudent to treat the
corporation as a separate legal entity. For example, it is important to pay
corporate expenses with corporate money (or be sure the corporation promptly
reimburses you for business expenses if you have paid them personally).
Conversely, you would not pay your personal electric bill with corporate money.
Instead, the corporation pays you a salary from the corporate checking account
(which is a tax-deduction for the corporation). You deposit your salary check
in to your personal checking account and use those funds to pay your personal
A Corporation continues its life after the death of the owners. Hudsons Bay
Company (HBC), for example, was founded in 1670, and is still in operation
today. HBC currently operates a large chain of department stores. General
Electric Company was founded by Thomas Edison in 1882 and is one of the world's
largest corporations today.
Duration of Corporation Compared to LLC
Unless the operating agreement says otherwise, the life of a limited liability
company may be limited upon the death, withdrawal or bankruptcy of a member.
The laws of many states allow a limited liability company to have perpetual
Disadvantages of Incorporating
A corporation is formed when properly drafted documents are filed in the
jurisdiction of incorporation.
Corporations have shareholders, officers and directors. One person can hold all
positions in most states. A corporation is also required to hold annual
shareholders and directors meetings. Personal and corporate funds should not be
commingled in the same account. If corporate formalities are not followed
(e.g.. the corporation is not treated like a separate person from the owners),
many states allow the owners, officers or directors to be held liable debts of
the corporation. Corporate formalities, while necessary, are typically quite
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