Certified Specialist In Taxation Law
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Certified Specialist In Taxation Law |
SHOULD I INCORPORATE MY BUSINESS Anyone doing business as a sole proprietorship should incorporate their business. While a sole proprietorship offers an easy way in which to conduct a business, it does not come without a price. The main disadvantage to a sole proprietorship is that the owner is personally liable for all of the debts of the business. Thus, not only the investment and business assets of the owner, but all of the owner's personal assets, are entirely at risk. Although this risk is usually offset at least to a degree by insurance coverage, there is always a possibility that liability may exceed the insurance coverage. Another disadvantage is that the source of capital available to the business is limited to the owner and the owner's ability to borrow funds. Essentially, the owner cannot seek investment, since any equity investment into the business by a third party would mean that the business is no longer a sole proprietorship. Conducting a business in the form of a sole proprietorship is generally recommended only when the following factors are met: The main advantage to conducting a business in a corporate form is that it affords the owners of the business limited liability. Thus, if the corporation is properly formed and the corporate formalities are observed, the extent of the shareholders' liability is limited to the amount they paid for their shares in the corporation. Likewise, directors and officers are normally insulated from personal liability for the debts and obligations of the corporation. [See Corp C § 300] Because the corporation is a separate legal entity, creditors of the corporation generally cannot look to the assets of the owners (the shareholders) to satisfy corporate obligations. The corporation is not an absolute shield, nor is it the only business entity that offers limited liability. Accordingly, the following items should be considered when evaluating the asset protection benefits of incorporation: Another main advantage to the corporate form is the ease in which additional investment into the business can be obtained. Basically, corporations may obtain investments from third party sources in exchange for the sale of stock. Although, issuing stock in exchange for an investment is relatively straightforward, certain formalities must be followed, and state and federal securities regulations must be observed. Another advantage to the corporate form is continuity of existence. Generally, a corporation will continue to exist until legally terminated. A corporation does not necessarily terminate on the death or change in its shareholders. [See Corp C § 200(c)] A regular corporation (usually referred to as a "C corporation"), is considered a separate taxable entity under federal and California tax statutes. [See 26 USCA § 11; Rev and Tax C §§ 23038, 23151] Thus, the profits and losses of a C corporation are taxed at the entity level. The shareholders are not taxed until the corporation makes a distribution to the shareholders. This is a potential disadvantage to conducting business in a corporate form: distributions treated as dividends are subject to double taxation, once at the corporate level when earned, and then at the shareholder level when distributed. The corporation does not get a deduction for dividend distributions. [See 26 USCA §§ 301, 316] In addition, losses generated by the corporation may only be deducted against income of the corporation, the shareholders may not deduct any part of the corporation's losses on their individual income tax returns.
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