!!

A Guide To Incorporating Your Startup Forming a C Corporation, S Corporation or LLC

LawTrades.com Benefits of Incorporation - How to Maintain a Corporation - C Corps v. S Corps v. LLCs

Introduction 3 ...................................................................Sole Proprietorship 3 ...........................................................................................................

General Partnership 4 ..........................................................................................................

Corporations 4 .....................................................................................................................

S Corporations v. C Corporations 4 ....................................................................................

Advantages of Incorporating Your Business 6 ..................Limited Liability 6 ................................................................................................................

Tax Savings 6 .......................................................................................................................

Perpetual Existence 7 ..........................................................................................................

Accessing Loans and New Revenue 7 .................................................................................

Increased Business 7 ..........................................................................................................

Ease of Transfer 8 ................................................................................................................

Operating a Corporation 9 ...............................................Shareholder and Director Meetings 9 .................................................................................

Separate Business Finances 9 ..............................................................................................

Annual Reports 9 .................................................................................................................

Tax Returns 9 ......................................................................................................................

Limited Liability Companies (LLCs) 10 ..............................Limited Liability Company (LLCs) Compared to S-Corporations 10 ....................................

Where to Incorporate 12 ..................................................

LawTrades Incorporation Service 13 .................................1. Get Introduced 13 ...........................................................................................................

2. Compare 13 .....................................................................................................................

3. Hire 13.............................................................................................................................

Table of Contents

Introduction !Every startup founder considers whether or not to incorporate his or her business at

some point. The legal entity you choose for your startup may be changed; you can

change the legal structures of your business as it expands. A common scenario is for

small businesses to start out as partnership or sole proprietorship and become

incorporated at some point later when the business has grown.

Incorporating a startup has many benefits for the founders. When a company or a

business turns into a corporation, it becomes a legal entity separate from the

individuals who own it. It has the same legal rights as the individual, but these are also

separate from the owners.

Incorporating a startup gives a long lasting business basis. For instance, if there were

only one owner of the business, the demise of that owner would usually mean the end

of the business. It could additionally mean legal battles with relatives and family

members who could claim legal rights to the business. Incorporating the business

means that it can continue regardless of the death of any shareholders, managers, or

executive officers. What’s more, the ownership of the company can be transferred by

selling stocks in the corporation.

Sole Proprietorship A sole proprietorship is a form of business owned and managed by one person. Sole

proprietorship is one of the simplest and easiest businesses to start. It’s also the most

common and widespread form of business all over the world. Major characteristics of

this form of business organization include: The owner contributes all the capital plus

other resources, the owner gets all the business benefits, and lastly the owner shares all

the debts and obligations.

However, even with the low starting capital and simple operation, other factors can

make sole proprietorship the most expensive business type in the long run. First, you

are personally liable for all the business debts since your business liability is unlimited.

Second, you may not be enjoying the benefits of a variety tax savings, such as the

power to reduce self-employment taxes. Lastly, when it comes to passing on or selling

your business, it can’t be done. This form of business cannot continue beyond the

death of the owner.

General Partnership Partnership is a relationship that it exists between two or more individuals jointly

carrying out business with the aim of making a profit. There are two types of

partnership that on can operate namely Limited Partnership and general Partnership.

A general partnership is one in which all the members of the business have unlimited

liability. Limited partnership is one in which the liabilities of some members is limited to

the amount of capital they originally put in the business. Just like the sole

proprietorship, when the owners of a general partnership die that marks the end of the

business. In addition, if they fail to repay their debts in time, all their assets can be sold

to account for the debts.

Corporations A corporation is a separate legal entity that has been incorporated either directly

through a registration process or through legislation established by law. The key

benefit of a corporation is that its owners (shareholders or stakeholders), are not

personally liable for the liabilities and debts of the corporation.

Despite not being human beings, corporations are legal persons and have many of the

same legal rights and responsibilities as normal human beings do. Corporation can

exercise human rights against the state and real people, and they can themselves be

liable for human rights violations. Corporations can own and operate a business, buy

and sell goods and services, hire employees, enter into contracts, lease or buy real

estate, maintain its own savings and checking accounts, and sue and be sued. A

corporation is not affected in any way by the bankruptcy or death of any stakeholder,

director or officer. Instead, it continues to operate as long as it complies with the

corporate formalities and state requirements.

S Corporations v. C Corporations Small business owners and startups usually choose from these two basic types of

corporations. The C Corporation is the most dated of the arrangements, and is more

often employed by large companies. With a regular corporation, the company’s losses

or profits are directly absorbed into the business. On the other hand, with the S-

Corporation, the business’s losses and profits are usually directed to the company’s

stakeholders.

The S-Corporation option was actually put in place by the federal government in

recognition of the fact that the working challenges faced by large businesses and small

businesses can actually be very different. As a matter of fact, the S-Corporation was

actually designed specifically for small business owners. S-Corporations give their

owners the limited-liability protections offered by corporate status, while also providing

them with a more beneficial tax environment. Indeed, S-Corporation status puts

businesses in the same basic tax state as sole proprietorship and partnerships. On the

other hand, the C-Corporations are subject to double taxation, profits registered by an

S-Corporation are only taxed once, when they reach the company’s stakeholders.

!

!

!

!

!

!

Advantages of Incorporating Your Business !Limited Liability The main advantage to incorporate your company is the limited liability of the

incorporate company. Unlike the sole proprietorship or the general partnership, where

the business owner assumes all the debts and liability of the business, when a company

becomes incorporated, a person’s shareholder’s liability is limited to the amount that

he/she has invested in the company.

!If you are a sole proprietor, your personal belongings, such as your car and house can

be seized to settle the debts of your business; as a stakeholder in a corporation, you

cannot be held responsible for the liability and debts of the corporation unless you

have given a personal guarantee.

!In addition, a corporation has the same rights as a person; a corporation can incur

liabilities, sue or be sued, own property and carry on business.

Tax Savings A general partnership or sole proprietorship will also miss out on some vital tax

advantage available to corporations. The following are some of the tax advantages that

you will get when you decide to incorporate your business:

Reduction in self-employment tax- When you work as a sole proprietor, your first

113,100 dollars of earnings for tax in the year 2014 is subject to self-employment taxes,

that is Medicare and Security, which is currently a combined 15.3 percent. With a

corporation, the only thing subject to taxes is salaries. You can generate significant tax

savings by allocating a corporation’s earnings between a reasonable salary and profit.

Medical Expenses- C-Corporations can offer medical compensation plan for their

owners, employees and officers, which allows you to subtract medical expenses not

covered by insurance. With a sole proprietorship or general partnership, medical

compensation plans may cover employees, but not the owner. Thus, uncompensated

medical costs are deductible only if they exceed 10 percent of AGI (adjusted gross

income).

Retirement plans and fringe benefits- There are quite a number of fringe tax benefits

that one can get when he or she incorporates his or her company. For instance, a

corporate tax-deferred retirement plans such as define benefits plans and define

contributions, can have higher contributions limits and can be more flexible.

Corporation are additionally allowed to pay for and deduct certain childcare expenses,

group disability insurance premiums, term group life insurance premiums, and certain

travel costs associated with shareholders’ and directors’ meetings.

Perpetual Existence Corporations and LLCs continue to operate throughout management or ownership

changes within your company. General partnerships and sole proprietorship simply end

if an owner leaves the business or dies. Forming a corporation ensures that your

business’s legacy can be preserved, as well as continue to provide services for clients

and employment should any changes in ownership take place.

Accessing Loans and New Revenue A general partnership or sole proprietorship depends on small loans and trickling

revenue streams to stay alive in different times. On the other hand, an incorporated

company can seek out larger loans from commercial banks that look at articles of

incorporation as signs of future success. Corporations can also seek raise more money

by using IPOs (initial public offerings) and additional offerings to selected investors.

Increased Business Having Corp, Inc., or Ltd. As part of your business’s name may increase your company’s

earnings, as people perceive corporations as being more financial stable than

unincorporated businesses. For example, if you are a contractor, you may also find that

some companies will only work with incorporated companies, because of liability

issues.

Ease of Transfer Ownership of the business can be transferred easily and fairly by simply selling stock.

On the other hand, a sole proprietorship or general partnership cannot be sold as a

whole. Instead, each of its permits, licenses and assets must be personally transferred.

!!!

!

!

!

!

!

!

Operating a Corporation !In order to operate and maintain your corporation properly to ensure personal liability

protection, you will be required to comply with certain corporate formalities. Some of

the most vital ones include:

Shareholder and Director Meetings Corporate stakeholders must meet annually to elect corporate directors. Directors are

also obliged to meet at least once yearly to elect corporate officers. You may

additionally be required to hold special meetings to approve special actions, such as

amending charter documents, purchasing another company, approving actions that fall

outside if the formal line of business and adding a new shareholder. During these

meetings, written minutes are always taken which record the actions that take place in

the meeting.

Separate Business Finances Due to the fact that a corporation is a separate legal entity, corporate finances should

be kept separate from your own personal moneys. It’s important to have a corporate

bank account, and you will also be required to have a separate EIN (Federal Tax ID

Number).

Annual Reports After the initial government fillings, most states require a yearly report that outlines the

names of the officers and directors as well as the corporations’ business address.

Basically, the state needs a filing fee with the yearly report.

Tax Returns Corporations are also required to file a federal corporate tax return, either on Form

1120 for C-Corporations or Form 1120S for S-Corporations.

!

!

Limited Liability Companies (LLCs) !A limited liability company is a hybrid form of legal structure that provides the

operational flexibility of a partnership and the limited liability features of a corporation

and the tax efficiencies.

Unlike stakeholders in a corporation, LLCs are not taxed as a separate business entity.

Instead, all losses and profits are passed through the business to each member of the

limited liability company. Just like the owners of partnerships, LLCs members report

losses and profits on their personal federal tax returns.

Limited Liability Company (LLCs) Compared to S-Corporations Less corporate formalities- corporations must hold meetings of the shareholders and

board of directors regularly and keep written corporate minutes. Conversely, the

managers and members of a limited liability company need not to hold regular

meetings, which reduces paperwork and complications, unless they chose to do so.

Simple Management Structure- Limited liability companies are not obliged to have a

formal board of directors. The owners and officers of a limited liability company can

make all vital company decisions directly.

Real Estate and Passive Income- A pass through tax structure should to be used to

reserve the advantages of capital gains treatment for asset distributions. Limited

liability companies have become the business entity of choice for real estate

investments as well as other passive income generating activities.

No ownership Restrictions- S-Corporations are not allowed to have more than 100

stakeholders, and each stakeholder must be a citizen or resident of the US. Such

restrictions do not apply on an LLC.

!

Greater Acceptance of Corporations- since LLCs are still relatively new on the market,

not everyone is well acquainted with them. In some cases, vendors or banks may be

reluctant to extend credit to a limited liability company. What’s more, some states

restrict the forms of business a limited liability company may conduct.

Potential Tax Disadvantage- By default, a limited liability company is usually treated as

a pass through entity for tax purposes, like a partnership or sole proprietorship.

Unfortunately, a limited liability company does not enjoy the same self-employment tax

savings as an S-Corporation. Instead, a single member limited liability company must

pay self-employment tax on both profit and salary. A limited liability company can,

however, make an election with the IRS to be taken as a corporation for tax purposes,

whether as an S-Corporation or C-Corporation.

!!

!

!

!

!

!

Where to Incorporate !Businesses often choose to incorporate in the state where they are residing since you

don’t have to pay extra for a registered agent. But sometimes it makes sense to form

your corporation in a different state. For example, many high growth technology based

startups incorporates their C Corp in Delaware because it has a very efficient court

system that favors businesses and corporate law. There’s also some more administrative

ease than some other states and generally just garners a level of credibility with

investors and potential partners.

!

!

!

!

!

LawTrades Incorporation Service !If you’re a startup founder, you need to protect your personal assets. Incorporating

your startup is one of the ways to do that. It will provide your with greater business

flexibility, save money in taxes, and make it much easier to attract investors and raise

capital.

LawTrades makes forming a corporation straight forward and more affordable than

using traditional law firms. Simply tell us about your business and receive instant

quotes from experienced startup lawyers starting as low as $379 plus state fees.

1. Get Introduced Within minutes of telling us your legal need, we’ll introduce you to several lawyers who

can complete your legal job.

2. Compare Each lawyer introduction will include a free consultation, transparent price quote, client

reviews, law office profile, and contact info.

3. Hire Each lawyer introduction will include a free consultation, transparent price quote, client

reviews, law office profile, and contact info.

!!!!To learn more about the LawTrades Incorporation service or to get started, call us at

(646) 470-5298 Monday-Friday from 9:00am-9:00pm and Saturday from

10:00am-6:00pm EST.