By:  James Pruitt, Senior Staff Writer

Types of Incorporation

Small businesses may incorporate as corporations or LLCs as well as partnerships. The first two formats shield owners personally from various liabilities. Hence, in case of debts or lawsuits, the owner’s personal assets remain behind the “corporate veil,” generally not reachable by creditors.

Limited liability companies (LLCs) offer the tax advantages and flexibility available to partnerships. Corporations differ from LLCs in the issuance of stock. Also, corporations issue by-laws that govern their management and govern the interactions of shareholders, directors, and officers.

Relationships with their home state govern corporations. Contract (and agency) law governs partnerships. Choosing between these methods of small business formation is the first step in availing yourself of the benefits of formal recognition.

Reasons to Incorporate

Benefits of small business incorporation include (1) name protection; (2) tax flexibility; (3) perpetual existence; (4) personal asset protection; (5) deductible expenses; (6) nationwide availability; (7) and not least importantly, additional credibility.

First, as for name protection, incorporation provides exclusive access to your business name. Second, tax flexibility grants the legal advantages of the most fitting taxation scheme. Third, the small business will exist perpetually and assume an identity independent from the owners. Fourth, the assets of the business will belong to the business itself rather than the owners. Fifth, incorporation allows a process for deducting business expenses before allocating income to the owners of the business. Sixth, the business will go on the records nationwide in all jurisdictions under the relevant name. Seventh, the plain fact of credibility offers opportunities for expansion.

Where to Incorporate

Incorporated businesses must file annual reports in any state where they register or do business.

Owners usually incorporate in their home state. While large corporations sometimes avail themselves of outside states (most commonly Delaware), for a small business, incorporating locally saves time and effort.

Taxation

Different corporate tax entities can include C corporations and S corporations, in addition to LLCs and partnerships. ”C corporations” file the IRS form 1120. “S corporations” qualify for “pass through” taxation, which taxes the owners themselves for the profits of the corporation without involving corporate income tax. In other words, “S corporations” escape the double tax liability typical of “C corporations.”  “S corporations” cannot have more than 100 shareholders. An accountant or lawyer can advise the best options.

LLCs, or limited liability companies, are also subject to the same type of “pass-through” taxation. The distinction between the three types of tax entities lies in the nature of the ownership of the company, with “C corporations” generally issuing shares to large numbers of owners.

How to Incorporate

Next, choose a business structure. Options include C-class corporations, S-class corporations, or LLCs. The best option really depends on the size and ownership of the organization. Smaller organizations with limited ownership may better fit with an S-type or LLC structure. Partnerships depend on contract law, hence agreements between business owners rather than with the state.

Articles of Incorporation

C or S type corporations should have Articles of Incorporation, filed with the local Department of State. These articles determine the scope of the company and the structure of the ownership. Such a company could have a Board of Directors. Such corporations may issue public or private stock to foster growth.

Small business owners who choose the C or S corporation route should not confuse articles of incorporation with bylaws, which are rules governing the day-to-day running of the company. Both articles of incorporation and bylaws are generally filed with the relevant office of the Secretary of State.

Should a small business owner choose to incorporate as a partnership, they need not file documents with the state. An LLC, on the other hand, should file “articles of organization.”

After Incorporation

Employers generally apply separately for an employer identification number, for employee entitlements such as unemployment. Next, one should obtain any necessary business licenses and permits. Finally, after the actual incorporation, the owners of a new business should draft bylaws and operating agreements to govern the day-to-day functioning and scope of business operations,

Incorporation v. Partnership

Legally, state governments control the status of corporations. Contract law between business owners governs partnerships. A limited liability corporation (LLC) may opt to file the paperwork for treatment as a separate entity from the owners. Hence, the owners may protect their assets in debt collection. In conclusion, the best choice between a C or S corporation, partnership, or LLC depends on a variety of factors, including the number of owners, their status, the relationships of each owner, and plans for the future and scope of the company.

VAMBOA, the Veterans and Military Business Owners Association is pleased to announce that James Pruitt will be contributing articles to our blog as a Senior Staff Writer.  James Pruitt is an independent copywriter and editor specializing in legal and health-related issues. He received his master’s from the University of Chicago and his bachelor’s from UC Berkeley. He currently resides in Thousand Oaks, where he pursues his passions in gardening, cooking, and spoiling his mixed Maine Coon cat, Russell.

By Debbie Gregory.

Whether you are just starting a business or thinking of changing your business structure, a common first step is comparing the types of business structures. While a Limited Liability Company, a C Corporation and an S Corporation share some characteristics, they also have distinct differences. You should spend the time getting familiar with each type before deciding which one might be right for you.

Most small businesses are usually either a sole proprietorship or simple partnership. In both of these cases, the business taxes are part of the individual’s taxes. There are three major types of business entities that classify the business as its own “person”– a C Corporation, an S Corporation, and an LLC (Limited Liability Company).

Some business and certain tax rules are unique to the type of entity that you choose for your business. Read below for more information on each and always check with your accountant.

C Corporations

A C Corporation is taxed at a flat 21% regardless of how much business they conduct or money they make. Additionally, C Corporations help create personal liability protection for the owners of the business. They are designated to the public with extensions such as inc, corp, or ltd.

This type of corporation can issue stocks that when held for more than five years, they entitle the seller to tax-free gains. Raising capital is also very easy for a C Corporation as compared to the other business types because they issue stock in exchange for the funds raised.

The major downside to a C Corporation is double taxation. All business earnings are taxed and paid for by the business however, the income received by the business owners is not deductible and they must claim and pay income taxes on the salary they take from the business on their personal taxes.

C Corporations are separate taxpaying entities and file their own very specific tax forms every year to the IRS.   These C Corporations can actually choose to be taxed as an S Corporation to help offset the double taxation by utilizing income pass-through to the owners, so they report their share on their personal taxes. This way the business and the business owners pay between 10 and 37% depending on the individual.

S Corporations

S Corporations also help create personal liability protection for the owners of the business. They are designated to the public with extensions such as inc, corp, or ltd – the same as C Corporations. An S Corporation also has the ability to allow up to 20% total business income deductions.

S Corporations are required by law to adopt and maintain certain formalities and they have extensive rules in place for how the business can be managed. They include by-laws, operating agreements, issuing stocks, membership shares, holding director and shareholder meetings, keeping meeting minutes and other extensive records.

LLC (Limited Liability Company)

An LLC has many advantages for business owners. As an LLC, you can elect to be taxed at the flat C Corporation rate, which can be very beneficial if the business owner is not qualified to use certain income deductions. This type of business entity also helps you avoid the double taxation issue of the C Corporation as the LLC is taxed a lot more like a sole proprietorship. This type of business also provides you good liability protection and some pass-through taxation, just like the C and S Corporations.

Another benefit of the LLC structure to a startup is that once you have set it up, there is not any need for continual maintenance. It is also easy to add new partners or sell interest in the entity to someone else.   An LLC can have an unlimited number of members whereas S or C Corporations can only have a maximum of 100.

The downside to an LLC is that there is a minimum tax regardless of how much business you conduct. If you make zero dollars or ten thousand dollars you still owe that minimum tax.

The choice of business entity is a complex matter and you need to take into consideration both state and federal tax matters as well as any other issues and non-tax considerations (personal liability protection, raising capital, etc.). As with any major changes to the overall structure of your business, as well as the tax implications of any changes, we highly recommend consulting a tax, financial, and/or business professional before making any changes.

By Debbie Gregory.

VAMBOA is delighted to announce the addition of Brigadier General (Ret) James E. Shane to our Board. Jim has extensive executive management experience in business, marketing, communications, strategic planning, and public policy.

Jim’s experience includes twenty-eight years of leadership and executive management experience as a Senior Army Officer serving in high level leadership and decision-making positions. Jim spent eleven years working with state and federal elected leaders in the Commonwealth of Kentucky. His personal leadership style places a high priority on developing subordinates, recognizing excellence, and team-building to maximize individual and organizational performance.

Jim was also the President and CEO of Shane Business Enterprises, LLC, a small Veteran Owned Business that provided consulting services to businesses seeking to work with the defense industry. Additionally, he was the CEO of Mobile Armored Vehicle (MAV) which designed, manufactured and sold Armor Protected Vehicles to the U.S. and foreign governments.  Jim understands the challenges of entrepreneurship.

Stay tuned for his bio on the site and a forthcoming press release.

By Debbie Gregory.

A new pack-frame design using ground-breaking technology could be a game-changer when it comes to reducing fatigue.

Lightning Packs, LLC has developed a patented pulley/bungee cord system that allows it to slide up and down on a mounting of metal rods. This reduces impact forces on the user by 80 to 90 percent, and reduces the metabolic energy requirement by 40-80 watts. This allows a wearer to carry an extra 8-12 pounds “for free.”

When people walk, their hips move up and down by as much as seven centimeters, which normally causes a backpack to bob up and down, too. That is bad news for the joints and back, because on its downswing the pack exerts added force on the wearer. A 50-pound load, for example, can slam down with 80 pounds of force when a person is walking and up to 150 pounds when running, says Lightning Packs’ founder Dr. Lawrence Rome.

A video on the company’s website demonstrates that when the pack is in the locked position, it bobs up and down as a normal pack would. But when the pulley system is activated, the pack appears to “float.” As a person’s hips rise, the mounting raises as well, but the bungee cords let the load dip down, limiting its movement.

“We first designed, built under contract, and delivered a series of ergonomic and electricity-generating backpacks for personnel of the United States Army and Marine Corps,” according to the company’s website. “The ergonomic benefits of our design have been field-tested and approved by soldiers themselves,” the website states.

What was originally designed for the military and rescue workers could be a game-changer for consumers, especially for parents who have long been concerned  about the effects on the spines of their school-aged children who carry heavy loads of school books.

The company will be launching a Kickstarter campaign to raise funding for the consumer version, the “Hoverglide,” sometime in September. The Hoverglide will be offered in several models for backpacking, commuting and light hiking. There will also be a tactical model which is about the size of a standard daypack or assault pack.