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ABCs of Small Business Incorporation

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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.

 

Veterans Day 2019

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By Debbie Gregory.

LinkedIN Debbie Gregory VAMBOA VAMBOA Facebook VAMBOA Twitter

 

This Monday, November 11th we celebrate Veteran’s Day.  I am the proud daughter of a Veteran who made the ultimate sacrifice and served with seven of his brothers.

 

I believe that the word “Veteran” needs to be expanded to celebrate all the men and women who serve, past and present, every day of the year in all the uniformed services.  They make incredible sacrifices so that the rest of us can live and prosper.   They are true patriots and write a blank check up to and including their lives.

 

Those that sacrifice so much include every man and woman who has served or is serving in our Armed Forces and Uniformed Services.  These include members of the United States Army, the United States Navy, the United States Air Force, the United States Marine Corps, the United States Coast Guard, the United States Public Health Service Commissioned Corps, the National Oceanic and Atmospheric Administration Commissioned Officer Corps.  Our United States military men and women operate in more than 10 countries too.

 

We must also honor our citizen soldiers who serve in the United States National Guard and Reserves and deserve to be honored as much as our active duty and Veterans.

 

Many people don’t know that those who serve in the National Guard and Reserves can and do dual duty.  They usually work in a civilian job and can be called upon in their home states, but they are also activated and deployed overseas to the Middle East and other countries.

 

A huge percentage of our currently deployed military are members of the National Guard and Reserves.   These citizen soldiers and their loved ones don’t have the full support system that is provided to regular military stationed on military bases.   Being citizen soldiers, they also face huge financial challenges to serve and are often underemployed.

 

On this Veterans’ Day, we need to include everyone and think of ways we can do better by them.   Many are not receiving proper healthcare or must wait too long for it.  Wellness, especially mental wellness, must be a priority especially with so many Veterans committing suicide.  One size does not fit all when it comes to solutions.  We need to work together to find solutions for everyone and dedicate ourselves to those doing more for who have sacrificed so much for us.

 

On Monday, November 11th and every day, think of doing a small random act of kindness that can make a huge difference.  It can be as simple as volunteering at a Veterans home or doing some “honey do” things for the spouses of deployed Veterans or helping coach or tutor their kids.  It might involve donating money or goods to a Veteran charity, driving a Veteran, or just telling a cashier that you want to pick up a Veteran’s tab.    We are losing almost 2,000 Veterans a day from “the Greatest Generation” and preserving and listening to their stories and memories is part of our history.  You might find that supporting those who serve enriches your life too.

 

Be there for those who serve and have served because they are and have been there for all of us.  Never forget them and remember, there is more that unites us as Americans than divides us.

 

Debbie Gregory

CEO – VAMBOA, Veteran and Military Business Owners Association

Vice-President & Producer, “America Salutes You”, a nationally televised annual concert

Director of Employer Engagement, California ESGR

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