Issues to Consider When Choosing to Incorporate

Selecting your business structure is one of the most important decisions you will make.  You should take the time to consider all of your options before selecting a business structure.

When you create a corporation you are creating an entity that is completely separate from the owners and shareholders.  The corporate entity will continue to exist until dissolved.  It is this separate entity status that provides the protection to shareholders from corporate debts and liabilities. This liability protection is often the primary reason for selecting incorporation.

One of the first decisions to be made is the name of the business.  When forming as a corporation you must include Corporation, Company, Incorporated or an abbreviation of one of these in the name of the business.

It is important to be familiar with any state or local requirements for the business you intend to run.  Are there professional license requirements that exist?  Hairdresser, employment agency or real estate agent are just a few of the businesses that have licensing requirements.  You will also need to check with the city for any permits that are required.  For example, a restaurant will need a permit from the local health department and a liquor license if they offer alcoholic beverages.

If the business will be involved in transactions that are subject to sales tax the seller must obtain a sales and use tax permit.  The margin tax became law effective 1/1/08 replacing the franchise tax.  With the margin tax there is a presumption of taxability.  Sole proprietorships, general partnerships owned by natural persons, and certain non-profit and investment entities are excluded from the tax.  The margin tax is a tax on the gross profit margin of the business.

One of the drawbacks to forming a corporation is that corporations must pay taxes on their profits.  This creates a double taxation situation that is quite noticable to the small organization.  One way to address this is with an S corporation election.  This result is the corporation will be taxed under partnership rules.  The corporate income is allocated to the shareholders and taxed on their individual tax returns.

There are disadvantages to electing S corp status.  Converting from an S corp or distributing property from an S corp are both taxable events.  S corps are not allowed to allocate income, deduction, gain or loss among their shareholders.  S corps are also limited in the number and types of shareholders they can have.

A discussion with an attorney and CPA will help determine if a corporation is the right step for your new business and whether you should consider the S corporation election.

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Law Offices of Debbie J. Cunningham

Debbie Cunningham is an Irving attorney providing affordable estate planning to the Dallas/ Fort-Worth areas. She understands the steps you should take to protect yourself and your loved ones. Debbie is family-focused and wants to ensure her clients are fully informed on the options that are available for their families. Debbie’s own blended family has given her valuable insights into the complexities of family dynamics.

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