If you own a small business or are in the process of creating a new business, you may have been advised to incorporate.Laws look upon corporations as separate persons or entities from the owners or shareholders, and can therefore provide some protection from seizures, claims, and legal liability.
But there are frequent misconceptions about the protections that an S-corporation can provide for a small business.Deciding on the structure of your business is a momentous decision.Be sure to research your options thoroughly before deciding on a course of action.
What is the difference between an S-Corporation and a Limited Liability Company?
An S-Corporation is the most basic level of business incorporation available.It is designed as a tax flow-through structure for small companies having less than 100 shareholders.A Limited Liability Company (LLC) provides the same type of tax structure but is set up more like a partnership agreement.
Five Myths About Incorporating
- “If I incorporate, I won’t have to pay as much in taxes.”Wrong.The corporation will totaling up all business gains, profits and expenses and passing your ownership share of the net profits on to you, and you will be taxed at your individual rate.So if your business is successful, expect to receive a hefty tax bill.
- “A corporation is better than an LLC.”Not necessarily.Both company structures require filings with your respective state, both have the same tax structure, and both provide some protection to the individual owners from legal liability.An LLC, however, is highly customizable and the bylaws can contain any language that the owners feel is applicable to their situation; corporation bylaws are much more rigid and less customizable.
- “When I incorporate, all my agreements can be transferred to the corporation.”Probably not.If you signed a commercial lease as an individual or a partnership, you are still individually responsible for that lease.It cannot be transferred to a new entity any more than you ask your leasing agent to transfer it to your Aunt Betty.A whole new lease will have to be drawn up, and new financials presented for review.This will be true for any prior agreement you were engaged in.
- “Incorporating will protect me from legal claims and liability.”Yes and no.Generally a corporation is seen as a stronger barrier against lawsuits, but attorneys got wise to that decades ago and now typically name all businesses and all owners individually as defendants in a lawsuit.In order to enjoy corporate protection, the offense must have been committed by the corporation, for instance, a breach of contract.If however, an owner or partner who was driving a company vehicle caused an accident, that person would still be held liable as an individual.Both the individual and the corporation could suffer consequences.
- “Incorporating will protect me personally from debtors.”Yes and no.If you owe child support, but your assets are owned by your corporation, your assets cannot be seized to pay your personal debts.However, courts are likely to examine the owners very carefully during bankruptcy proceedings or debt claims.Corporate assets belong to the corporation only, not the officers of the corporation. However, if the officers begin treating the corporate assets as if they personally owned them, laws allow creditors to seize company assets.So if you’ve been using the company boat to woo your new lady, it’s very likely that the boat will be seized.