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Forming a corporation and its advantages

Corporation Overview


The majority of companies that you see listed in the New York Stock Exchange, NASDAQ, and other exchanges-as well as many businesses we encounter in our day-to-day lives-are corporations. The corporation is a separate entity from its owners. In tax laws, the corporation is considered a person and pays its own taxes, enters into contracts, and has debt separate from its owners.


This characteristic as an "independent entity" allows for the corporation not to have to dissolve if one of the owners leaves the business. Moreover, this limits the liability for the owners of the corporation, as they are not liable for the corporation debts.

Although the corporation is a separate entity and is treated as if were a separate “person,” if you are planning to apply for a loan you will have to personally sign the loan application form; this makes you personally liable. Financial institutions may not give a loan if the owners do not personally sign for it. If you are married, they might even ask your spouse to co-sign for the loan.

Contrary to the sole proprietorship and the partnership, incorporating gives the owners liability protection. The corporation as a separate entity shelters the owners from liability for the corporation's business debts or obligations. For example, if the corporation is sued, you only lose what you invested in the corporation.

Ownership of the corporation is freely transferable; the existence of the corporation does not depend on who owns it at any particular time or whether the owner sells his or her shares or dies. The shares are freely transferable unless there are restrictions such as buy/sell agreements or securities laws.


To Do List:

-Name Search(Optional)
It is not a requirement but a name search can be conducted by writing a letter (no official format) accompanied by a $5 fee and sent to the NYS Division of Corporations.
A credit card authorization form can be found:
credit card authorization
(http://www.dos.state.ny.us/corp/busfile.html)

The Form:Certificate of Incorporation
The Certificate of Incorporation is not actually a form and it does not have a standard format. You can a obtain a simple version of it from NYS Division of Corporations and use it to incorporate your business Certificate of Incorporation
(http://www.dos.state.ny.us/corp/busfile.html)

Filing the Form
You should mail or deliver the forms and the accompanied fees(you can send check or a credit card authorization form mentioned in the link earlier) to:

NYS Department of State,
Division of Corporations,
State Records and Uniform Commercial Code,
41 State Street, Albany, NY 12231

Filing fee for a certificate of incorporation is $125 plus minimum $10 tax for the issuance of stock.

Call the Division of Corporations helpline to get most current information:
8:00 A.M. to 5:00 P.M. (518) 473-2492

After Registration

-Getting a Tax ID You are required to get a Tax ID(EIN Number) for your corporation. The Tax ID is like a social security number for your business.

-Business Bank Account Once you register the business and get your Tax ID you can go to a bank and open a business checking account. Having a separate account enables you to separate your business and personal expenses.

-Retail Tax Authorization If required for your business you should obtain Retail sales tax Authorization

-Obtain any licenses or permits your business may require.

Limitations to Limited Liability, the benefit of the limited liability will be curtailed if the owner:

  • The owner personally guarantees a bank loan on which the Corporation defaults
  • The business owner directly injures someone
  • Illegal activities
  • Does not separate the corporation as an independent entity from the owner, that is, the owner does not separate business from personal matters. You will have to treat the corporation as if it is a separate entity. You should document everything.
  • Failing to deposit taxes withheld from employee wages

One of the drawbacks (although depending on the situation it can be an advantage) is corporate taxation. Unlike the other business structures we have discussed before, the corporation pays taxes on its profits independently from its owners, after paying for salaries, bonuses, and other deductible expenses.


The profits made by the corporation are taxed at the corporate level and the profits distributed to the owners are later taxed at the personal level. This is known as double taxation of the corporation. You should always consult your accountant to see if they are comfortable doing taxes for a corporation.

Finding a good accountant is one of the first things you should do as an entrepreneur. It pays to have an accountant that is easily accessible. Also, you want to discuss the incorporating process with your accountant because she will be doing the tax filings and should feel comfortable with your business structure.

Retaining Corporate Status

In order to maintain all the benefits of corporation status, the owners need to do the following:

  • The corporation needs to hold annual meetings between shareholders and directors.
  • All major transactions need to be recorded in the corporate minutes.
  • The corporation directors must sign documents in the name of the corporation.
  • The corporation must have separate bank accounts from its owners and keep thorough and independent financial records.
  • The corporation must file a separate tax return.

Protecting Limited Liability

The corporation is characterized as a separate entity and can offer liability protection to the owners, if the owners adhere to the following corporate formalities:

  • The corporation maintains business records and transactions separate from the owners.
  • The owners manage the corporation fairly and legally, and are not concealing any material information from investors, creditors, or vendors.
  • The owners make an adequate investment in the company; the owners cannot simply lend the company money.
  • The corporation holds regular meetings between directors and shareholders.
  • The corporation formally issues stock to initial shareholders.

For more information about forming your corporation proceed to the next section. How to form a corporation

 

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