Business Law

Should you incorporate? Many owners of small businesses confront the issue of whether the business should be incorporated. This information will provide you with some basic information to help make that decision. Incorporating has both legal and tax consequences, and we recommend that the decision be made in consultation with a qualified accountant who is familiar with your personal tax situation.

Advantages of Incorporating
The major advantage of incorporating a business is the limitation of liability that is provided by a corporation. Corporate shareholders are not responsible for the debts or actions of the corporation. Therefore, many people find it advantageous to incorporate to protect their individual assets. A corporation can also provide good structure for a business. The rules relating to corporations can provide a convenient framework for allowing new investors to become part of a business, or old investors to leave a business. Furthermore, many potential disputes can be resolved by a well-drafted shareholders or "buy-sell" agreement. Finally, the use of corporate stock, given or sold over a period of years, is often the best way to pass on a business to other family members.

Disadvantages of Incorporating
Incorporation is not for all businesses. There are costs involved with record keeping and taxes that are not present with other forms of business. Also, Pennsylvania levies a "capital stock tax" on all corporations formed in the state. Careful planning can keep this tax fairly low, but it will create additional costs of at least $375.00 each year.

The Corporate Players
Most corporations function with people serving in three positions - shareholders, Board of Directors, and officers. The shareholders are the owners of the corporation. They elect the Board of Directors, and receive the benefits of ownership (such as dividends). The Board of Directors sets the overall policies of the corporation, in order to maximize the return on the shareholders investment and maintain the corporation as a viable business. The Board also elects the officers, who are responsible to see that those policies are carried out. A person can act in more than one of those capacities, and can also hold more than one office in a corporation. In fact, a single person can be the shareholder, the Board, and the only officer of a corporation. However, in order to gain the benefit of limited liability, the corporation must observe necessary corporate formalities, such as keeping minutes of annual meetings, even when the shareholders, Board members and officers are identical.

"S" and "C" Corporations
Under federal and state tax laws, it is possible to have two types of corporations. Unless designated otherwise, a corporation will be considered a "C" corporation, so named because the Internal Revenue Code "Subchapter C" contains tax rules relating to corporations. Because "C" corporations pay tax on money they receive, and the shareholders then pay an additional tax on any dividends received, most small business owners elect to be taxed under "Subchapter S," thus creating an "S" corporation. An election to be taxed as an S corporation must be made within 75 days of incorporating in order to obtain maximum benefit, and should always be made after consultation with your accountant.

Other Forms of Business
If you choose not to incorporate, your business can be operated under a variety of different forms. Sole proprietorships and partnerships are the most common. In addition, recently enacted laws in Pennsylvania have allowed for new types of business entities called Limited Liability Companies and Limited Liability Partnerships. If you are in business, or thinking about going into business, we are available to review the options and decide what is best for you. If you decide to incorporate, we can prepare and file the necessary paperwork for you. We have prepared a worksheet to help you make some decisions about your corporation and provide us with most of the information we need. Call, Fax, or e-mail us if you would like to receive a worksheet. If you decide not to incorporate, we will be happy to review your legal needs to operate your business.