Free Business & Corporations FAQs | Free Business & Corporations Legal FAQs

What are the advantages to a Corporation?

Tue, 24 Mar 2009 12:37:25 GMT

There are several advantages to organizing your business as a formal corporation. A corporation is a separate legal entity that is distinct from its individual owners. Businesses that incorporate according to the requirements of state law are provided a “corporate veil” for the business owners. That means that the owners’ personal assets are protected and are typically not used to pay any corporate debts or liabilities. While the limited liability is one of the most important advantages to forming a corporation, there are also tax advantages and it is often easier to attract investors if a business is incorporated.

What are the advantages to a Sole Proprietorship?

Tue, 24 Mar 2009 12:38:16 GMT

A sole proprietorship is a business that is owned by an individual and that is not formed pursuant to any special legal construct, such as a limited liability partnership or a corporation. As a sole proprietor, the individual who owns the business has the exclusive right to make business decisions. It is a rather inexpensive way to operate a business since there are no corporate taxes, filing fees and few, if any, legal fees associated with creating or operating a sole proprietorship. However, sole proprietors should be aware that they can be held personally liable for any negligent or willful misconduct that occurs in the course of their business.

What is an "S" corporation?

Tue, 24 Mar 2009 12:39:01 GMT

There are several different types of corporations from which business owners can choose when they initially set up their business. One type of corporation is an S corporation. The “S” in “S Corporation” refers to Chapter 1, Subchapter S of the United States Internal Revenue Code. Owners who choose to incorporate an S Corporation are choosing not to have the Corporation pay income taxes but rather to have each shareholder pay personal income tax (or report a loss) on the shareholder’s proportionate share of income (or loss) from the S Corporation. In order to elect to incorporate as an S corporation, the company must have only one class of stock and not more than a certain number of shareholders. Since all of the shareholders are responsible to the IRS and state revenue department for their proportionate share of the corporation’s profits or losses, all of the shareholders must be US citizens or residents and must be people and not other legal entities (such as other corporations, LLC or LLPs.)

What is a "C" Corporation?

Tue, 24 Mar 2009 12:41:22 GMT

A C corporation is the most common type of corporation. The “C” refers to the subchapter of the Internal Revenue Code which explains the rules of taxation for this type of business structure. C corporations may have any number of investors and it can, therefore, be easier to raise the capital necessary to operate the business. Since the number of investors is not limited, C corporations can offer stock incentives to their employees. Corporate owners usually do not have personal liability for corporate debts or negligence. Some businesses also find that it is less expensive to provide health insurance and retirement benefits for employees if their business is properly incorporated as a C corporation.

What is equity financing?

Tue, 24 Mar 2009 12:46:14 GMT

Businesses are usually expensive to open and operate and many businesses need investors in order to make the business successful. One way in which business owners can get funds for their business is through equity financing. Equity financing allows people (or other businesses) to invest in the business in exchange for an ownership interest in that company. The investors may be given common stock or preferred stock in the company and, depending on the amount of money they invest, may be given a seat on the board of directors or other decision making body. Since the investors are given an ownership interest in the company, the money which they invest does not need to be repaid by the company. Instead, the investors are entitled to the potential profits of the company in proportion to their ownership interest.

What is debt financing?

Tue, 24 Mar 2009 12:47:02 GMT

Debt financing is a way for businesses to get the capital that they need to open or to operate an existing business. Debt financing is when a person, business, bank or other entity provides capital to a business and the business has the obligation to pay back the principal on that loan plus an agreed upon rate of interest. Many businesses find that debt financing is advantageous because it provides needed capital while allowing the existing owners to maintain ownership and control of the business. Businesses who engage in debt financing may also be eligible for significant tax deductions. However, businesses need to be able to repay their loans according to the agreed upon repayment schedule in order to avoid negative consequences.

What steps are required to form a corporation?

Sat, 21 Nov 2009 00:20:07 GMT

A corporation is a legal entity with a corporate charter from a state. To form a corporation, the following simple steps are required:

1. Select a name for your business. State laws restrict certain words or phrases that can be used in your business name - so make sure you check your state’s rules, which are typically available on the Secretary of State website.

2. Prepare and file the required paperwork with the Secretary of State in the state of incorporation. Typically, Articles of Incorporation must be filed, but in some states the wording is slightly different.

3. Pay the required filing fees.

4. Establish the corporate governance by choosing a board of directors and adopt corporate bylaws.

5. Hold the first meeting of the board of directors and authorize the directors and officers to conduct business. Typically, the first orders of business include issuing stock to the owners, setting up bank accounts, setting up a record-keeping system, obtaining licenses and permits from local government offices, obtaining appropriate insurance for the business, leasing or purchasing offices and equipment, hiring employees, etc.

As time goes on, it is important the board of directors, and officers, conduct business in accordance with corporate governance requirements. Meetings must be held at least annually, and usually more regularly, to document that the corporation is conducting business in accordance with state laws.

What steps are required to form an LLC?

Sat, 21 Nov 2009 00:21:12 GMT

To form a limited liability company, the following simple steps are required:

1. Select a name in accordance with the state’s rules regarding limited liability company names. Certain words may be restricted from being used in an LLC name per your state’s laws.

2. Prepare and file the required paperwork with the Secretary of State in the state where the LLC is to be formed. Typically, Articles of Organization must be filed, but in some states the wording is slightly different. In some states, additional paperwork may need to be filed.
3. Pay the required filing fee.

4. Prepare an LLC Operating Agreement. This is the document that sets forth the rights and responsibilities of the LLC members. LLC’s can be “member-managed” or “manager-managed,” which is typically set forth in the Operating Agreement.

5. Hold the first meeting of the members to authorize the members (or a manager, if the LLC is manager-managed) to take actions necessary to start-up the business. Typically, the first orders of business include setting up bank accounts, setting up a record-keeping system, obtaining licenses and permits from local government offices, obtaining appropriate insurance for the business, leasing or purchasing offices and equipment, hiring employees, etc.

As time goes on, it is important that the LLC conduct business in accordance with the Operating Agreement and state law requirements. Meetings should be held and important business documented. While an LLC does not typically need to follow as many formalities as a corporation, it is important that the members/managers conduct business with sufficient formality so as not to jeopardize the integrity of the entity’s limited liability status.

What Is Limited Liabilty?

Mon, 31 Mar 2008 19:41:42 GMT

Limited liability is a principle of business law which shields the owners of a business from the business's liabilities. Owners of a business which has limited liability may lose only what they have invested in the business, meaning creditors cannot reach to the owner's personal assets to cover the businesse's debts. If a business is sued or goes bankrupt only the assets of the business may be used to cover the debt, a stockholder may not be forced to sell their home or other property to cover their share of the company's debt. Businesses that have limited liabilty are corporations, limitied liability companys (LLC) and limited liability partnerships (LLP).

In a business that is a sole proprietorship or a partnership the owners are personally liable for the business's debts.

What are the advantages of a corporation?

Fri, 20 Nov 2009 21:45:37 GMT

Forming a business as a corporation offers many advantages over a sole proprietorship or other entity types. The corporate form gives the owners (called the shareholders) limited liability protection. This means the owners are not liable for the corporation’s debts and, as such, their personal assets are not at risk if the corporation is unable to pay its debts. Also, the owners are not personal liable for the mistakes or misconduct of the board of directors, officers or employees of the corporation. Additionally, corporations enjoy separate tax treatment from its owners. The owners do not pay taxes on the business income. Rather, the owners only pay taxes on the corporate profits that are distributed to them in the form of salaries or dividends. However, the corporation itself must pay taxes at the corporate rate on profits that are realized. Finally, with the stock structure of the corporation, and transferability of shares, it is a form of business which is typically attractive to investors and employees.