Should You Incorporate Your Business?
Jeffrey L. Rehmeyer II
Following fast on the heels of a decision to go into a particular kind of business is the decision about what type of legal entity it should take. The most common options are a sole proprietorship, partnership, corporation, or a limited liability company ("LLC"). Traditionally, the corporate route enjoys an understanding of its concepts, and you may like the sound of having "Inc." after the company's name, but there are more practical, business-like considerations to take into account.
More so than with other structures for a business, starting a corporation means complying with formalities required by state laws. Once the shareholders (owners) of the business agree on some basic matters, such items are embodied in Articles of Incorporation that must be filed with the appropriate state agency. These essentials may include:
- a corporate name;
- a physical address (not a P.O. Box) within the state of incorporation;
- the number of shares that can be issued; and
- the nature of the corporation's business.
The proposed corporation will also need bylaws, which constitute a procedural rule book for the company. Similarly, LLCs include a name and address, but do not issue "shares" in the traditional sense. Ownership in an LLC is evidenced by membership units.
Decision-making
Majority rules. Whoever holds a majority of the shares of a corporation or LLC has ultimate control over it. Usually a majority ownership of shares is required to elect a board of directors (sometimes known as "managers" in an LLC), which is charged with making the "big picture" decisions. If a decision affects a shareholder's rights, such as a change in the Articles of Incorporation or whether or not to merge with another company, the shareholders have an equal role in that they themselves must approve the decision by a certain margin of votes.
The board elects the officers of the corporation, typically including a president, vice-president, secretary, and treasurer. The officers may or may not be salaried employees or shareholders, and in some cases one person may hold more than one office. LLCs can, but do not always, have officers.
Accountability
Near the top of the list of reasons to incorporate is the fact that, since the corporation is treated as a legal "person" separate from the people who own and run it, the shareholders as a rule may not be personally liable for the corporation's debts. Instead, their risk is confined to their investment in the company. However, an exception with the colorful legal name of "piercing the corporate veil" exists. If the owners do not comply with the statutory requirements for running a corporation, or if they blur the lines too much between corporate and personal finances, the legal existence of the corporation as a separate entity is ignored and the owners are on the hook for the corporation's losses. The same rules apply to owners of an LLC.
