In this four-part series, we examine the different ways to structure your small business, comparing the various advantages and disadvantages

Part IV - C Corporation

By Reed Richardson

Incorporating a small business can be a shrewd move or an unnecessary complication depending on your company's short and long-term goals. The main attraction of incorporation involves the liability protections it offers to the company's shareholders. Because a corporation is treated as a separate entity from those who run it-both in legal and tax terms, federal and state laws treat corporations as "persons"-corporate officers and stockholders have limited liability when it comes to debts or risks incurred by the company during the normal course of business. The corporate business structure also offers small business owners a myriad of ways to structure partnerships, raise capital, and survive changes in leadership, but its rather high regulatory and tax burdens make it a course of action that an entrepreneur should carefully consider before undertaking.

Operations - Corporations are, first and foremost, statutory structures regulated by state law. So, incorporating your small business will require following the rules of your local state business corporation act. For most small businesses, this will mean incorporating in the state where your company is located or does a majority of its business. Although one can find numerous do-it-yourself "incorporation kits" available on the Internet at the relatively low cost of a few hundred dollars, it's probably worth the extra money to approach a law firm that specializes in this work. Depending on your home state, the cost to incorporate a small business typically runs between $500 and $5,000.

Once incorporated, there are additional cost and time requirements. Most state laws mandate that a corporation hold at least annual shareholder meetings, keep minutes of these meetings, establish a set of corporate by-laws, and document all major company decisions. In addition, most states require the election of company officers such as a president or CEO, as well as a treasurer or comptroller.

All this complexity does bring with it some advantages, however. Well-established company rules and by-laws for dividing shares make it easier to tailor your company's operations to your needs. For example, C corps can issue stock of various classes and, unlike with LLCs or S corporations, there is no limit to the amount of shares or partnerships that a C corporation can have. Likewise, the air of permanence and legitimacy that comes with incorporating often makes a company more attractive to potential sources of outside capital, like venture capitalists or angel investors.

Some of these administrative hurdles can be avoided by incorporating in so-called tax haven states such as Delaware (http://corp.delaware.gov/) or South Dakota (http://www.sdsos.gov/busineservices/corporations.shtm) that have much lower financial and regulatory requirements. But if you do take this tack, it's important to remember that your corporation will still have to qualify to do business in your home state no matter where it's incorporated. For many small companies, this tactic won't be worth the extra hassle as it will require hiring a separate corporate agent to handle official notices and paperwork in the incorporated state.

Tax - Because corporations-and specifically C corporations-are separate legal entities, they are taxed under the IRS's corporate tax structure. Unlike in sole proprietorships, LLCs, or even S corporations, individual partners or shareholders do not have the company's net profits taxed on their individual returns. Technically, there are no "owners" of a corporation, only shareholders and company officers or directors, who are considered corporate employees. And because of this, the officers or directors in a small corporation have the flexibility to decide how much of a business's net profits will go toward employee salaries versus how much will stay with the company. This tactic of "income-splitting" can significantly reduce a company's tax burden and allows for more robust reinvestment back into the business.

Personal liability - Incorporating your small business provides the strongest protection from personal liability available, shielding the company officers, directors, and shareholders from risks-operational or financial-incurred by the business. However, it's important to weigh the financial and administrative burden of incorporating, against the relative freedom offered by LLCs, which effectively do the same thing without the requisite corporate rules and restrictions.

Benefits - Other advantages to incorporating involve the benefits that a corporation can offer to its company officers and employees. Fringe benefits like health and life insurance policies purchased by the corporation for its employees are not considered taxable salary and so the officers and employees receiving them do so tax-free. And often, the corporation can deduct the cost of providing these benefits.

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