SMITH_JOHN
New member
i am wondering what the benefits of being incorporated are?
what are the down sides?
what are the down sides?
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INC.
- Thread starter SMITH_JOHN
- Start date
Advantages: Saves me about $15,000 per year in taxes. Liability protection. More choices for qualified retirement contributions.
Disadvantages: Huh? Seriously, an extra tax return to file which costs about $1000 alltogether. Pay unemployment on owner wages (very innexpensive and you can file for benefits if you ever go out of business)
Disadvantages: Huh? Seriously, an extra tax return to file which costs about $1000 alltogether. Pay unemployment on owner wages (very innexpensive and you can file for benefits if you ever go out of business)
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The main benefit of incorporating is limited liability. Nobody can come after your personal assets in the event of a bankruptcy or lawsuit.
Many vendors will ask you to provide a personal guarantee anyway, and that will diminish your limited liability. I just cross it out on the credit application and tell them I won’t do business with them if they require it. They always back down.
If you do incorporate, you want to elect subchapter “S” status. Subchapter “C” corporations are really only for companies that plan on having a large amount of shareholders or plan to go public. “C” corporations have the downside of dividends being double-taxed, and you really don’t want that as a small business.
All profits and loses of an “S” corporation will flow through to the shareholder’s personal taxes.
If you plan on having shareholders, one downside of a corporation is that all dividends need to be paid in direct proportion to amount of shares held. You can’t have a 50/50 split of shares and come to the agreement that one person will get 90% of dividends.
Another downside, although small, is you’ll have an increase in legal fees. You’re required to have an annual meeting and those should be put together by an attorney. It will also cost some money to set the corporation up.
To be honest, I think incorporating is a no-brainer; definitely something a restaurant should do.
Many vendors will ask you to provide a personal guarantee anyway, and that will diminish your limited liability. I just cross it out on the credit application and tell them I won’t do business with them if they require it. They always back down.
If you do incorporate, you want to elect subchapter “S” status. Subchapter “C” corporations are really only for companies that plan on having a large amount of shareholders or plan to go public. “C” corporations have the downside of dividends being double-taxed, and you really don’t want that as a small business.
All profits and loses of an “S” corporation will flow through to the shareholder’s personal taxes.
If you plan on having shareholders, one downside of a corporation is that all dividends need to be paid in direct proportion to amount of shares held. You can’t have a 50/50 split of shares and come to the agreement that one person will get 90% of dividends.
Another downside, although small, is you’ll have an increase in legal fees. You’re required to have an annual meeting and those should be put together by an attorney. It will also cost some money to set the corporation up.
To be honest, I think incorporating is a no-brainer; definitely something a restaurant should do.
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Again I am not sure of the US situation but here in the great white north you can issue different classes of shares. This give the ability of declaring different values of dividends for different classes of shares. I could for example have a class of shares for my self, a class for my wife and a class for each of my children. I can then declare dividends at one rate for my self and another rate or none at for each the other classes. I would have it so each of the kids get 1 vote the wife gets the total of the kids plus one and I get the total of the wife and kids plus one.
And in Canada you can have your annual meeting where ever the board deems. So the meeting is going to be maybe in Jamaica or Hawaii next year (all expences paid by the corporation.)
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Again I am not sure of the US situation but here in the great white north you can issue different classes of shares.
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A little bit different down here then. With an “S” corp you are only allowed to have one class of shares. You can have multiple classes in a “C” corp, but that would not be a good option for a small business.
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Piper,
Good points.
It sounds like your attorney has been selling you some extra servics though. You can have an annual meeting around your kitchen table with yourself if you feel you need to have one. Your attorney does not need to be there or have anything to do with it. There is actually no requirement to have a meeting at all but many attorneys will recommend that you have one for liablity concerns. If you end up in a lawsuit, you can count on being named as an individual despite being incorporated. The opposition will try to “pierce” the corp to get at personal liability. Having had meetings MAY help prevent that. The other purpose is for binding the corp for debt or leases. Technically, you should have a board meeting and pass a resolution to enter into the contract. On a practical basis, a closely held corp (for example you own all the stock, or you and your wife own it) most people you contract with will not ask for a corp resolution. You bank probably will though and if you control more than 50% of the stock, you can have the corp meeting right there in your bankers office with yourself and sign the corp resolution form they will provide you.
In my state (Colorado), incorporation costs $50 and can be done over the internet. You can have an attorney do it for you if you feel more comfortable with that and they will provide some boilerplate bylaws etc and charge you $400. the last time I went to ask my attorney do one, she suggested that I save the money and just do it on line.
You are correct on the personal G. If you have been in business for a while you can refuse and most will do business with you anyway assuming your business has a solid payment history with other vendors. If you are new or they want the PG for other reasons, you can also add language making it expire after a year or two which is a good compromise position.
As regards options the avantages of different ways of approaching organization, the C corp is not the way to go until you have lots of shareholders. The “S corp” allows up to 100 shareholder now. The tax law requires that dividends be paid according to ownership as described in the post above.
If you want the ability to distribute profit out of proportion to ownership you need to select LLC as your entity rather than S-Corp. You do not get the advantage of tax savings on FICA that the S-corp provides but the liability protection is identical.
FICA tax savings in an S-Corp come from how dividends are treated. As an owner, you can pay yourself a fair market wage for the work you do and take any additional profit as an S-Corp dividend. For example, this year the FICA cap is $102,000; if your business produces 100K in profit, as a sole proprietor you will pay self-employment tax (FICA for sole proprietors) of roughly $15,000 on that income. As an S-Corp, you could pay yourself 40K as a manager and take 60K as a profit dividend. Your FICA tax as an employee of your own corp would be about 6K including the employer’s share, the dividends are not subject to the tax saving you 9K in taxes.
It is not settled law what minimum wage you have to take before taking the rest in dividends. My accountant’s advice was to take a wage for which you could replace yourself for doing the duties you provide to the business. If you can hire a GM for 40K, pay yourself 40K for running the place.
Good points.
It sounds like your attorney has been selling you some extra servics though. You can have an annual meeting around your kitchen table with yourself if you feel you need to have one. Your attorney does not need to be there or have anything to do with it. There is actually no requirement to have a meeting at all but many attorneys will recommend that you have one for liablity concerns. If you end up in a lawsuit, you can count on being named as an individual despite being incorporated. The opposition will try to “pierce” the corp to get at personal liability. Having had meetings MAY help prevent that. The other purpose is for binding the corp for debt or leases. Technically, you should have a board meeting and pass a resolution to enter into the contract. On a practical basis, a closely held corp (for example you own all the stock, or you and your wife own it) most people you contract with will not ask for a corp resolution. You bank probably will though and if you control more than 50% of the stock, you can have the corp meeting right there in your bankers office with yourself and sign the corp resolution form they will provide you.
In my state (Colorado), incorporation costs $50 and can be done over the internet. You can have an attorney do it for you if you feel more comfortable with that and they will provide some boilerplate bylaws etc and charge you $400. the last time I went to ask my attorney do one, she suggested that I save the money and just do it on line.
You are correct on the personal G. If you have been in business for a while you can refuse and most will do business with you anyway assuming your business has a solid payment history with other vendors. If you are new or they want the PG for other reasons, you can also add language making it expire after a year or two which is a good compromise position.
As regards options the avantages of different ways of approaching organization, the C corp is not the way to go until you have lots of shareholders. The “S corp” allows up to 100 shareholder now. The tax law requires that dividends be paid according to ownership as described in the post above.
If you want the ability to distribute profit out of proportion to ownership you need to select LLC as your entity rather than S-Corp. You do not get the advantage of tax savings on FICA that the S-corp provides but the liability protection is identical.
FICA tax savings in an S-Corp come from how dividends are treated. As an owner, you can pay yourself a fair market wage for the work you do and take any additional profit as an S-Corp dividend. For example, this year the FICA cap is $102,000; if your business produces 100K in profit, as a sole proprietor you will pay self-employment tax (FICA for sole proprietors) of roughly $15,000 on that income. As an S-Corp, you could pay yourself 40K as a manager and take 60K as a profit dividend. Your FICA tax as an employee of your own corp would be about 6K including the employer’s share, the dividends are not subject to the tax saving you 9K in taxes.
It is not settled law what minimum wage you have to take before taking the rest in dividends. My accountant’s advice was to take a wage for which you could replace yourself for doing the duties you provide to the business. If you can hire a GM for 40K, pay yourself 40K for running the place.
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I would strongly disagree with that…
http://www.scoredenver.org/small_busine … _guide.htm
There’s a small business resource guide for Colorado. It states “S-corporation cannot have more than 100 stockholders, must hold periodic director’s meetings and must hold an annual meeting of stockholders”.
Colorado statute 7-107-101 (1): " A corporation shall hold a meeting of shareholders annually at a time and date stated in or fixed in accordance with the bylaws, or, if not so stated or fixed, at a time and date stated in or fixed in accordance with a resolution of the board of directors."
I know it’s required in my state of incorporation. I’ve never seen a state that doesn’t require an annual meeting of shareholders for corporations, whether S or C. It probably doesn’t matter much if you’re the only shareholder, but we should still be posting accurate information.
It’s true that you can hold an annual meeting around your kitchen table without an attorney present. But the meeting must be formally documented and meet your state laws. The attorney will make sure the meeting is carried out properly and, most importantly, make sure your minutes are in order.
In my state, failure to carry out the meeting can lead to dissolution of the corporation. That could be kind of serious and would be the kind of thing you wouldn’t find out about until you get sued for something. It costs me $150 per year to have my attorney prepare and oversee our annual meeting (which is more than 1 shareholder and includes more than me and my wife.) My attorney isn’t “selling” me anything; I feel $150 to ensure the legal integrity of my corporation is solid risk management. My post said you should have an attorney handle your annual meeting, not that they had to.
Now of course you can go years and years never having an annual meeting and not have any issues with it, especially if you are the sole shareholder. But seeing as how it’s most likely against state law, it might not be the best advice to give to somebody researching corporations that may or may not have arms-length shareholders.
Even if all of your shareholders are family (other than spouses, who are automatically considered single shareholders) it is best to keep your ducks in a row. I’m tangentially involved in a major family business breakdown that is on its way to court (between a father and son.) You never know what’s going to happen down the line; it’s best to dot the I’s and cross the T’s.
As of December 31st, 2004, the maximum number of shareholders for an “S” corp is 100, not 75: http://www.law.cornell.edu/uscode/26/1361(b(1)(A).html
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NicksPizza
New member
We went LLC.
I recommend speaking with your accountant and/or attorney about the value of each to your particular operation. The guys here are very knowledgeable, but your business is a different creature than ours with different realities to consider . . . . your attorney/accountant can sift those out and give you some suggestions and options. Since we are talking about your company’s liabilities and money, you get to make the call
I recommend speaking with your accountant and/or attorney about the value of each to your particular operation. The guys here are very knowledgeable, but your business is a different creature than ours with different realities to consider . . . . your attorney/accountant can sift those out and give you some suggestions and options. Since we are talking about your company’s liabilities and money, you get to make the call
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Piper, thanks for the clarifications.
I did think that the S-Corp shareholder number was 100 and originally wrote my post that way. Then I was not sure and went back and googled it and came up with information that said 75. In any case, a lot more shareholders than most of us deal with.
I was not clear enough in my statement about meetings. I was thinking about the situation most store owners are in where they are choosing between a sole-proprietorship and a corp (which is how I interpreted the original post). The law does require that the bylaws and/or the directors set the meeting requirements. The advice I have had states that with a corp with a sole shareholder that can be pretty informal. If you are the sole shareholder and only director you can “decide” that meetings may be called as needed with no notice. As long as the kinds of decisions that a board needs to make are documented properly you can have “meetings” as you please. It sounds like your situation is different having several shareholders. In that case it makes a lot of sense to have a more formal arrangement. I serve on a number of boards and am comfortable with meeting and notes protocols but I can see your point that $150 for peace of mind is money well spent if you are not.
Nick’s advice is the best and is the same that I provide to my counseling clients: You should certainly seek the advice of your attorney and accountant when making these choices even if you do not choose to use them on an ongoing basis to impliment them. Interesting that you link to Denver/SCORE. I am an accredited SCORE counselor out of that office.
I did think that the S-Corp shareholder number was 100 and originally wrote my post that way. Then I was not sure and went back and googled it and came up with information that said 75. In any case, a lot more shareholders than most of us deal with.
I was not clear enough in my statement about meetings. I was thinking about the situation most store owners are in where they are choosing between a sole-proprietorship and a corp (which is how I interpreted the original post). The law does require that the bylaws and/or the directors set the meeting requirements. The advice I have had states that with a corp with a sole shareholder that can be pretty informal. If you are the sole shareholder and only director you can “decide” that meetings may be called as needed with no notice. As long as the kinds of decisions that a board needs to make are documented properly you can have “meetings” as you please. It sounds like your situation is different having several shareholders. In that case it makes a lot of sense to have a more formal arrangement. I serve on a number of boards and am comfortable with meeting and notes protocols but I can see your point that $150 for peace of mind is money well spent if you are not.
Nick’s advice is the best and is the same that I provide to my counseling clients: You should certainly seek the advice of your attorney and accountant when making these choices even if you do not choose to use them on an ongoing basis to impliment them. Interesting that you link to Denver/SCORE. I am an accredited SCORE counselor out of that office.
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SMITH_JOHN
New member
thank you all for a speedy reply.
i am a sole proprietor,and i am thinking i should be incorporated.
i have set up a meeting with my lawyer and accountant for next week.
thx again
i am a sole proprietor,and i am thinking i should be incorporated.
i have set up a meeting with my lawyer and accountant for next week.
thx again
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