Forming a corporation limits the personal liability for business debts. However, there is more to the creating and running a corporation than doing paperwork. You have to spend your time in the business keeping a good record of all the business activities so that you will not find it hard to handle more complicated tasks like filing a corporate tax return. In terms of limiting liability, you have to be sensible in terms of decision making and record keeping. Getting organized is the key.
How to Form a Corporation
- File an “Articles of Incorporation” at the corporate divisions in the secretary’s office of your state government.
- Create a corporate “bylaws” that states the basic rule that govern the ongoing decision or formalities of the corporate life.
- Issue stock certificates of the initial owners or shareholders of the corporation and document the ownership interest or the shares of stock in the business.
To retain the corporate status as a legal, separate entity, certain formalities should be observed by the owners of the corporation. This includes:
- Holding of directors’ and annual shareholder meetings
- Minutes of meetings and agreement or decisions should be documented
- Signing of documents by the corporate officers and directors should be done under the name of the corporation
- Bank accounts are separate from the personal accounts of the owners
- Maintain a detailed financial records
- Income tax return should be filed separately
Limited Personal Liability
Personal assets of the people involved in the corporation are protected from the creditors. In cases where a corporation owes a creditor, your personal assets are protected because only corporate assets will be used to pay the debts. The only money you will likely end up losing is the money you have invested in the corporation.
Exceptions to Limited Liability
There are situations where the owners’ personal asset is not protected by limited liability. The owner of the corporation will be held personally responsible if:
- Directly and personally injured another person
- Personally guarantees a bank or business loan which the corporation fail to pay
- Fail to deposit withhold taxes from employees
- Intentionally engage in fraudulent causes that can harm the company
- Treats the corporation like an extension of his personal affairs and not as a separate legal entity
Corporation should be treated as a separate legal entity. This is very important especially in cases involving court proceedings. The court can rule that the corporation does not exist, and the owners should not be shielded from their personal liability for their actions. This is likely to happen if you did not follow the routine corporate formalities such as:
- Adequately investing money in the corporation
- Formal issuance of stock to the initial shareholders
- Holding of meetings regularly of the directors and shareholders
- Keeping a separate business records and transactions from those of the owners
Forming a corporation can protect your personal assets, but it should not be an excuse for not getting insurance. Insurance can be a good investment that can protect the company from lawsuit and claims. The risk of doing business can be minimized by getting a solid liability insurance policy. Any claims made by the corporation can be covered by the insurance as long as the corporation is also doing its part like paying the bills and other corporate responsibilities.
Paying Corporate Income Tax
Corporate income tax refers to the taxes paid by the corporation on whatever profits they left after it has paid all the available expenses like salaries, bonuses, overhead and other expenses. It uses a tax return form to be filed to the IRS and pays taxes at a special corporate rate tax. In terms of the owner, if he is working for the corporation, he should be paid a salary and possible bonuses like other employees and pay their taxes using their own personal tax return.
Corporation shareholders can choose to elect an S corporation status by filling at the IRS a tax Form 2553. Using this form can mean that the corporation will be treated like a partnership, where business profits and loss will be reported on the each shareholder‘s individual tax returns.
source: 1-2-Law: www.12law.com