Incorporation (SC-LLC)
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WHY TO INCORPORATE?
Make your dreams come true and protect them
Reduce your personal liability by separating your business and personal assets
Add new owners/investors easily while maintaining control of the company
Do business internationally – corporations are accepted almost everywhere
Choose to incorporate if you are considering taking your company public in the future
Taking care of business formations
We’re working overtime to help clients start and run their businesses — give your business its backbone today.
Definition of a Limited Liability Company or LLC
Like a corporation, a limited liability company or “LLC,” is a separate and distinct legal entity. This means that an LLC can get a tax identification number, open a bank account and do business, all under its own name.
How Does an LLC Protect You?
- One of the primary advantages of an LLC is that its owners, called members, have “limited liability,” meaning that, under most circumstances, they are not personally liable for the debts and liabilities of the LLC.
For example, if an LLC is forced into bankruptcy, then the members will not be usually be required to pay the LLC’s debts with their own money. If the assets of the LLC are not enough to the debts and liabilities, the creditors generally cannot look to the owners for payment. Their debt was with the LLC, not the people that owned the LLC.
If a business operates as a corporation, the business owners, called shareholders, are not personally liable for debts or other claims against the corporation. That’s because the corporation is a separate legal entity from its owners. If a corporation complies with the formalities required for it to be treated as a separate legal entity, then anyone seeking to collect a debt from, or enforce a claim against, a corporation, would not be able to collect from the shareholders themselves. They would only be able to pursue the assets held in the name of the corporation.
The IRS allows corporations to choose to be taxed as either a “C corporation” or an “S corporation.” Income from C corporations are subject to double taxation; that is, the corporation pays taxes on its net income and then the shareholders also pay taxes on the income that they receive from the corporation. S corporations have only one level of taxation. The shareholders still have to pay taxes on money that they receive from the corporation, but an S corporation does not pay taxes on its net income. While the S corporation is popular among small business owners, C corporations have greater tax planning flexibility.
An employer identification number (EIN), also known as a federal tax identification number, is used to identify a business entity for tax purposes. It’s like a Social Security number, but for a business. In general, most businesses need an EIN. The only reason a business would not get an EIN is if it has only one owner, elects to be treated as a sole proprietor for tax purposes, and does not want to open a separate business bank account. In this case, the owner would use their Social Security number as the business identifier. However, there are disadvantages to this approach, namely the risk of liability.
Unlike a corporation, LLCs have some flexibility in how they’re taxed. Depending on how many members and the type of tax treatment the owner selects, the LLC can be taxed as either a corporation, partnership or as part of the owner’s personal tax return (called a “disregarded entity”). By default, an LLC with two or more members are taxed as a partnership, unless they file an IRS Form 8832 to elect to be treated as a corporation. If the LLC has only one owner, it will be taxed as a sole proprietor, unless the owner files Form 8832. It’s not necessary to decide which tax treatment until after your business is formed. You have up to 12 months to decide and can speak to an accountant if you need help making this decision.
Thus, a shareholder with 15 percent equity in a C Corp will receive 15 percent of the corporation’s profits. Corporations can also issue stock certificates to company employees, but the initial shareholders must receive their stocks certificates before the company commences operation.
A registered agent (sometimes called a resident agent or statutory agent) is a person or business authorized to accept important legal documents on behalf of a business. States require businesses to provide the name of their registered agent at the time they form their business entity. While you can be your own registered agent, there are disadvantages. You have to be available during regular business hours and your information goes on the public record. If you miss a filing deadline, you risk being fined or shut down. Our registered agent service can ensure you receive important business documents, sort through junk mail and keep your information private.
It is essential to keep these records in one location for easy access when the IRS wants to audit the company. You can store corporate records in the cloud but be sure to use a safe and secure cloud service to prevent a breach of sensitive business information.
Why Wyoming Is Rated The Best State To Incorporate Wyoming is the most business friendly state in the nation. It has consistently been rated # 1 by the Tax Foundation in Washington D.C. and tops all states again in their report for 2017 just released at taxfoundation.org.
- NO Corporate state income taxes.
- NO Personal state income taxes.
- NO Business license tax, tax on shares, or inventory tax.
- NO Excise tax, franchise tax, or gross receipts tax.
- NO Minimum capitalization. You can start your Corporation with one dollar.
- NO Disclosure of shareholders and only one shareholder required.
- NO Limit on shares of stock. Issue as little or as many shares as you want.
- NO Requirement to hold any meetings in Wyoming.
- NO Tax information is collected and sent to IRS.
- NO Officer filing fee of $125 like Nevada.
- NO Social Security numbers required from shareholders or officers.
- Wyoming has close corporations with less rules and paperwork.
- Wyoming was the first state to offer LLC’s. Close LLC’s are available.
- Unlimited ability to issue stock, simply making the proper entries in your Articles of Incorporation.
- Wyoming allows Nominee Officers and Lifetime Proxies.
- Corporations transferred in from other states still retain their original incorporation date.
- There is no fee on any assets outside of Wyoming.
What Is an Example of a Corporation?
REGULAR CORPORATION
The C-corporation is the most commonly formed corporation. It is great for building credit separate from individual credit and limiting individual liability. The corporation is a legal separate “person” which may live forever and be passed down from generation to generation. It protects the shareholder from any adverse actions the corporation may encounter. Just as an individual it can own assets, borrow money, mortgage its assets, and file bankruptcy. Shareholders elect a board of directors and officers to manage the corporation. Wyoming allows one person corporations where you can be the only shareholder who is also the director and officer.
You may have heard of double taxation. Double taxation can occur when corporate profits are taxed at the corporate level and are returned to investors as dividends to be taxed again as individual income. The simple solution is for the corporation not to pay dividends. There are plenty of other ways to get money out of the corporation. You can pay yourself whatever wage you want. You can have the corporation reimburse you for expenses. The corporation can spend its money on anything the owners of the corporation want. It doesn’t have to be deductible or even make sense.
Corporations file their own separate tax return on IRS Form 1120 and report earnings and taxable profit or losses. This can be a disadvantage or an advantage depending on tax brackets.
Regular Corporations must conduct shareholder and director meetings, elect a board of directors
CLOSE CORPORATION
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Wyoming is one of the few states that realizes there are many corporations that are held by just one person or a small number of family members or individuals. Close corporations are regular business corporations that elect to operate in a more informal manner similar to partnerships. Regular business corporations must conduct shareholder and director meetings, elect a board of directors, and provide shareholders with written proposals for any major corporate action to be voted on in the annual meetings. Close corporations usually do not hold annual meetings because the same people are shareholders and managers of the corporation or they see each other regularly. They do not need an “official” meeting to talk to themselves. A Board of Directors is also not required and there is much less formal paperwork required for ongoing operations.
Limited Liability Company or LLC
An LLC is basically a partnership with the liability protection of a corporation. A Limited Liability Company (LLC) passes gains or losses, credits or deductions, on to the members of the LLC in the same manner that partnerships are taxed. Individual members may benefit from a reduction in their taxable income if the corporation operates at a loss. Despite their unique tax treatment, LLC’s maintain full corporate attributes like limited liability. Unlike corporations with shareholders, LLCs have members. A managing member runs the LLC.
CLOSE LLC
The main differences between a regular LLC and a Close LLC is there is a restriction on the selling of a member’s shares. A member must offer the shares, for sale, to the other member(s) of the LLC before they can be sold to anyone else. All members also must approve of the sale of shares. This works well in a closely held family company, were the parents want to make sure that the children cannot sell part of the company to outsiders.
A Close LLC is not required to hold annual meetings, unless requested by a member.
The Close Limited Liability Company Supplement, articles of organization, and operating agreement of a close limited liability company may also restrict transfer of ownership interests, withdrawal or resignation from the company, return of capital contributions and dissolution of the company.
When to Incorporate Everything You Need to Know
Deciding when to incorporate involves clearly considering the characteristics of your business, the timing involved, the cost, and other factors. If you incorporate too early, you will be responsible for paying the hefty fees although your company may have not yet made a profit. If you wait too long, however, you can lose valuable intellectual property such as your business name and risk your personal assets. In most cases, it’s best for companies to incorporate as soon as they are able to do so. These are just a few of the signs that it may be time to incorporate your company.
Establishing Co-Founder Relationships
Some business owners begin preparing for incorporation long before it is necessary to do so. This can be beneficial as it sets expectations for co-founders and investors right away, which can avoid the conflict experienced by start-ups like Facebook. This may be the best route for your company if you can clearly envision its future, are solidly entrenched in the planning process, can cover the costs associated with incorporation, and/or own intellectual property (IP) that you want to legally protect.
For example, co-founders can disagree on serious issues such as how to split business equity. When you incorporate, you settle all these issues in the corporate bylaws, so disputes are resolved before you are overly invested in the company.
Although you may not be able to afford to pay early employees handsomely, incorporating allows you to recognize their sweat equity in the form of stock. If you don’t incorporate, you cannot make enforceable promises to compensate co-founders and other initial partners with shares of stock.
If you are a sole proprietor and are planning to add a partner to your business, it’s a good time to form a limited liability company (LLC) or corporation. This establishes decision-making authority and ownership shares for your company.
Protecting Personal Liability
Many business owners decide to incorporate to protect their personal assets from business liability. When you incorporate, your business becomes a separate legal entity with its own debts and obligations. This protects your home, vehicle, and accounts from being seized to satisfy a business lawsuit or debt. When you are operating as a sole proprietorship and partnership, business and personal assets are legally considered one and the same.
Shielding Intellectual Property
The valuable intangibles that distinguish your business from its competitors are collectively known as IP. Incorporating prevents a co-founder from starting a competing business with the IP developed for your existing business. However, you can also protect IP with legal remedies such as trademark, copyright, and patent registration if you aren’t yet ready to incorporate your business.
Preparing for Third-Party Funding or Acquisition
If you want to court investors who can help fund the growth of your business, you need to be incorporated. Some business owners prefer to grow a business and then sell it to a larger corporation, which allows them to avoid high income and capital gains taxes. However, you need to hold stock in the company for at least one year before doing so, which means incorporating as soon as possible so you’ll be prepared for acquisition when the time comes.
Taking Advantage of Tax Benefits
In some cases, you may be able to save on business taxes by incorporating. However, this varies based on your income tax bracket, whether you take a salary, how the income of the business is invested, and other factors. Consult with your tax advisor before incorporating for this reason.
When You Should Not Incorporate
In some circumstances, it doesn’t make sense to incorporate your business. These include when:
- You can’t afford to do so. Incorporation carries substantial upfront and ongoing costs, which vary depending on your state. You also put yourself at risk of interest and penalties for late report filings.
- You don’t want to face the deadlines and requirements associated with running a corporation.
- Your business is at risk. It makes more sense to invest the funds in improving your operating to bolster your startup and improve its chances of survival.
- You see your business as a hobby or side hustle and don’t ever plan to hire employees or go public.
