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Jeff On Call: Is a Corporation Right for My Business?

Jul 24, 2009

jeffoncall2

Q: Is a corporation right for my business?

If you have multiple owners (other than spouses) or employees, there are distinct advantages.

These legal entities exist because a properly established and maintained corporation is a separate person under the law. Therefore (at least in theory) the corporate assets and liabilities are not those of the owners (shareholders).

It has a perpetual existence (as long as it is properly maintained), and can prosecute or defend legal action separately.

The corporate structure also facilitates equity ownership for employees, allows a wider range of employee benefits, and can offer 401(k) or other deferred compensation plans.

The most common entities recruiters form are:

“S-corp” (corporation with a Subchapter S election taken under the Internal Revenue
Code). They usually designated by “Inc.”, “Incorporated”, “Corp.” or “Corporation”.
For tax reasons, regular “C-corps” are rarely used.

Limited Liability Company (designated by “LLC”). LLC’s have different names for the
same functions as traditional corporations (“member” for shareholder, “manager” for
director, “company”, “articles of organization” instead of “articles of incorporation”,
“operating agreement” instead of “by-laws”, and “minutes of members meeting” instead
of “minutes of shareholders meeting”.

LLC’s don’t require the formality of annual shareholders and board of directors meetings.
Profits and losses pass through the entity and are reported on the owner’s personal income
tax return. This is the same as S-corp and partnership tax treatment.

However the primary advantage of an LLC is that profits and losses can be divided advantageously. In an ordinary corporation, profits and losses must be divided in proportion to the percentage of shares owned by each shareholder. This is why the decision regarding formation should include your accountant and definitely your lawyer.

Both entities provide some personal asset protection from client, candidate and employee lawsuits (although not the protection many advertisers would like you to believe). They are also a sensible way for two or more non-spouse owners to divide ownership without each others’ personal liability.

So, for liability and tax reasons, a corporation may be the preferred business form for you.

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To participate in future Q&As, email jeff@placementlaw.com. Keep in mind you should always consult with your own attorney. Nothing contained herein should be construed as legal advice. It is for your information only.

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