Selecting the right entity for your business! Where do I Incorporate?
Checklist for a Start-Up…


The most frequently asked question we hear is, “Which type of entity is right for my business?” One of the first significant decisions to be made when starting a business is entity structure. There are several key factors to consider and the decision you make will have an effect on matters such as how the business operates, the extent owners are liable, and how the entity and/or owners are taxed.
The appropriate business entity for any individual(s) will depend on their particular facts and circumstances. They must consider the current objectives with an eye towards future potential objectives to determine what type of entity best suits these goals. Some choices are based on the particular business while others are primarily focused on long-term estate planning objectives.

Entity Selection
The choice of the structure for a closely-held business can have far-reaching tax and legal implications. We at IncorpTaxAct ( www.incorptaxact.com   ) are skilled at recognizing and explaining the advantages and disadvantages of different business entities, including:

  • Limited liability company (LLC)
  • General and limited partnerships
  • S corporation or C corporation
  • Limited liability partnership (LLP)
  • Non-entity ownership (sole proprietorship)
  • Family limited partnership (family business)


Through diligent exploration of the client’s needs and goals, we help produce an entity custom-made for each unique situation. We explore all start-up considerations, including taxation, personal liability and asset protection, ease of operation, transferability of ownership interest and exit strategies. We serve clients in all industries, with significant experience.
We can simply divide the entities into two categories, corporations and partnerships. Between these two categories is a gray area where the entities take on characteristics of each other. Deciding on which category to form the entity will depend upon the individuals forming the entity, how the profits are to be shared, the extent of liability exposure, and the tax consequences.

Sole Proprietorship: If an individual chooses to operate a business without selecting an entity that business will, by default, operate as a sole proprietorship. This is a business that is not incorporated and is owned by one person. A sole proprietorship is not a separate legal entity and therefore there is no legal distinction between the sole proprietor and the business. This makes a sole proprietor financially responsible for all liabilities the business incurs - all of that individual’s personal assets are subject to seizure or lien by creditors. From a tax standpoint all of the profit or loss from the business will be reported on the individual’s personal tax return and will be subject to self-employment tax in addition to forfeiting certain tax advantages available to corporations.

Corporations: This type of entity is formed upon filing articles of incorporation with the appropriate Secretary of State. The owners of the Corporation are called the shareholders, but unlike the sole proprietorship the shareholders do not have personal liability for those liabilities arising in the ordinary course of business. The entity automatically becomes a C Corporation unless the shareholders elect and timely file with the IRS a subchapter S selection (Form 2553).
The major difference between these two entities is that a C Corporation has a corporate level income tax on its profits whereas the S Corporation is a pass-through (or flow-through) entity, which does not have a corporate level income tax. A pass-through entity has a pro rata portion of the annual profit or loss reported to each shareholder, which is in turn reported on that individual's personal tax return and taxed at that individual's income tax rate.
If a C Corporation is profitable and pays a dividend to its shareholders there's a potential for double taxation. This can be avoided by increasing the compensation paid to its shareholder-employees as this will provide a deduction to the Corporation as a business expense thereby reducing the annual profit. The C Corporation is also permitted to take other deductions for tax purposes that an S Corporation may not take.
S-Corporation shareholders holding more than 2% of the stock in the corporation are also limited in availing themselves of corporate fringe benefits. There is also a limitation on the number of shareholders in an S Corporation and the types of shareholders permitted, for example not all trusts can be shareholders of an S Corporation. Even non resident aliens cannot be shareholder of S Corporation and the number of shareholders is limited to 100.

Partnerships: A general partnership is a business entity that has not incorporated and is owned by two or more individuals. Profits will be shared amongst the individuals equally unless there's a partnership agreement in place providing for some other manner to the profits and losses. The taxation of those profits or losses is similar to an S Corporation as a partnership is a pass-through entity. Each partner of this entity will be personally liable for all debts and liabilities of the partnership. This liability also extends to the actions of the other partners either for debts incurred by one of the partners or through one of the partner's wrongdoings.
In order to minimize the liability exposure it might be advisable for the individuals looking to establish a partnership to consider either a limited partnership or a limited liability partnership (only available to accountants and attorneys). A limited partnership operates with one or more general partners managing the entity, while limited partners share in the profits and contribute capital they take no part in running the entity. The general partners are personally liable for partnership debts while the limited partners have no liability with regards to partnership obligations beyond their capital contributions as in a Corporation.
 

Limited Liability Company: an LLC falls within that gray area between a Corporation and a partnership. This type of entity has the pass-through characteristics of a partnership with the limited liability afforded corporate shareholders. The profits and losses in an LLC unlike a corporation may be divided in any manner the members decide as per their membership agreement. A 33% member does not necessarily need to receive 33% of the profits as in a corporation. The main benefit for an LLC is the remedy available to creditors attacking a member of the LLC personally. That remedy is called a charging order and provides the creditor only with the actual profits paid out to the member. It does not allow the creditor to take the individual members interest in the entity. The creditor cannot liquidate the LLC or compel the LLC to sell any of its assets to pay the claim against an individual member.
Operating Agreements/Agreements among Owners
Structuring and documenting the arrangement among the owners of a business is extremely important. Disagreements among owners frequently lead to costly litigation, the destruction of longstanding personal relationships, and ultimately the death of the business itself. Too often these disagreements arise because financial and legal relationships were not given careful attention at the outset and carefully documented.
We can prepare operating agreements, shareholder agreements, partnership agreements, joint venture agreements and variations thereof. From structuring many such relationships we have a keen understanding of the issues likely to cause friction. By dealing sensibly and fairly with these issues at the time of business formation, we can help to remove a common stumbling block to success.
Where a business is owned by more than one person, it is imperative that the partners reach agreement on fundamental issues such as ownership percentages, contributions, compensation, areas of management responsibility, decision-making control, time commitment, buy-in tax structure, and buy-sell matters — and understand the implications of their decisions.


Where to incorporate your business?
Now that you have decided to incorporate your own business, it is very important to select the state where you want to incorporate it. You can incorporate in any 50 U.S. states or the District of Columbia. The filing requirements and laws governing corporations vary from state to state. A new business owner should ask him few questions before selecting the proper state. The first question a new business owner might ask himself is, “Will we be doing business in one state, or several?” If business will be conducted primarily in one state, then incorporating that state may be the simplest and most logical choice. If there is more than one state in which business will be conducted, then the business should take into account various factors involved in incorporating in another state like the corporate laws of the state regarding responsibilities and rights of directors, officers, and shareholders of the corporation. Other factors to consider are the corporate laws of the state with regard to the rights of creditors, tax rate for the state being considered for incorporation and the difference in costs between incorporating in one state, as opposed to registering as a foreign corporation in that state. By incorporating your business, you can take advantage of the liability protection. Liability protection can shield your homes and private property from lawsuits that could arise from business activity.

Entity Start-up Checklist
We understand as to how challenging starting a new entity could be for you as an entrepreneur. To assist new businesses, we have created a series of checklist to guide you through the process and make your start up process simple. This checklist can also be used by mature businesses to realize their potential and ensure that they are covering all bases.
We have divided the checklist in various categories for effectiveness of entity start up and ease of understanding for entrepreneurs.

ENTITY INCORPORATION

  • Select Entity Type (C Corp, S Corp, LLC, LLP, LP, etc.)
  • Select State for Incorporation
  • Select Legal Name for your business
  • Select Legal Address / Registered Address for your Business
  • File Articles of Incorporation / Organization with Secretary of State
  • File Employer Identification Number (EIN) with IRS
  • Get State IDs (if required)
  • Get DOL# (if hiring employees)
  • Open Bank Account
  • Order Corporate Kit / Legal Seal / Certificates, etc.
  • Prepare Bylaws / Operating Agreement
  • File Form 8832 with IRS (if applicable for treating entity differently for tax purposes)
  • Get Required Business Licenses
  • Register with Dun & Bradstreet (if needed)


GENERAL
  • Prepare Organization Chart with Roles & Responsibility
  • Create a Vision Statement for your Organization
  • Create your Corporate Mission Statement
  • Order Business Phone / Online Fax
  • Register your company domain (if planning to have a website)
  • Create Basic Email addresses such as sales@yourcompany.com
  • Create Company Logo
  • Create Business Cards
  • Order Basic Stationary
  • Create Marketing Brochures / Catalogs

FINANCIAL PLAN

  • Prepare Start-Up Capital Requirements
  • Prepare Working Capital Requirements (next 6 months expenses preferred)
  • Create Financial Cash Forecast for next 1 year on monthly basis
  • Create Financial Forecast for next 3 years on annual basis
  • Create Accounts Receivable Strategy
  • Create Reminder for important deadlines such as Quarterly Estimated Taxes, Annual Taxes, Payroll Taxes (if applicable), Business License Renewal, Franchise Taxes (if applicable), etc.
  • Open Business Credit Card / Apply for Line of Credit
  • Determine if you need Venture Capital Funds / SBA Loans / Bank Financing

 

PROFESSIONAL SERVICE PROVIDERS

  • Tax / Accounting firm
  • Legal / Attorney firm
  • Marketing / PR firm
  • Bankers
  • Insurance Agents
  • HR Firm / Hiring firms
  • PLANS
  • Business Plan
  • Marketing Plan
  • Financial Plan
  • Operational Plan
  • Employee Stock Option Plan

 

CORPORATE COMPLIANCE AND GOVERNANCE

  • Select Board of Directors
  • Select Advisory Board
  • Create List of Officers
  • Certificate of Resolution (Issuance of 1244 Stock) by Board of Directors
  • Share Allocation
  • Certificate of Share ownership for Buy/Sell
  • Notice of Corporate Shareholder Meeting
  • Minutes of Annual Meeting of Shareholders and Directors
  • Receipt for Shares of Stock


Contact Umang Thakkar, Enrolled Agent for all your Tax Filing, Incorporation, Corporate Compliance, Tax Planning & Financial Planning needs. You can reach us at 770.682.3119 or thru email at umang@incorptaxact.com with your questions and comments.