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Corporation for home-based business?

Ben101Ben101 subscriber Posts: 6
edited August 2006 in Business Planning
I was talking to an very interesting gentleman and he is a retired business lawyer. He said something which I thought was interesting. He said that all businesses, regardless of field or size, should consider filing for corporation.
 
He said most people he encoutered destest the idea of a corporation due all the paperwork and legal hurdles,but he said that a corporation can shield you from a business failture and along with plenty of other important advantages.
I ran a home-based business, I guess I am doing okay, but the scope of my business is local. So I was wondering would it make sense for a home-based business to file for corporation and what are its benefits and deteriments.
 
Thanks
 
Ben

Comments

  • RichRich administrator Posts: 582 Site Admin
    ben,
    corporations and limited liability companies (LLCs) do offer protection.
    as you contemplate this topic, i highly recommend you visit this page in our 10 Steps to Open for Business. there we provide Upside and Downside of each business structure. that should help you determine what structure to get serious about for your home-based business.
    beyond that resource, folks, who`s a legal or accounting expert who can chime in on this topic?
    rich
  • LordEmsworthLordEmsworth subscriber Posts: 0
    I meant to answer this question the other day.  Today in the United States there are actually a number of different business types that will fill the bill.  There are Corporations (S and C), Limited Liability Companies, Limited Partnerships and Limited Liability Partnership.  Corporations have been around for many years.  The others are quite new.  There are many good summaries on the web about the advantages and disadvantages of each type.  Also, there is a book written by a lawyer, Fred (I think) Steingold.
    In my view, you form one of these entities primarily to provide asset protection (in case of a lawsuit) and anonymity and for tax and inheritance purposes.  Don`t forget, you can provide considerable asset protection with insurance.  You should consult your tax advisor about the best business entity to form for your particular situation. 
    Also, beware of forming a business entity in a state that is not your home state.  Several States, notably Delaware and Nevada, have laws favorable to business entities and have low or no taxes.  (Forming a Nevada Corporation has been much touted on the radio of late.)  The dirty little secret is that if you do not live in that State you have to appoint an agent and have a bank account in that state (which is costly) and your home State may require you to register as a foreign business entity, which will probably cost you in taxes also.
    Once you have decide which entity to form, forming it is not all that complicated.  Advice is available on the web.  The most complicated part is probably preparing the operating agreeement, which should be written for your specific situation.  You can probably form the entity yourself, but you can hire a lawyer if you are intimidated.
    Good luck.  I may be able to provide referral to an attorney who does business entity formation, depending where you live.  Contact me through my web site.
  • GilGil subscriber Posts: 0
    Yes, unless you have a special reason like out-of-state investors or partners, there is rarely a reason to incorporate anywhere else.  When you do Delaware is the clear choice, not Nevada or New York.
    Using a corporate entity (LLC or corporation -- limied liability partnerships have largely been eclipsed by LLCs) is often but not always useful even for a home based business.  You do have some protection of your personal assets against the risks and debts of your business, but with lots of caveats:
       (1) creditors often require a personal guarantee of corporate debts, especially for a small or new business;
       (2) in many risk scenarious you may be sued personally in addition to your business, and whether it is your business or you who get sued, somebody has to come up with the funds for the lawyer.
       (3) the shield only comes into play when you have exchausted the resources of your business, in other words shut down or gone bankrupt.  Before that the business will have to pay its debts, which will affect you personally inasmuch as you own the business.
       (4) there are many opportunities for creditors to "pierce the veil" of the corporate liability protection in order to go against you personally.  These include your comingling funds and assets or using the business for your personal ends, failing to follow corporate formalities, or your distributing out assets or incurring debts when you know that will render the company unable to pay its bills.
       (5) having a corporation or LLC is only one of several things to do to minimize liability risk.  You should also have adequate insurance, cash reserves, safe business practices, contracts that disclaim liability, etc.
    One situation where a corporation/LLC is less useful is if you are operating a relatively stable business with a low risk of a lawsuit, and the various costs of running a corporation (fees, additional taxes, accounting costs) would seriously erode your profits.  You should also know that forming a corporate entity will put you on the map with all kinds of government agencies and mass marketers.  They`ll make sure you are up on your business license, tax reporting, business personal property tax, etc.
    On the other hand, a few factors could make it especially important: you have significant assets, you have other partners/owners (and don`t want to be stuck with the entire bill if they vanish), you have investors, or you are in a business with significant financial or liability risks. 
    There are also some tax, retirement, and estate planning concerns and consequences to various business forms or the lack thereof.  So if the size of the business justifies it, talk to a financial planner, CPA, estate planning attorney, etc.
  • jenqjenq subscriber Posts: 2
    Both an LLC and Corporation as a part of a Foundation will give you the most in privacy and protection.
  • Ben101Ben101 subscriber Posts: 6
    I guess to take this question one step futher, would you recommend that I just fill out a form on a website and pay for $50 or get a real lawyer and pay more than that? Or is there really a difference. ThanksBen
  • OhhBoyOhhBoy subscriber Posts: 5

    I meant to answer this question the other day.  Today in the United States there are actually a number of different business types that will fill the bill.  There are Corporations (S and C), Limited Liability Companies, Limited Partnerships and Limited Liability Partnership.  Corporations have been around for many years.  The others are quite new.  There are many good summaries on the web about the advantages and disadvantages of each type.  Also, there is a book written by a lawyer, Fred (I think) Steingold.
    In my view, you form one of these entities primarily to provide asset protection (in case of a lawsuit) and anonymity and for tax and inheritance purposes.  Don`t forget, you can provide considerable asset protection with insurance.  You should consult your tax advisor about the best business entity to form for your particular situation. 
    Also, beware of forming a business entity in a state that is not your home state.  Several States, notably Delaware and Nevada, have laws favorable to business entities and have low or no taxes.  (Forming a Nevada Corporation has been much touted on the radio of late.)  The dirty little secret is that if you do not live in that State you have to appoint an agent and have a bank account in that state (which is costly) and your home State may require you to register as a foreign business entity, which will probably cost you in taxes also.
    Once you have decide which entity to form, forming it is not all that complicated.  Advice is available on the web.  The most complicated part is probably preparing the operating agreeement, which should be written for your specific situation.  You can probably form the entity yourself, but you can hire a lawyer if you are intimidated.
    Good luck.  I may be able to provide referral to an attorney who does business entity formation, depending where you live.  Contact me through my web site.

    Excellent Post!!  Everyone situations are different.  Everyones businesses are different.  Seek counsel of a professional you can trust.  Make sure you understand the financial consequences associated with your decision as well as the protection each affords. 
  • tojealcatojealca subscriber Posts: 5
    I would talk to people in your community that you trust and find a few (two at least) coperate lawyers that you can then set up a time to meet with, give them your story and see what they think you should do.  But, don`t settle for the cheaper person (cheaper is not always better) look at what they recomend and then make your decision from there. 
     
  • jaybeejaybee subscriber Posts: 0
    Are you suggesting that we set up our own foundation for our music
    school and then operate as an LLC or find a foundation that will allow us
    to form an LLC under their foundation?
  • jenqjenq subscriber Posts: 2
    Entities comprised of a foundation, C-Corp and LLC`s are really the only way to structure your business for maximizing tax savings and protecting your assets.  If you`re paying more than 7% a year, YOU`RE PAYING TOO MUCH!
    Happy New Year Everyone!!!!!
  • jaybeejaybee subscriber Posts: 0
    Thanks for your quick reply!

    You`ve gotten me very curious about this. We`re about to choose a
    structure for ourselves, heading into the new year moving on from a sole
    proprietorship because we have grown enough to need to hire a few
    employees.   Can you recommend any reference or reading material that
    brought you to your conclusion to combine a foundation and C Corp in
    this way? It sounds intriguing.

    Hoping your new year brings you joy and properity!

    Jaybee   
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