A business lawyer in San Diego can provide assistance with the choice of business entity when your organization is formed or when your organization expands. The selection of the proper way to structure your business can impact many aspects of business operations going forward. Gehres Law Library can help you to understand options and can provide advice on selecting the right structure for your organization.
Among the services we provide, our legal team can explain benefits of incorporation for those companies considering the formation of an S-corp or C-corp, LLC, other type of entity, or a combination of entities. In this article, we discuss some of the benefits of incorporation.
Protection from Liability
Millions of civil cases are filed in the United States each year against individuals and companies, and plaintiffs win the majority of tort cases that go to trial. Your company faces the risk of lawsuits by visitors to your premises who suffer harm; by those who you enter into contracts with who feel you breached your obligations to them; by customers who believe you breached a warranty or that your product injured them; and by current or former employees. Creditors may also sue for nonpayment if your business falls into substantial debt.
When a lawsuit is decided in favor of a plaintiff, business owners could be personally responsible for the judgement against the company if the business does not exist as a separate legal entity. This means personal assets are at risk whenever a company is operational unless steps are taken to avoid personal liability. Incorporation is one of the key ways to protect personal wealth.
When you incorporate your business, your company becomes a separate “person” in the eyes of the law. As long as you do not co-mingle assets and as long as you follow corporate formalities as set out in the California Corporations Code, such as regularly holding a meeting of shareholders, you are typically protected from substantial loss. While there are some exceptions, such as section 302 of Sarbanes-Oxley which can result in CEO’s and CFO’s being held responsible for certifying false financial reports under certain circumstances, incorporation generally protects you from losing more than you invested in the business as long as you follow corporate formalities. This protection is one of the most important reasons for incorporation.
Ease of Ownership Transfer
It can be very difficult to transfer an ownership interest in a business like a sole proprietorship, which does not exist independently of its owner. Because a corporation is a separate legal entity with its own identity, the transfer of assets can be facilitated more easily. Corporations, including closely held private corporations, issue stock to owners. These shares can be transferred to new owners. While there are still valuation issues for private companies that can present challenges, the corporate form does simplify the process of allowing new owners to take control of a business organization.
Sole proprietorships and partnerships do not offer much, if any, tax flexibility to their owners. The owners of these types of organizations will simply declare profits and losses on personal tax returns. The income from the businesses are taxed as regular wage income, subject to all federal and state taxes on wage income.
Incorporating a business can provide much more flexibility. First, you have a choice of electing S corporation status, which is a pass-through entity so owners declare profits and losses on personal returns, or as a C-corporation, LLC or other type of entity. Read more here about electing S corporation status.
A C corporation pays taxes on profits, while its owners are taxed only on distributions. If you choose to structure your company as an S-corporation, you also have the option to classify some portion of your income as a distribution, which means that you do not have to pay Social Security or Medicare taxes on the part of your income not considered wages.
President Trump’s tax reform proposals also include a plan to allow S corporation owners to be charged at a lower corporate rate on company profits, which could substantially lower the tax liability of many small business owners, as the Wall Street Journal explains.
While there is a risk of being double-taxed when you form a C corporation (the company is taxed on profits and you are taxed on distributions which come from those same profits), there are many other benefits that may outweigh this potential downside, which you should discuss with your business attorney prior to making a decision.
Getting Help from A San Diego Business Lawyer
A San Diego business lawyer at Gehres Law Library will explain both the pros and cons of incorporation, including disadvantages such as initial incorporation costs, complex incorporation paperwork and ongoing costs and compliance demands. To find out more about the ways in which our legal team can help you to determine if incorporation is right for you, give us a call at 858-964-2314 or contact us online today.