This is the grandfather of all business structures. Featuring incredible liability protection, ease of transferability, simplicity of raising capital and perpetual duration. Once you incorporate, you create a separate and distinct entity, or “person”. This is separate from those who own it or comprise it. The entity could have more than one “home”, traditionally where the business is incorporated is its resident domicile, however if the principle place of business is another state, then this could be called a commercial domicile.
Corporations have long been favored for their liability protection over any other business structure. In the rare cases that the shareholder’s assets were reached to satisfy corporate responsibilities, it is usually the result of either fraudulent activity, poorly managed formalities and alter-ego scenarios. This could be an array of issues, but the focus here is that a corporation that is properly established, organized and maintains its operating formalities is the maximum in liability protection for business owners. Proven.
There are two types of corporations, the standard and default “C” Corporation and the IRS classification “S” Corporation. The S Corp is a tax classification giving the incorporated entity, pass-through taxation. This means that the S Corporation is not a taxable entity, the income and losses are reported on the shareholder’s personal tax return. The S Corporation is also limited in number of shareholders, type of shareholders and classes of stock.
Every corporation is responsible to pay taxes on income. Shareholders of a corporation pay taxes on their income and dividends from the corporation, which is called double taxation.
With LLC’s offering incredible flexibility, liability protection and tax classification options, this leaves at least one question, why wouldn’t you incorporate? This is a fairly significant impact for entrepreneurs. Most states recognize and allow for a single member LLC, which would be the same as a sole proprietor and adding additional members mirrors a traditional partnership. In those states that do not allow single member LLC’s, you could simply bring in a family member or someone else that you trust to hold minimal interest in the company and have the operating agreement empower only the proprietor to make all top down decisions and run the business. Another route is to incorporate in a state that does allow single member LLC incorporation and qualify as a foreign entity in your home state – this should be taken into careful consideration with a legal expert if you feel that this applies to you. Since the limited liability company has so few operating formalities and the protection from business liability, and full service document filing businesses, such as Companies Incorporated, who make it easy to incorporate, it could possibly render some older forms of business obsolete those being the unincorporated structures.
When Should You Incorporate
Generally speaking, most businesses, however, small or big need to be incorporated. Of course, there are a few exclusions that may often be classified as “side-hustles” or extra pocket money activities. However, if you are planning on turning your business into your main or substantial stream of income, you will need to think of incorporation. Often times, this is not a legal requirement, but it provides a certain shelter and is part of smart tax planning.
How Should You Incorporate
You need to find the business structure that is right for your venture. Don’t just form an LLC because it works for most. Incorporate based on your unique business characteristics, market and goals. Something that truly deserves a thought is forming an offshore company and this is particularly good for eCommerce businesses. By incorporating in a country, different than your home country, you make your business compliant to the tax system, laws and regulations in that jurisdiction.
Where Should You Incorporate
There are a few options for you depending on the market you want to serve. For example, if you want to trade in Europe, you should incorporate in Bulgaria or Cyprus. Those countries can open a business bank account for you without requiring your physical presence. You will also receive a VAT number, which is something you must have as a trader in the EU.
Other options could be Switzerland or United Kingdom. If you want to spread outside of the Old Continent, good destinations would be Singapore or Hong Kong.
If you come from outside of the United States, your best places to incorporate would be Delaware or Wyoming. Especially if your business is an eCommerce. The main two reasons why you should take this step are asset protection and secrecy.
If you choose Delaware you will benefit from a number of tax incentives:
- No property tax
- No sales tax
- No VAT
- No capital shares tax
- No stock transfer tax
- No inheritance tax
Another great advantage here is that it would be easy to attract big investors and industry experts to help you grow your business. It would be fair to mention at least one downfall and that is the requirement to visit the USA personally in order to open a bank account.
Wyoming, as the other very good option, is perfect for small businesses. The incorporation process is quite fast and convenient. It can all be done online. You also benefit from:
- No corporate tax
- No income tax
- 4% sales tax
- Up to 5.6% local tax
Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intends for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. This article cannot serve as a substitute for such professional services or advice. Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation. This article is subject to change at any time and for any reason.