Business owners of all types need to familiarize themselves with the concept of incorporating.  No matter what kind of business you undertake or the service you provide, there are several significant benefits to becoming a corporation.  Let’s look at some of the important things to know about setting up a corporation. Exactly What is a Corporation A corporation is a business structure.  When the owners of a company incorporate, they are establishing their business as a separate legal entity.  The act of incorporation gives the owner significant personal legal protection.  This is because once incorporated, a company enjoys the distinction of “corporate personhood.”  The corporation is the entity that subsequently enters into contracts, borrows money, and goes to court.  As such, the owners cannot be personally held liable for the corporation’s liabilities and debts. Business Structure of Corporations There is a two-level structure to most corporations: Ownership level: shareholders are the owners of the corporation, whether private or public. Active management level: the shareholders usually elect a board of directors, who in turn are responsible for the selection of corporate officers, which would include titles such as: Chief Executive Officer (CEO) Chief Financial Officer (CFO) Etc. In smaller corporations, shareholders often take on the roles of corporate officers; this is usually not the case with larger corporations. The Two Most Common Types of Corporation Although there are several types of corporation designations, by far the two most common are: C Corporation: this is the most basic form of corporation.  C corporations can have an unlimited number of shareholders, and shares can be traded publicly, although this is not mandatory.  They can also be privately held, with the shareholders being the owners. S Corporation: rather than a business structure, an S Corp is a form of tax status.  The main advantage is that the owners can pass through the income the business generates onto their personal tax return.  This allows them to avoid double taxation, a significant benefit. Other Types of Business Entities Apart from C Corporations and S Corporations, there are other entity types that may apply to certain types of businesses.  These include: Professional corporation Limited liability company Non-profit corporation Public benefit corporation A lawyer will tell you if any of these types of entities apply in your specific situation and the advantages of being set up in a particular way. Benefits of Incorporating Your Business Probably the single greatest benefit to forming a corporation is that it limits your personal liability.  Having the distinction of corporate personhood means that in the event of any issues down the road, the shareholders are not personally liable for any debts (their personal assets cannot be seized, for example). There are also potentially significant tax advantages to incorporating your company.  The aforementioned pass-through taxation feature for S corporations is just one of them.  There are also tax deductions available to corporations that do not apply to business entities such as sole proprietorships and partnerships. We’d be happy to answer any questions you may have about forming a corporation. Contact our team to learn more.

A non-profit corporation is a type of business entity.  In contrast to other kinds of corporations, nonprofits exist for the benefit of some collective, social, or public benefit rather than to generate a profit for the owners.  To put it another way, they carry out a non-commercial purpose.  Any revenues generated by a nonprofit have to be committed to the organization’s purpose, as opposed to being paid out to anyone else. Who Owns a Non-Profit Corporation: No One This is an important distinction over all the other business entities out there, including sole proprietorships, general partnerships, for-profit corporations, and limited liability companies. None of these structures apply to non-profit corporations.  In a non-profit, there are no owners; there are no shareholders. The Purposes Non-Profit Corporations Typically Serve We’ve mentioned the idea of a non-commercial purpose.  Here are some of the specific purposes that would qualify for a non-profit corporate structure: Charitable Scientific Educational Religious Social Club Political Although it is possible to operate a non-profit entity without creating a corporation – as an unincorporated association – in most situations, lawyers would advise against it. As mentioned, non-profit corporations are forbidden from operating in such a way that individuals receive private inurement – or profit – from it. Granting Non-Profit Status and Tax-Exempt Status The Granting of non-profit status to a corporation is typically a state responsibility, although the federal government can also grant it.  Acquiring tax-exempt status is done through the federal government.  To be income tax-exempt in the United States, there are requirements in the Internal Revenue Code (IRC) that have to be met.  The process is overseen by the Internal Revenue Service (IRS). It is important to note that not all non-profit corporations are granted tax-exempt status.  Lawyers are often consulted to assist with the process. Potential Issues with Non-Profit Corporations Despite their best intentions, non-profits have their share of issues: Mismanagement of resources – this is a problem non-profits are particularly susceptible to, due to the fact that, in fact, there is no “owner” an employee is accountable to.  An employee, for example, could start some new program or initiative without a full recording of transactions and liabilities could result in accounting fraud. Founder’s Syndrome – as the organization evolves and expands over time, it may, through the actions and initiatives of volunteers or new employees, start to deviate from the original vision as set out by the founders.  This can lead to conflict and a struggle among the various parties over direction and control. Help Getting Started with a Non-Profit Corporation It is widely acknowledged that starting a non-profit can be complicated and difficult.  There are multiple hoops to jump through, red tape to cut, governmental levels to work with, and all the legalities that go with them.  One essential word of advice is to enlist the services of a good corporate lawyer, who can advise and assist you along the way. We’d be happy to answer any questions you may have pertaining to non-profit corporations.  Contact our team to learn more today.

As an owner of a small business avoiding the danger of litigation should be a top priority for you. Legal issues can take you by surprise and seriously hurt your bottom line. To help protect your business, watch for these common legal issues: