Wealth Building Lessons

A lot of people think that you only form a corporation if you’re establishing a business at a physical location. However, if you’re doing anything that generates some income like consulting or even investing, you can form a corporation and you probably should do so. There are several good reasons to incorporate but the main benefits are asset protection and tax savings, both of which are necessary to create and preserve your wealth.

Before looking at all the benefits of forming your own corporation, let’s look a little closer at what a corporation really is. A corporation is defined as a legal entity or structure created under the authority of the laws of a state consisting of a person or group of persons who become shareholders. What this means is that you are creating a fictional organization that, like a person, can enter into contracts, sue or be sued, pay taxes, and do other things necessary to conduct business. The key, however, is that the entity’s existence is considered separate from yours (and all of its members).

So, what are the benefits with forming your own corporation?

1. Limited Liability
   One of the key reasons for forming a corporation is the limited liability protection provided to its owners. Because a corporation is considered a separate legal entity, the shareholders have limited liability for the corporation’s debts. This means that if someone sues you, your personal assets will never be at risk (unless of course you have mismanaged the corporation or commingled with your personal assets but that’s a topic for another discussion).
2. Tax Advantages
   Having a separate entity (from your personal) to run your investments from provides a tremendous opportunity for tax write-offs. You can write off various different expenses from travel, meals, car, part of your rent/mortgage, supplies, entertainment, all kinds of insurance, etc. You can even pay yourself a salary to off-set any corporate taxes altogether.
3. Corporate Tax Treatment
   Since a corporation is a separate legal entity, it pays taxes separate and apart from its owners (at least in the typical C corporation). Owners of a corporation only pay taxes on corporate profits paid to them in the form of salaries, bonuses, and dividends. The corporation pays taxes, at the corporate rate, on any profits after the expenses have been deducted.
4. Perpetual Existence
   A corporation continues to exist until the shareholders (you) decide to dissolve it or merge with another business. Death of the owners doesn’t hinder the existence of the corporation.
5. Freely Transferable Shares
   Shares of corporations are generally freely transferable because as a separate entity, the existence of a corporation is not dependent upon who the owners or investors are at any one time. In other words, your corporation continues to exist as a separate entity and is not terminated or dissolved if decide to sell your shares or even if you die.

So, now that you’re sold on why you need to setup your own corporation, let’s look at the basic steps for doing this.

1. Decide the type of corporation to form
   There are basically three choices: C corporation, S corporations or a Limited Liability Company (LLC). The main difference between a C and S corporation is the way profits are taxed. The basic setup procedures are the same, except that an S corporation requires an additional IRS filing. You will probably need to discuss with your CPA and Attorney which entity is best for you.
2. Decide where to incorporate
   You’re entitled to incorporate in any state in the US. There are certain circumstances where you need to incorporate in the state where you intend on running your business but wherever possible you should pick one of the states where you are exempt from state income taxes. Some examples include Nevada, Delaware and Florida.
3. Decide on a name for your corporation
   You can pick whatever name you want so long as it’s not already being used by another corporation. The most efficient way is to call the Secretary of State to do a corporate name search to see if the name is available. Remember that you will have to append either Inc. or LLC to the end of the name depending on which corporate structure you choose.
4. File Articles of Incorporation
   This step is also done via the Secretary of State. Here, you will submit some basic information about your corporation, such as its name and principal office address.
5. Select a Registered Agent
   A registered agent is a person or corporation who is designated in the articles of incorporation/organization that will receive service of process or other important documents from the state. All corporations and LLCs must choose a person to act as their registered agent.
6. Pay the Fees
   There are typically four types of fees, including: a fee to file the articles of incorporation with the secretary of state; a first year franchise tax prepayment; fees for various governmental filings and the registered agent fee.

NOTE: Always check with a CPA and/or Attorney to make sure you set up the entity that best suits your needs.

Money Saving Tip: Normally an Attorney will charge around $2500-$3500 to set up a corportion. I’ve found it much cheaper to use on online service like LegalZoom or MyCorporation for around $500-$1000 and then have your attorney draft the Operating Agreement and Buy-Sell Agreement(if you need one) for around $1,000.

Related Products:
1. Get your Legal Documents Online for up to 85% less than Lawyer Fees
2. Get Your Free Living Will

Related Books:
1. Inc. Yourself: How to Profit by Setting up Your Own Corporation
2. Home Business Tax Deductions: Keep What You Earn
3. Small Business Taxes Made Easy: How to Increase Your Deductions, Reduce What You Owe, and Boost Your Profits
4. Small Business Tax Secrets: Ultimate Tax Savings for the Self-Employed!

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