| Many people start businesses as a sole proprietor, | | | | chance to more fully define the rules under which it will |
| operating under their own social security numbers and | | | | operate. |
| reporting their income on their personal tax return. | | | | In some cases, you will be required to get a business |
| However, given the ease with which you can | | | | license as well, such as accountants, architects, various |
| incorporate a business and the protections that it | | | | service providers, and certain types of engineers. For |
| offers you, it is well worth going through the process. | | | | most occupations and professions requiring a license, |
| Why Incorporate? | | | | you must meet educational and work experience |
| The primary reason for incorporation is to protect the | | | | standards as well as pass a qualifying examination in |
| owners from liability in the case of bankruptcy or a | | | | order to obtain a license. |
| lawsuit. Once incorporated, a business is seen as a | | | | Throughout the operational life of your company, you |
| separate "person" from the owner in the eyes of the | | | | must continue to keep a record of minutes that |
| court. The owner or owners are not liable for the | | | | records the company's actions and maintains |
| debts and/or obligations of the company (unless they | | | | documentation that you have been following your |
| have provided personal guarantees). | | | | by-laws. Failure to follow the articles of incorporation |
| Other reasons for incorporating are more positive. | | | | and by-laws can open the officers and directors up to |
| Once incorporated, the company can be sold or | | | | a lawsuit by the shareholders. |
| transferred to another entity. Additionally, a retirement | | | | Limited Liability Company |
| plan, such as a 401K, can be set up more easily under | | | | Historically, LLCs required two members and may in |
| a corporate umbrella. Employees can more easily be | | | | some states. In Maryland and most other states, you |
| provided with healthcare and other benefits available | | | | may form a sole member LLC. To form an LLC, you |
| only to incorporated businesses. | | | | must complete and file Articles of Organization, which |
| Types of Incorporation | | | | include:the name of the LLCpurpose for which the LLC |
| C Corporation | | | | was formedaddress of LLC's principal officename and |
| A C Corporation provides a higher level of personal | | | | address of LLC's resident agent |
| liability protection than a Limited Liability Company or | | | | That's it. Seems a little too easy, doesn't it? |
| Limited Liability Partnership. This type of corporation is | | | | Due to the more extensive documentation |
| taxed as a separate entity. Owners of a C Corp are | | | | requirements and taxation requirements, the likelihood |
| called shareholders and they receive their payments | | | | of the affairs of the C Corporation and owner |
| from the company in the form of dividends. This leads | | | | becoming entwined are low. However, because the |
| to a double taxation penalty as the corporation is | | | | LLC requires only simple Articles of Organization and |
| taxed as an entity for its income, then each of the | | | | the income flows to the owner, a sole member LLC |
| shareholders is taxed based on the dividends they | | | | risks having "the corporate veil pierced," meaning that |
| receive. | | | | the court sees the LLC and the owner as one |
| S Corporation | | | | "Person" equally responsible for the debts and |
| An S Corporation provides the same level of liability | | | | obligations of the company. |
| protection as a C Corp, but limits the number of | | | | To avoid this, make sure you treat your company as a |
| shareholders to 75. The process for filing for an S | | | | separate entity. Create an operating agreement that |
| Corporation is the same (at least in Maryland) as a C | | | | defines the ownership interest, responsibilities of |
| Corp. | | | | members, banking and accounting decisions, and |
| Limited Liability Company | | | | general operating rules for the company. This is meant |
| An LLC is designed to provide liability protection, but | | | | to be an agreement between the members, so often |
| allow the income and losses to flow through to the | | | | a sole member will not bother; however, creating this |
| members (owners) based on their ownership | | | | document and following it is important if you need to |
| percentage. This form has minimal paperwork and is | | | | show that you are independent of your company. |
| generally considered the preferred form for a business | | | | Additionally, do not allow your funds and the |
| that is just forming and not planning on raising capital | | | | company's funds to mingle. Have a separate credit |
| from shareholders. | | | | card for the company purchases and do not pay for |
| There are also General Partnerships, Limited Liability | | | | unallowable expenses (such as a nanny) through your |
| Partnerships, Limited Partnerships, and Limited Liability | | | | company. |
| Limited Partnerships, but these will not be covered in | | | | Filing |
| this article. | | | | You file this document with the state agency that |
| Forming the Corporation | | | | handles business registration and taxation. In Maryland, |
| C and S Corporations | | | | that agency is the State Department of Assessments |
| In general, to form a C or S Corporation, you must | | | | and Taxation (SDAT). If you are planning a C or S |
| complete and file Articles of Incorporation which | | | | Corporation, Maryland actually provides a form that |
| include:name and address of the incorporator(s)name | | | | you can fill in for your Articles of Incorporation, but it |
| of corporation and address of corporation's principal | | | | would behoove you, if you plan on having multiple |
| officepurpose for which corporation was formedname | | | | stockholders, to have a lawyer complete your Articles |
| and address of corporation's resident agentauthorized | | | | of Incorporation. |
| number, class, and par value of any sharesa | | | | This is not true for the LLC as the Articles of |
| description of each class of stock, if applicablenumber | | | | Organization are simple to fill out. You should, however, |
| and names of corporation's initial directorsprovisions | | | | have a lawyer review all your company documents to |
| governing the basic rights of shareholdersprovisions | | | | make sure you are truly limiting your liability. |
| defining the authority of directors | | | | If you are filing in Maryland, you may send in your |
| Each state has difference rules defining the number of | | | | Articles of Incorporation plus the fee of $120 ($100 |
| officers and directors required, the types of officers | | | | processing fee and $20 organization and capitalization |
| required (president, secretary, and treasurer, for | | | | fee) to SDAT and you will hear back in 6-8 weeks. |
| instance), and whether a single person can hold multiple | | | | Alternatively, you can add an Expedited Service Fee |
| offices. | | | | of $50, fax in the request and hear back in 5 days. |
| In addition to your Articles of Incorporation, you should | | | | Better yet, if in a huge rush, you can walk in and pay |
| also have By-Laws which define your annual meetings, | | | | the expedited service fee and have your company in |
| board of directors, officers, stock, corporate seal, bank | | | | about an hour. |
| accounts and loans, and other provisions that may | | | | Good luck! |
| affect the company. This offers the company the | | | | |