| February 24, 2010 | | | | type of corporation. A C-Corp (you must do this step |
| So you want your own business. Or, you have been | | | | even if you later want to elect to become an S-Corp) |
| doing business under a certain name but have not yet | | | | is formed by preparing and filing the Articles of |
| incorporated. Often even the savviest entrepreneurs | | | | Incorporation with the Secretary of State and paying a |
| do not understand the basics of setting up a | | | | fee. Government filing fees range from approximately |
| corporation. This article is a quick reference guide to | | | | $100 - $300, depending on whether you file online or |
| some of the differences in protection, setup and | | | | off-line, expedited or non-expedited, and vary from |
| maintenance of a corporation (C-Corp or S-Corp) and | | | | state to state. Thereafter, corporate minutes, bylaws |
| an LLC (Limited Liability Company). | | | | and other documents are drawn up to spell out how |
| 1) Why to Incorporate? | | | | the corporation will operate. At this point, it is also a |
| While there are many reasons for incorporation, one | | | | good idea to open a separate bank account for the |
| main purpose for incorporating a business is to shield | | | | corporation. To do this, you will need a tax I.D. number. |
| your personal assets from creditors or a judgment. | | | | This number can be applied for online or with the help |
| However, beware that oftentimes when a corporation | | | | of your accountant or lawyer. You should put initial |
| seeks to purchase assets, such as a corporate car | | | | capital (traditionally $ 1,000) or more into the new |
| for its employee, the bank that finances the purchase | | | | account and give a copy of the check to your lawyer |
| will ask for a personal guarantee. If you give a | | | | to be stored with the corporate records as proof of |
| personal guarantee, then the corporate asset is no | | | | initial capital. Next, appoint a registered agent for your |
| longer shielded by the "corporate veil." This is true | | | | new corporation. This may be, but does not have to |
| whether it is a C-Corp, and S-Corp or an LLC. The | | | | be, your attorney. Last, your attorney must prepare |
| other main reason to incorporate is to obtain certain | | | | shareholder minutes each year to keep the |
| tax advantages. Every business owner should have a | | | | corporation up-to-date. |
| good Certified Public Accountant or tax attorney who | | | | Formation of an LLC is a similar process. Instead of |
| can advise them on complex tax issues. | | | | Articles of Incorporation, you will need your attorney to |
| 2) What is an S-Corp? | | | | prepare and file Articles of Organization and pay a |
| An S-Corp is a corporation that has taken one further | | | | fee. Government fees to form an LLC are traditionally |
| step for different tax classification. In order to elect for | | | | a bit higher than those of a C-Corp and vary from |
| S tax treatment, you must be an employee of the | | | | state to state (approximately $500 in Illinois). An LLC |
| corporation. When considering whether to form an | | | | does not have "shareholders" as a C-Corp, but instead |
| S-Corp, you should consult a Certified Public | | | | has "members." Unlike a corporation, trusts cannot be |
| Accountant for advice. CPAs or attorneys specializing | | | | shareholders, but may be Members of an LLC. |
| in tax work can best advise which tax treatment is | | | | Additionally, LLC's have less annual corporate |
| best for your particular company. | | | | formalities. |
| 3) What is an LLC and Why All the Hype? | | | | 5) Do I Need A Lawyer? |
| An LLC, or Limited Liability Company, sometimes may | | | | Many sites online provide guidance and forms for |
| offer even better protection from liability than a | | | | "Do-It-Yourself" incorporation and formation of your |
| traditional C-Corp. First, an LLC avoids double taxation. | | | | business. Many of these services are low cost and will |
| For example, a C-Corp is taxed at corporate rates | | | | help you get incorporated or help you form your LLC. |
| and then the owner who takes income from the | | | | However, an attorney can help you talk through which |
| corporation may then be taxed again on that same | | | | corporate structure is most beneficial to your type of |
| amount as income tax. Additionally, creditors who win | | | | business and most aligned with your goals and vision |
| a judgment against an LLC may only receive a | | | | for the future of the company. Importantly, an attorney |
| Charge Order against distributions. Thus, after the LLC | | | | can help you manage the maintenance of the correct |
| discloses its distributions (salaries, etc.), no distributions | | | | forms and filings so that the corporate veil will be |
| may remain that can be applied to the Charge Order. | | | | preserved in case of a lawsuit against the corporation. |
| Therefore, in some cases, the creditor holding the | | | | More factors go into a court's decision as to whether |
| Charge Order against the LLC may receive little or no | | | | to pierce the corporate veil and allow a successful |
| payment on its judgment. Avoiding double taxation and | | | | litigant to pursue an owner's personal assets, and most |
| potentially decreasing the risk that the corporate veil | | | | courts disfavor piercing the corporate veil, but if the |
| would be pierced are both strong reasons to consider | | | | corporation is not kept up to date, a court will consider |
| if an LLC is the right choice for your business. | | | | the same in making its decision. While an attorney is |
| 4) Is Formation of a C-Corp or an S-Corp or an LLC | | | | not mandatory, an attorney is well-versed in the law |
| Difficult, and How Much Does It Cost? | | | | and can handle the details of your corporation while |
| Both a C-Corp (or S-Corp) and an LLC are relatively | | | | you work on growing your business. |
| simple to form. An attorney can help you form any | | | | |