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No, there is no need to incorporate.
But it is advisable that you do.
You should understand, that if you run a business without
incorporating it, either as an "incorporation"
or as an "LLC" (Limited Liability Company),
you, as the business owner, are exposed to
unlimited financial liability. In fact you
"guarantee" an unincorporated business,
with your total personal financial capacity.
Incorporation means that the business is its own legal
person and financial claims on the business are separate
from claims against yourself.
But you
can open and run a business as a sole proprietor
or as a partnership. This is usually
done directly, or indirectly, with your own name. If you
do not want to use your name, then you have the business
registered as "dba" and give it a name of your
choice. In other words, if your name is Mark Niemersland,
then you register the business as "Mark Niemersland'
doing business as (dba) "Happy Lawncare". Your
business licenses will state it that way, as does your
business bank account. You as Mark Niemersland are liable
for the operation of the business.
2. What are
the Advantages of Incorporating a Business? |
The principal advantage of an
incorporation (i.e. calling the company "My Company
Inc.".) is that it limits normal financial liability
of the shareholders to the amount of share holding
investment. In other words, if the share capital of the
incorporated company is, say $1,000, the maximum
financial liability of the shareholders of the
company, provided that there is no fraud, negligence or
other irregularity or misappropriation, is limited to
that amount. This is especially important when one of the
companies clients for instance decides to initiate a law
suit against the company, for whatever reason. Similarly,
incorporation is an important issue, when you decide to
take on employees. But you also have to understand that when
you incorporate, you have to keep records for the company
and pass written resolutions on issues for
instance, like setting up a bank account, appointing
officers for the company, giving a person the right to
sign on behalf of the company and so on. The same
procedure applies, if you, as the owner, for instance,
takes a loan from the company. There has to be a contract
between you, as the owner, and the company, stating
amount, length of repayment, rate of interest, and so on,
and this has to be approved in a resolution by
the company.
You should, however, note that
"incorporation" is not a license to be
irresponsible and to expose the company to undue risks.
If you do that, your creditors can and will sue you as
the officer of the company for "negligence". As
a newly incorporated company, you are also very unlikely
to receive a working capital loan from a bank without any
additional security, such as giving a "personal
guarantee".
In most States, a simple incorporation can
be done through a lawyer for about $300-600, depending on
the complexity. The office for incorporation is normally The
Secretary of State in your States capital. You do not
need to take a lawyer to incorporate, though this is
highly advisable. But Office material suppliers, such as
Staples and Office Depot
or Office Max sell
incorporation kits which included all legal documents
necessary for an incorporation (less the incorporation
form, which you have to get from the Secretary of State
in the State, where you incorporate).
The items needed for
incorporation are
2.1. |
The Articles
of Incorporation (The Laws of the
Corporation) |
2.2. |
A business
name which has not been taken up in your
State |
2.3. |
A
Form (obtained from the Secretary of
States Office) providing the State with
various details about the newly formed company
and its Officers (President/CEO and Corporate
Secretary) |
2.4. |
Two
officers (in some states only one is
required) of the company - The President and a
Company Secretary. |
2.5. |
The
payment of the incorporation fee and the
Franchise Tax |
Once you have incorporated, you
have to obtain a business license (from county and city,
as applicable) and you have to open a "corporate
bank account" in the name of the company. The
opening of a bank account requires a Corporate
Resolution. Usually, your bank will have a
preprinted form for that, which you, as the President and
as an Officer of the company, will have to sign. You also
have to establish an accounting system (using a computer
and a small accounting system such as Quickbooks or
one of the Programs will help greatly. There are many
other accounting programs around, some of
them are shown on our pages, and the choice
depends on your preference.
You as the owner (shareholder) of the
company really have two positions. One
as a shareholder, the other one as a salaried
employee (being the President
or CEO- Chief Executive Officer) for
which you need an employment contract made out between
yourself and the company. This contract should specify
your duties, your salary, length of employment (can be
open ended), and the kind of liabilities you have as an
employee. Some of the employment aspects of Officers of
the Company can also be regulated through the adoption of
By-Laws.
In many States, business names can be
reserved for a specified period against the payment of a
fee to the Office of the Secretary of State.
In summary therefore, incorporation
provides a legally safe and regulated environment within
which the company can operate, provided
you as the owner keep within the "rules of the
game". These rules mean
that important decisions which the company takes (or you
as the owner on behalf of the company), such as giving
or getting a loan, or other decisions which materially
affect the value of the corporation, have to be
decided upon and recorded in the form of
Corporate Resolutions. Understanding the
importance of such Corporate Resolutions
is essential, since you have to realize that the
Corporation is a Legal Personality
who can make claims on other people and who accepts
claims against itself which are quite independent from
those made against you as the owner, shareholder of
manager of that co-operation.
Some useful Books from
amazon about Incorporation |
Notwithstanding whether or not you
incorporate, in most States.within the USA, you have to
obtain a business license which means to
register the name under which you operate the business at
various offices in your State, County and City. In many
places you get your business license from the County
and City Departments of Revenue against the
payment of an annual tax. Usually, a license is
required from the State, County and from the City in
which you operate as well. The annual license
fee charged normally varies with the size of the annual
business turnover (annual sales revenue). starting
usually around $50-150 per year.
In addition to applying for business
licenses, you have also to apply for Sales Taxes. This is
also done at the State, County and City
Departments of Revenue, or in some States at a combined
office. This registration for Sales Taxes requires you to
make a monthly return with the applicable sales tax
collected on the governments behalf. You have to file the
return even if you have not collected Sales Taxes in that
particular month.
Most cities have rules about the
kind of activities that can be carried out in different
geographical areas or a municipality. The basis of these
are usually zoning laws for commercial zones (stores and
offices), industrial zones (factories) and residential
zones (houses, apartments, condominiums). Zoning
ordinances often limit or even prohibit business
activities in residential areas. In most cases as long as
a home containing a business is primarily used as a
residence and the business activities don't negatively
affect neighbors or the area, operating a home based
business will be allowed.
To determine what your zoning ordinances
are, you have to get a copy of them from your city or
county clerk's office or your public library. You have to
read it carefully, since business definitions are often
vague and if you are in doubt, you ought to consult a
lawyer or a legal office (the Small Business
Administration office in your city is also often
able to help), to help you decide whether you are allowed
to run your business from your home. This might cost
money, but is well worth it, if the regulations are
unclear or difficult to interpret.
That is a difficult question to
answer, since different types of business have needs, and
sometimes legal requirements for different levels of
documentation and also, of the retention period for such
documentation.
But, there are some principles which any
kind of business has to follow. There are also some
prudent rules which exceed what is legally required. For
tax purposes, the key to eliminate the fear of the tax
authorities (be it the IRS in the USA or the tax
authority in any other country) is Documentation.
Adequate documentation should
eliminate any fear of the tax authorities challenging
your tax return. Such documentation consists of
original receipts, canceled checks, and a detailed
summary for the reason for each expense having been
incurred and being claimed as a business and/or tax
deductible expense. The minimum information has
to include:
|
The Amount
and description of each expenditure |
|
The Date of
the expenditure |
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The
Business Purpose of the Expenditure |
Most business receipts have the
documentation regarding the amount, description, and date
on the receipt. The business purpose of the activity or
expenditure is, however not always apparent on the
receipt. The receipt is the most important
documentation. And a system for collecting and
cataloguing receipts is an essential business tool. Using
checks and credit cards makes the retention of receipts
much easier and companies like American
Express, Visa or Mastercard
provide special facilities for small companies and their
expense accounts.
Business expenses for the use of
cars are treated differently in different countries, but
here again, documentation of business trips and clear
separations between business, commuting and private use of
the car will prevent any undue risk of legitimate car
expenses not being allowed by the tax authorities.
- In
the USA business expense deductions for your home
office have to be very clearly identified. Here
again, the key is documentation.
Business expense deductions for a home office may
include a proportion of:
-
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Mortgage interest |
|
Rent |
|
Real estate taxes |
|
Utilities |
|
Home repairs; and |
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Home owners
insurance. |
Whereas regulations in most countries have
become much more strict over the years, few tax
authorities will challenge your home office expenses
provided you can document that
|
You perform
the most important business activities at home;
and |
|
If your
time is spent equally between your business
activities at home and other locations, you spend
the majority of the time at home; and |
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If in your
normal business you meet clients, you regularly
meet these clients at home. |
Having the home as your
only business venue will obviously also strongly favor
you. You have to understand, however, that you
can only deduct a proportion of your home expenses
as a business expense. The rules on how you calculate
that differs from country to country and, it is essential
to consult a tax adviser, before you make such
deductions. Though recent US IRS forms have a simple
built in formula that relates to how many square feet of
your total space in your house you use for business
purposes, and only for business purposes.
Yes it is, and some particular
consideration should be given to choosing a name for your
company. Quite apart from the fact that some names might
have been taken by other business ventures and are
therefore not available. There are people who maintain
that much of the value of a company lies in the name
recognition of its customers. At the point where you
might want to sell your company, brand names associated
with your company may assume some special value. This
could be reflected in a higher sales price for the
company.
Besides the identification of your business,
the name might convey associations with ideas or methods
of doing business that potential clients relate to
certain desirable qualities. Therefore, research
carefully what kind of message you want to transmit to
the outside world through the name of your business. A
careful balance between something that gives the
impression of solidity, inventiveness, reliability,
capability and other desirable qualities without raising
or implying expectations in the minds of potential
clients that you can clearly not fulfill is a save, but
not easy choice.To check, if the proposed name for your
business is available in your State, phone the Division
or
Office of
Corporations in your State.
The basic rules for how the company
operates are THE ARTICLES OF ASSOCIATION. These are usually
kept fairly general, to cover as wide an area as
possible. More specialized areas can be covered through By-Laws which are sets of
rules, that the company adopts through a resolution.These
govern areas of the company's activities not
covered by the Articles of Association. There is
no requirement to adopt by-laws, but they often serve a
useful purpose.
Another agreement that is often also a By-Law is a Buy-Sell
Agreement. It is written, when in a privately held
company, there are more than one shareholder in the
company and regulates the buying ansd selling of stock.
Usually, it is formulated in a way that forces a selling
shareholder to offer his stock first to the remaining
shareholders, before he can sell it to a third party.
Sometimes it prohibits sales to a third part altogether.
It generally, also covers the ability of the shareholder
to offer his shares as security, for instance to a bank.
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