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There is one thing that General Motors,
Microsoft, AT&T and all other major businesses in America have in common – they
are corporations.
A corporation is a separate legal entity. Corporations function like
individuals, but with some compelling advantages. Most importantly, there is no
liability to an individual business owner who is incorporated. Shareholders of a
corporation are generally not liable for the obligations of the corporation.
Creditors of a corporation may seek payment from the assets of a corporation,
but not the assets of the shareholders. This means that business owners may
engage in business without risking their homes or other personal property.
Corporations are also very flexible in their operation. It is easy to admit new
owners (shareholders) by transferring shares. In addition, the corporate
business structure allows you to more easily raise money from investors and
gives you the choice of offering equity incentives for employees.
As always, I recommend that before forming a corporation, you should check with
your tax advisor and attorney. One disadvantage of corporations can be double
taxation. That is because corporations pay tax on their earnings and profits,
and shareholders also pay tax on distributions received from the corporation.
However, there are many methods to reduce or eliminate the double taxation. A
corporation may make a Subchapter S election which disregards the corporation as
a separate taxpayer. As a result, shareholders pay tax on the corporation's
earnings, whether or not profits are distributed to the shareholders.
Alternatively, corporations may pay bonuses or fringe benefits to its owners,
which reduces the profits of the corporation.
Overall, incorporating is one of the best ways a business owner has to protect
his or her personal assets. Be smart with your business and incorporate.
Sincerely,
John Saletta
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