.....Some advantages to your business from operating as a corporation....
Owners of Arkansas businesses often consider whether or not their business should be incorporated. At times they have only a limited understanding of the advantages and disadvantages of operating their business in corporate form. This article will discuss some of the factors to be considered in making the decision.
Arkansas, along with other states, authorizes businesses to conduct their businesses in the form of a corporation, rather than as a sole proprietor or as a partnership. Approval from the Secretary of State's Office is required before a business can be operated as a corporation.
A corporation is a seperate legal entity in the eyes of the law. It can own property and can sue and be sued, to the same extent as a private individual.
An Arkansas corporation is owned by its stockholders. Its policies are set by its board of directors, who are elected by the stockholders and who may or may not be the same people as the stockholders. The board of directors selects officers (president, secretary, treasurer, etc.). Depending on the size of the corporation, there may be other employees in addition to the officers.
Probably the most common reason for operating in corporate form is to protect the owners of the business from unlimited liability. If a corporation is properly operated, each stockholder's responsibility for the corporation's debts and liabilities is limited to the value of his investment in his stock. This differs from sole proprietorship or partnership, in which the proprietor or partner is fully responsible for all the debts of his business even if the debts exceed his investment in the business.
This is not to say that in all instances a person's personal assets are protected when he operates a business properly in corporate form. As a condition for credit, banks and suppliers may require that the president sign not only as an officer but also in his individual capacity. As another example, suppose you negligently injure someone in a motor vehicle accident while driving on a business errand for your corporation. Since you did the act yourself, you would be personally responsible. The corporation would also be responsible, since you were acting as its agent. However, if one of the corporation's employees had been driving the vehicle, in most cases only the corporation and the employee would be responsible. The private assets of the stockholders, apart from the value of their stock, would be protected.
It is commonly believed that liability insurance can serve as a substitute for the limited liability protection offered by operating as a corporation. While it is important to have liability insurance, it does not provide all the protections of incorporation. Liability insurance also has maximum limits of coverage. Suppose a very serious injury resulted in the motor vehicle accident example above involving the employee driver. If you operated as a sole proprietor or partnership and the injured person's claim exceeded the coverage limits of your insurance, you would be personally responsible for the excess. If you were operating your business properly in corporate form, normally you would not be responsible.
Operating in corporate form involves more formalities and administrative requirements than does operating a sole proprietorship or partnership. The additional burden of these formalities and administrative requirements must be weighed in making the decision whether to incorporate.
It is not uncommon to see a businessman obtain a corporate charter and then fail to really operate his business as a corporation. The person who does this and expects to reap the benefits of corporate status (e.g., limited liability) does so at his peril. If a corporation is not operated properly as a corporation, it may not be treated as one in the eyes of the law.
The law requires that the stockholders meet at least annually and it is recommended that the board of directors also meet at least annually. Special meetings of the directors, and, if necessary, the stockholders, should be held for important policy decisions. It is important that such meetings be held and that they be properly documented with minutes in the corporate record book.
The business should at all times hold itself out as being a corporation by using its proper corporate name (e.g. letterhead, adverstisements, contracts, etc. should read "Smith Construction Co., Inc." not "Smith Contruction Company"). A detailed set of bylaws should be adopted. Stock should be issued, and the corporation should acquire assets. A corporate seal should be obtained to affix to contracts and other corporate documents.
Start-up fees and expenses are involved in forming the corporation. An annual fee must be paid to the Secretary of State. A separate set of books must be kept for the corporation-business. The corporation is required to file a tax return, unless it qualifies for and elects Subchapter S status. The Subchapter S election allows many smaller corporations to pass their income directly to the stockholders without taxation at the corporate level, in the same manner as partnerships. In such cases the corporation prepares an informational return for the IRS regarding its income, as opposed to a tax return.
The following can also be advantages to incorporation:
Fringe benefits plans for employees
Status of operating in the corporate form
Centralization of management
Ability to obtain capital
Easier transferability of ownership interests
Whether or not these would be applicable to a given business depends upon its particular situation. A detailed discussion of these items is beyond the scope of this article.
This article has summarized some of the major points to be considered in making the decision whether or not to incorporate. It is based upon Arkansas law. The situation and needs of each business is unique, however, and a final decision should not be made until consulting with an attorney regarding the particular facts of your business. It is also advisable to consult an accountant.
If your business is located in Arkansas, we would welcome the opportunity to help you with your incorporation or other business planning needs. We also handle business disputes involving court action, including collection of your accounts. Please call 479-968-4747 (Russellville area) or 888-295-4741 (Arkansas state-wide toll-free).
Copyright (c) 2011, Jim Carfagno, Jr., P.A. All rights reserved.