Business Owner's Manual

Corporation

This is the most complex and expensive way to structure a business, but it also offers important protections for the owners. A corporation is a legal entity distinct from its owners. This ensures continuity and protects the assets of the owners (i.e. the shareholders) from the liabilities and debts of the corporation.

Advantages:

• Except where shareholders are professionals who are always responsible for their own negligence, the liability of corporate shareholders is limited to the amount of their investment.

• A corporation has advantages in raising capital because of greater access to investors.

• Ownership is transferable and inheritable — the corporation doesn't fold if its owners change or die.

Disadvantages:

• Corporations are difficult and expensive to set up and dismantle.

• There are stricter legal rules than for other business structures. Power is limited by the articles of incorporation and bylaws, and a vote of the shareholders may be required for various decisions.

• As a separate legal entity, a corporation must maintain its own set of accounting records and file its own income tax returns.

Special Tax Considerations:

• Corporate shareholders are subject to a form of double taxation. The corporation pays a corporate tax on earnings and each owner/shareholder pays personal income tax on any profits distributed to them. This is a special problem for small corporations controlled by their owners.

• Both the IRS and New York State allow corporations with under 35 shareholders to elect to be a Subchapter S Corporation, treated as a partnership for tax purposes. This avoids the double taxation by the state and federal governments. Whether or not to make a Subchapter S election is a matter to be discussed with a tax advisor. If you want to go ahead, use IRS Form 2553 and New York State Form CT-6. Note, however, that New York City treats "S" Corporations as true corporations, subject to corporate tax.

It is a good idea to consult an attorney for help in setting up a corporation. It's possible, but risky, to do it yourself.

A corporation must obtain approval from the Secretary of State to do business under a fictitious name. The name must be unique and, ordinarily, must contain the terms "ltd.," "corporation," "corp." or "inc." You should think of at least three name options, in case your first choice is taken.

Forms, detailed instructions, and additional information on forming a corporation are available from the NYS Department of State Web site. Or call the DOS at 518-473-2492.

Alternatively, you might contact an incorporation service listed in the Business to Business Yellow Pages under "Incorporating Companies." The service will check the name you have selected, file a certificate of incorporation, and provide you with a corporate "kit" — forms for articles of incorporation, bylaws, stock certificates, etc.