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     Should I Incorporate My Small Business?

The owner of a small business has several options with regard to the STRUCTURE of the business. These include operating as a sole proprietorship, partnership, corporation, or limited liability company. Many small business owners have chosen to incorporate.

A corporation is a legal entity. The characteristics of this entity include the ability to own PROPERTY in its own name, to enter into CONTRACTS, and to sue someone or be SUED. The formation of a corporation, in addition, allows co-owners to act as a unit under a common name and protects the co-owners (shareholders) from personal liability beyond their individual investment.

Since a corporation is a creation of state law, there are strict legal formalities associated with its formation and continuation. The first step of incorporation is the selection and reservation of a name. ARTICLES of incorporation must be prepared and filed. The existence of the corporation will begin when the Secretary of State issues a Certificate of Incorporation (also referred to as a "Charter"). BY-LAWS, which govern the internal operation of the corporation must be prepared. The first meeting of the shareholders and board of directors must be held following incorporation. Filing and publication costs for incorporation are $100.00, a corporate book and seal costs approximately $40.00. Attorneys fees are in addition to these costs.

The primary benefit of incorporation is the limitation of personal liability of the shareholders. In order to maintain this benefit, corporate FORMALITIES must be followed. There must not be commingling of corporate and personal finances, annual meetings must be held, the corporation must be adequately capitalized. The corporate entity can de DISREGARDED if the corporation engages in fraudulent activity or commits some intentional act that results in harm to a third party. Notwithstanding the general rule, in many instances the principals of a small corporation will be asked to guaranty corporate debt.

A corporation will be taxed as a separate entity, and will be subject to DOUBLE taxation(taxed on income and shareholders taxed on dividends received), unless the corporation elects to be treated as a SUBCHAPTER S corporation. Income and losses of a Subchapter S corporation pass through to the individual shareholders and are subject to the individual tax rate. The benefits of limited liability, availability of Subchapter S tax treatment, and reasonable start up costs make incorporation a sound decision for many small business owners.

(The information above is provided for general EDUCATIONAL purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal ADVICE, but should always consult their own attorney regarding legal matters.)


Joe Gottlieb is a partner with the law firm Hassett, Cohen, Goldstein, Port, & Gottlieb -- a law firm focusing on the special needs of entrepreneurs and companies in the new economy. Joe specializes in business transactional matters, including choice of entity, preparation of business agreements, the purchase / sale of a business, and franchise arrangements. You may contact Joe at or 770-393-0990 x 105 -- or visit his firmís website at >www.internetlegal.com.

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