Q: WHAT FACTORS SHOULD BE CONSIDERED IN CHOOSING THE TYPE OF BUSINESS FORM FOR MY BUSINESS?
A: Although there are many important things to think about when choosing a business form, some of the main considerations include your preference of tax treatment, how you intend to capitalize the business, and the type of business your operate. It is very important to plan your business and to work closely with someone who can help you choose the business form that will meet your needs. The common forms of business structure are the following:
Limited Liability Company
Family Limited Partnership
Limited Liability Partnership
Q: HOW CAN A PROPERLY ESTABLISHED BUSINESS ENTITY SUCH AS A CORPORATION SHIELD ME FROM PERSONAL LIABILITY FOR BUSINESS DEBTS AND OBLIGATIONS?
A: Personal liability arising from business obligations can devastate the accumulated wealth of a lifetime of work. Personal liability may extend to business losses, but other obligations may also reach individuals, including:
- Damage awards in lawsuits
- Tax penalties
- Back wages and benefit payments
Limited liability offered by corporations and other business entities shelters business owners from personal liability. Nonetheless, if an owner or director performs certain personal acts, behaves illegally, or fails to uphold statutory requirements for corporate status, he or she may face personal liability despite the corporate shelter.
Q: WHAT IS THE DIFFERENCE BETWEEN A SUBCHAPTER C AND S CORPORATION?
A: The Internal Revenue Code allows for two different levels of corporate tax treatment. Subchapters C and S of the code define the rules for applying corporate taxes. Subchapter C corporations include most large, publicly-held businesses. These corporations face double taxation on their profits if they pay dividends: C corporations file their own tax returns and pay taxes on profits before paying dividends to shareholders, which are subsequently taxed on the shareholders’ individual returns. Subchapter S corporations meet certain requirements that allow the business to insulate shareholders from corporate debts but avoid the double taxation imposed by subchapter C. In order to qualify for subchapter S treatment, corporations must meet the following criteria: Must be domestic Must not be affiliated with a larger corporate group Must have no more than one hundred shareholders Must have only one class of stock Must not have any corporate or partnership shareholders Must not have any nonresident alien shareholders. Additionally, after a business is incorporated, all shareholders must agree to subchapter S treatment prior to electing that option with the Internal Revenue Service.
Q: WHAT DOES IT MEAN TO PIERCE THE CORPORATE VEIL?
A: Sometimes, courts will allow plaintiffs and creditors to receive compensation from corporate officers, directors, or shareholders for damages rather than limiting recovery to corporate assets. This procedure bypasses the usual corporate immunity for organizational wrongdoing, and may be imposed in a variety of situations. The specific criteria for piercing the corporate veil vary somewhat from state to state and may include the following:
- Courts may not allow owners to benefit from a corporation’s limited liability if the underlying business is indistinguishable from its owners.
- If a corporation is formed for fraudulent purposes.
- Courts may impose liability on the individuals controlling the business if a business fails to follow certain corporate formalities in areas such as record-keeping.
Q: HOW OFTEN SHOULD A CORPORATION HOLD MEETINGS AND UPDATE ITS MINUTES?
A: Any time a corporation undertakes a major change or transaction, it should be reflected in its minutes. In addition, meetings of shareholders and directors should take place at least annually if for no other reason than to elect new officers and directors. Failure to adhere to the formality of regular meetings can jeopardize the corporation’s ability to shield its officers, directors and shareholders from personal liability for the corporation’s actions.
Q: IS IT A GOOD IDEA TO HAVE A BUY-SELL AGREEMENT?
A: Corporations with more than one shareholder should seriously consider a buy-sell agreement. A shareholder’s death, divorce, disability or termination of employment can create serious problems for a corporation and its other shareholders. A buy-sell agreement can help minimize these problems by providing for an orderly succession in such plans. Similar provisions are recommended for partnership.