This is part 3 of a 4 part series entitled “What Type of Business Entity should I choose?”. In Parts 1 and 2, respectively, I discussed the various aspects of starting a business as a sole proprietorship and important considerations when forming a business partnership.
In this Part 3, I will explain the different aspects and steps to take when forming a corporation, and why you should consider this option when forming your business entity.
First, let me go back to why individuals decide to operate under the umbrella of a business entity in the first place. People choose the protection of a business entity to avoid their personal assets being exposed to liability. In Texas, only some of your assets are automatically exempt.
At Romano & Sumner, we always strive to make sure our clients are thoroughly educated on all of the options they have available to them. Before you move forward in forming your business entity, you should be aware of the positive and negative impacts that may occur depending on how you choose to form your business. Our recommendations will vary depending on each client’s circumstances. If you have further questions about making this crucial decision in starting your business, please don’t hesitate to contact us.
So, what is a corporation?
Let’s begin with a definition of a corporation:
The Corporation is a legal entity – i.e. it is treated like a person. However, because a corporation cannot make decisions, it is run by a board of directors and officers. It is owned by shareholders, who exchange their capital investment for shares of stock. It provides the maximum personal protection available – so long as the corporate formalities are observed, and the directors or officers don’t do anything that would allow someone to “pierce the corporate veil”
I am going to revisit my hero’s from the last section of Part 2 of this series, Clark Kent and Bruce Wayne. Clark and Bruce have a great idea for starting a business called Superheroes, Inc. They have decided that a corporation is the best business entity to form this new endeavor under.
Now, Clark and Bruce are asking the following questions:
Yes. As shareholders, Clark and Bruce’s personal assets are protected. If Bruce Wayne is also a director and CEO, then so long as he didn’t use the corporation as an extension of his own will –i.e. paid his cable bill and mortgage using corporate bank accounts–then it will be difficult to “pierce the corporate veil” and get to his personal assets.
Remember: the corporation is like a person. Its earnings are taxed and then when dividends are paid, the shareholders pay tax again.
Overall Costs of forming a C-Corp
Clark Kent and Bruce Wayne are on board with the idea of forming Superheroes, Inc. as a C-Corp. They really like the idea of the protection provided by the C-Corp. However, there is a big problem:
They both hate the idea of double taxation…is there anything our heroes can do?
Yes – Convert the C-Corp into an S-Corp
Now, Clark and Bruce are asking a new set of questions:
To convert Superheroes, Inc. into an S-Corp, they must follow this process:
Yes – the S-Corp can pass along income, losses, deductions, and credits to the shareholders. In an S-Corp, there is no double taxation, and they will still have stronger Asset Protection as a corporation.
Figuring out how and why to form a corporation and whether you should choose the C-Corp option or S-Corp option can be a daunting task. Deciding how you will conduct your business can be the most crucial decision you make in forming a business entity.
If this process of choosing a corporation vs. an LLC seems too daunting to go through on your own, we are happy to help. We thoroughly enjoy helping our clients navigate through the legal aspects of forming and building their businesses. Contact us today and let us know how we can help you.
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