Why Incorporate?
People and/or businesses usually incorporate for 1 or more reasons. Usually to limit their personal liability for the business, tax savings, and/or to shelter and protect their assets.
Operating a business as a DBA can be risky. Often times, owners of DBA’s use their own personal credit and assets to open and run their business, again placing themselves at risk. The liability of debts and law suits fall on the owners of the business and their personal assets can be attached. This means a DBA business owner can possibly lose his/her home, ruin their credit, etc. Again, this is one of the major reasons that business owners choose to incorporate.
Incorporation separates an individual from the company. The corporation becomes an entity in itself. It can then accrue it’s own assets and liabilities. Which means it can obtain corporate credit and assets without placing any liability on its shareholders/owners and employees.
Why place yourself and your assets at risk. Incorporate your business and protect yourself while at the same time taking advantage of corporate tax laws that can save you money.
Types of Corporations
Non-Profit Corporations:
Non-Profit Corporations are usually formed to provide a benefit to society. These corporations have members and not stock holders. Their profits are used to further the purpose of the organization. While there are no dividends to receive, Non-Profit Corporations do have paid employees. Many are paid well, however there is no personal asset protection within this type of Corporation. Many people/businesses choose to form a Non-Profit Corporation to better their chances of receiving government and private grants, and sometimes to obtain government contracts.
For Profit Corporations:
These corporations are in business to make money. The formation of a for profit corporation, known as a C-Corporation or S-Corporation, can offer maximum protection for its shareholders. The company can establish credit and own a home, car, offer medical and retirement benefits to employees, and most of all it can be set up to transfer no personal liability to its owners. After setting up your corporation you can then hire yourself as an employee with a full range benefit package from 401k’s, health insurance, and other benefits. These benefits of course, become part of the corporation’s expenses. For profit corporations start out as a “C” Corporation and can later be changed to an “S” Corporation if elected.
C- Corporation- a separate tax return must be filed for the corporation and the owner – shareholders.
S-Corporation – each shareholder files taxes on his/her profits or loss portion of the corporation. S-Corporations with less than 35 shareholders can pass their profits directly to the shareholders, thereby eliminating the Federal Corporation Tax. However, in this case shareholders would be responsible for profits even if they did not actually receive dividends. Also shareholders can write off their losses under an S-Corporation. Shareholders would receive a Schedule K-1 from the corporation at the year’s end. **S-Corporations let others, including creditors know that you are a small company. If your goal is to obtain maximum credit potential you will need to carefully weigh the positive and negatives of an S-Corporation.
What’s the big deal with Nevada?
Some people and businesses choose to incorporate in the state of Nevada. In Nevada the names of shareholders do not have to be disclosed. What does this mean? It means that if a company chose to do so, in Nevada it could be virtually impossible to find out who the owners of the corporation are. In addition to this Nevada does not charge state income tax. Many states have a minimum state tax that corporations must pay, well in Nevada there is no such thing.
If you want to do business in your state while choosing to create a Nevada Corporation (if you do not live in Nevada), you have options, here are a couple of them.
For starters, to incorporate in Nevada, if you do not live there, you will need to provide a street address, not a Post Office Box. You will also need to have a Registered Agent. A registered agent is someone or company who will be listed with the state and will accept service of process for you. You can obtain a registered agent for a fee, and for an additional fee many will also allow you to use their address as the corporation’s address. There is a list of Nevada Registered agents at the end of this book.
Again, you will need a physical address in Nevada. Many registered agents offer Corporate Headquarter services. This type of service allows you to use them as your registered agent, as well as their street address as your corporate address, and some also offer a phone number that is actually answered for you. Many will set up your bank account in Nevada for you and other things. Remember that if you choose to incorporate in Nevada your corporate records are supposed to remain at the corporations headquarters, not at your house. There are also some companies such as Mail Boxes Etc in Nevada that actually have a street address. If you would like, PDSParalegal.com can prepare your Nevada corporation paperwork for only $50, (this fee does not include state filing fees) but please note we do not offer registered agent service or corporate headquarters packages for Nevada.
You can register your Nevada Corporation as a foreign corporation in the state you live in (your home state) and will actually do business in, or you can create 2 corporations. Remember that as a foreign corporation you will still pay taxes to your home state.
Why 2 corporations?
Some people create a corporation in their home state, remember this corporation will show who really owns it. Then a 2nd corporation is created in Nevada, which does not show who owns it, using a “nominee“ service. The Home State Corporation borrows money from the Nevada Corporation. The Nevada Corporation charges them interest so that basically, the home corporation never pays it off. In addition to this, the Home State Corporation uses all of the company’s assets as collateral. By doing this if the Home State Corporation is sued, it won’t be worth anything because it would be indebted to the Nevada Corporation.