This article takes you through the different milestones of the incorporation process. You will learn what is the information required to start the process, what are the terms you need to familiarize yourself with, which entity type to choose, where to incorporate, how to open your corporate bank account and how to plan your taxes.
Incorporation state
The best advice may be to form a corporation in the state where you plan to conduct business. It will be far less complicated and more cost-effective in the long run. Listed below are some of the reasons why Delaware attracts both large and small businesses:
Delaware maintains a separate court system for business, called the "Court of Chancery." If legal matters arise involving a trial in Delaware, there is an established record of business decisions. No minimum capital is required to organize the corporation and there is no need to have a bank account in Delaware. Just one person can hold all the offices of the corporation: President, Vice President, Secretary and Treasurer. There is no state corporate income tax on Delaware corporations that do not operate within the state. Shares of stock owned by persons outside of Delaware are not subject to Delaware personal income tax. There is no Delaware inheritance tax levied on stock held by non-residents.
ENTITY TYPE
Corporations
The most important benefit of a Corporation is that, legally, it's a separate entity from the individuals who own or operate it and thus limits your personal liability. If a court judgment is entered against the Corporation, you stand to lose only the money that you have invested in the Corporation. Generally, as long as you have acted in your corporate capacity (as an employee, officer or director) and without the intent to defraud creditors, your assets can not be used creditor to satisfy a judgment against your Corporation.
As the Corporation is separate from its owners, the Corporation pays taxes on any net income (profits) that is left after all business expenses have been paid or accrued. Corporations file IRS Form 1120 to report their income, expenses and taxes.
Corporate Income Tax Rates--2005
Taxable income over Not over Tax rate
0 50,000 15%
50,000 75,000 25%
75,000 100,000 34%
100,000 335,000 39%
335,000 10,000,000 34%
10,000,000 15,000,000 35%
15,000,000 18,333,333 38%
18,333,333 .......... 35%
In addition, if the income is distributed to shareholders in the form of dividends, the shareholders pay taxes on the dividends they receive, currently 15%.
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Limited Liability Company (LLC)
LLC is the newest form of a business entity. As with a Corporation, the owners of a LLC benefit from limited liability. This means that being a member of a LLC doesn't normally expose you to legal liability for business debts and court judgments against the business. Generally, if you become a LLC member, you risk only your share of capitol paid into the business. A LLC member may be an individual or a separate entity such as a Partnership or Corporation that has invested in the LLC. Operating agreement should be created (when forming the LLC) to detail how the business will operate.
If the LLC has one member it is treated like a sole proprietor or for tax purposes, otherwise it is treated as a partnership with each member reporting and paying income tax on their share of income.
Single Taxpayers