Simply defined, a corporation is a legal entity that functions as a person. It is “an association of shareholders, even one shareholder, created under law and regarded as an artificial person by courts, having a legal entity entirely separate and distinct from the individuals that compose it, with the capacity of continuous existence.” (Black’s Law Dictionary)
A corporation can open bank accounts, buy and sell real estate, conduct businesses, sue and be sued — in short, anything a person can do. If someone is asked why they want to form a corporation the answer will invariably be: to avoid personal liability. Avoiding personal liability isn’t enough, in itself, to require or desire to create a corporation.
In today’s world, it is very likely that if a wrong or perceived wrong is committed, lawyers for a plaintiff will seek “deep pockets” in order to satisfy any judgment. Everyone involved may well be sued. In an automobile accident that results in a lawsuit, the driver of the vehicle is sued. However, the driver may not have assets, so the owner of the vehicle is sued too. Liability insurance is required to indemnify accident victims. Excess judgments can be collected from the owner over and above policy limits.
If the vehicle is owned by a corporation, liability for excess judgment over insurance limits generally goes no further than the assets of the corporation. The owners of the corporation, officers and stockholders, are not usually individually liable unless they were operators of the vehicle or have taken personal operative steps that put them in the posture of a defendant: for example, an officer who took it upon himself to repair the brakes.
With corporations federal, state, and local tax implications also come into play. A corporation is taxed as would be a “person.” Tax returns must be filed if it is a profit making corporation. Non-profit corporations raising funds over a stated limit must also file with the IRS if they have qualified as a 501(c) corporation allowing tax-exempt status for most activities.
One great benefit of a corporation is its perpetuity. It does not die with the owner. A corporation’s shares of stock and ownership can be exchanged. When one owner dies, the shares of the corporation are inherited by heirs. As a general rule, the corporation does not close its doors simply because its founder died. The corporation continues to function.
In a partnership, as opposed to a corporation, each partner is individually legally liable for the acts of other partners, as is the partnership itself.
Limited Liability Companies
Some choose to create an LLC. Limited Liability Companies are used by professional people, doctors, lawyers, dentists as well as small enterprises. LLCs are simpler than corporations with membership that can be one person or several.
Avoidance of personal liability by setting up an LLC is not absolute. If a surgeon, for example, creates an LLC the surgeon is also the person performing the operation and can be sued as well as the LLC.
Non-profit or not-for-profit corporations are recognized in every jurisdiction. There are two categories of non-profit corporations: charitable and organizational. When charitable is mentioned, houses of worship and religion come to mind. The category also includes cultural, educational, and literary entities. The organizational category includes fraternal organizations, volunteer fire companies, and the like.
There are many benefits to establishing a non-profit corporation. Tax laws offer exemption to real estate taxes as well as many other taxes for religious organizations. If, however, a religious organization operates a gift shop to raise money, sales tax must be collected. If a non-profit operates a museum any entrance or amusement tax required by the jurisdiction must be collected on ticket sales.
A non-profit corporation can buy insurance for the church or fire hall, buy and sell real property, and transact business as any person could. The corporation remains in perpetuity, unless there is a lapse in renewing corporate status.
There are shareholder corporations and membership corporations. A club established for social purposes, for example a yacht club that owns a marina that has a restaurant, bar license, and boat slips, is a membership corporation established on a non-profit basis. It can employ people and pay them. Unemployment, worker compensation, and other taxes must be paid. There is no exemption for that, be it a church or a yacht club.
Corporate Services Companies
If after considering some of the questions raised above, and many more that may occur, a reason exists to form a corporation, then the place to start is with a corporate services company, which can do the organizational work for you, prepare and file the necessary documents, and save time.
Many companies exist that offer these services. Do some research on services, reviews, and pricing, and find one appropriate for your needs. One example of a one-stop service company of long standing is BlumbergExcelsior (blumberg.com). In most cases, a corporation can be formed routinely in a day or week or two. In the U.S., each state has its own laws and regulations on corporations, so service companies must be able to meet the differing requirements of each jurisdiction.
Many corporate service companies will offer expedited corporate formation in most jurisdictions. This increases state fees significantly. Ask how long expedited service will take and the cost of the service.
Obtaining an Employer Identification Number from the IRS
In the U.S., an Employer Identification Number (EIN) from the Internal Revenue Service is required to open bank accounts, conduct a business, employ people, and so on. For all intents and purposes, the EIN becomes the corporation’s “Social Security number.” It is easy to apply for an EIN online or request the IRS printed forms and do it by mail. Go directly to the IRS website where applying for an EIN is offered as a free service.
Many sites will come up if you search online for “how to apply for an EIN.” These may look like official IRS sites, but they are not. They may even have a form that resembles an IRS form to be filled out giving confidential information including the personal Social Security number of the applicant. Once filled in, a credit card payment is requested to complete the application. One site said it would cost as much as $248 to obtain an EIN. That’s a far cry from the IRS’s $0.00.
Plan in advance and work closely with your contact at the service company so that costs are contained. Basic corporate formation costs include state filing fees, publication of LLC or corporate articles in newspapers and legal journals where required, plus their corporate kit, which can be fancy or plain. Total cost without a lawyer should be about $500 or less.
Using a lawyer to form a corporation or LLC can cost $1000 or more. Lawyers today charge hourly fees of upwards of $300 an hour for themselves and $180 for paralegals. Some lawyers still charge a flat fee depending on the complexity of the corporation being formed. If it all seems overwhelming and beyond simple procedure, consulting a lawyer is always prudent.
Is forming an LLC or corporation, whether for profit or not-for-profit, something you desire but do not need? Something you need but do not know how to go about? Something that may seem to be beyond the existing budget for your small operation? There are these and other questions. Advent of internet services make answers accessible to all.