Hello to you, Jen. I have been reluctant to take your question since
the options that you were interested in were probably not on my radar
screen. If you don’t mind the opinions of a Michigan attorney that
specializes in business law, I will be glad to try to be a help. And,
you did say “pretty please”!!!!!
First, let’s look at why we incorporate, and by “incorporate” I mean
why we form some type of limited liability organization, such as a
corporation, a limited liability company, a limited partnership, or
other entity. Principally, the question is why we form a corporation
or a limited liability company (LLC).
Although there may be tax ramifications motivating our decision to
incorporate, the primary reason, far and away, is to limit liability
to the owners of the entity. A corporation/LLC, you see, is a separate
person under the law. It can’t get married to a human, and it can’t
vote for public office, but it can do most other things that a natural
person can do – it can own property, it can contract, it can sue and
be sued, and it can vote in most non-political elections (such as
shareholder meetings).
Black’s Law Dictionary defines a “corporation” as “an entity (usually
a business) having authority under law to act as a single person
distinct from the shareholders who own it and having rights to issue
stock and exist indefinitely; a group or succession of persons
established in accordance with legal rules into a legal or juristic
person that has legal personality distinct from the natural persons
who make it up, exists indefinitely apart from them, and has legal
powers that its constitution [its Bylaws] gives it. Black’s 7th ed. at
340.
In California, according to the excellent California Secretary of
State web site (see its “business portal” and pass through - a
“limited liability company” consists of one or more members which may
be individuals, partnerships, limited partnerships, trusts, estates,
associations, corporations, other limited liability companies or other
business entities. The members of a limited liability company are
afforded limited liability similar to shareholders of a corporation
and have pass-through taxes comparable to a partnership.
http://www.ss.ca.gov/business/llc/llc_faq.htm .
“Limited Liability” – that’s what it’s all about. If the
shareholder(s)/members or managers operate the entity properly – keep
books separate from the owners, maintain separate bank accounts and
records, in short, treat the company like the separate person that it
truly is, then that “person” distinction is protected. If sued, the
plaintiff (person bringing the law suit) may only sue the business
entity, and not the individual shareholders. DISCLAIMER: The reason
law students spend three years of their lives in law school is to
learn how to get around this rule thereby enabling them to sue
everybody in sight!
Example – you win the California Lottery and buy a beautiful new
Mercedes CLK500 Cabriolet in Mocha Black Metallic wrapped around Stone
Napa Leather Upholstery (see
http://www.mbusa.com/brand/container.jsp?/models/clk500_ee/index.jsp&menu=3_0&modelCode=CLK500A&class=03_CLK&menu=3_0
) [it’s good to dream] – AND you decide to incorporate your business
and you file the papers and deposit $10,000 into your new corporate
bank account. You instantly sell your first product, which, since you
have used up all your good luck, instantly injures the purchaser by
having its faux gold finish of this widget rub off onto someone who is
allergic to faux gold finish, injuring him. He sues. For $100,000,000
and the jury believes him (old lawyer bromide – never trust your fate
to twelve people not smart enough to get out of jury duty.) Well, he
can now attach your $10,000 bank account – BUT HE CAN’T GET AT YOUR
MERCEDES, since that is a personal asset, and not an asset of that
other person – your corporation.
“Limited Liability” – it bears repeating – that’s what it’s all about.
Otherwise, why incorporate. It costs money. It is one more
administrative nightmare that you have to manage. Why do it, other
than to get the cool business cards that say “Jen, President and CEO”.
If the limited liability weren’t so important, you would remain a
sole-proprietor or partnership and remain personally liable with that
gorgeous CLK500 available to your business creditors.
SO, we incorporate or form an LLC.
The act of granting corporation status (Inc., Corp., Corporation,
Incorporated, etc.) or limited liability company status (L.L.C.) is
strictly a function of the California Secretary of State.
http://www.ss.ca.gov/ . Their outstanding web site has complete
directions for do-it-yourselfers:
http://www.ss.ca.gov/business/corp/corp_formsfees.htm .
And there are companies that will do it, and how-to-kits available on
CD – and bookkeepers that will do it, and dog-catchers that will do
it. There are a lot of resources out there – no question. And some of
them are pretty darn good.
But what if they slip. What if they make a mistake in the filing. What
if their choice of entity (corp or LLC, say) is NOT the best for your
particular and peculiar situation. Have you lost the very protection
that you were seeking to obtain? There is simply too much at risk to
not have it done professionally by someone who spends their time
dealing with it – your friendly neighborhood attorney-at-law. Not the
accountant. The attorney.
Now, just yesterday, I answered a question about what do you put down
on the form to incorporate for the person to receive “service of
process” in California. You may want to look at that answer – it ties
in to your question. See
http://answers.google.com/answers/threadview?id=258588 .
Here is another wonderful resource for you, if you haven’t been there.
It is from the United States Small Business Administration:
http://www.sba.gov/starting/indexfaqs.html
You asked about Nevada in your clarification. I wouldn’t.
California’s tax gurus are going to tax you on your California income,
regardless of the state of incorporation. There are many good and
great reasons to incorporate in other states (Delaware is VERY
popular) – but those choices are best left, in my opinion, to more
mature companies and to companies that operate across state lines with
large dollar amounts at stake.
If you were to take your California corporation and open an office in
another state – say open a branch in Las Vegas, then a whole series of
other questions come into play – registering the California
corporation in Nevada as a “foreign corporation”, or incorporating a
Nevada subsidiary or some other affiliated company (maybe there is a
Jen California, Inc. AND a Jen Nevada, Inc.). Serious legal and tax
questions arise.
In my opinion, Jen, the best way to protect yourself and your company
is to find a good business attorney and a good tax person and sit down
with them together – talk about your plan and find out from them,
together, what your best course of action is. It may cost $1000, but
you will find, I am absolutely positive, the experience to be a
bargain and invaluable. Make it clear that money is a consideration –
get a fixed price for a consult and business filing in advance.
Talk to friends and colleagues for recommendations. Ask the attorney
and CPA if they have experience in your field. Ask the professionals
that you know (dentists, doctors, accountants, other business owners)
for recommendations.
There is a place for the services that you mentioned, services like
Bizfile, etc. They are excellent at processing paperwork through some
of the mazes that exist out there, particularly for interstate filings
and out-of-state filings. They serve many useful and great services,
but, in my professional opinion, your needs will best be served by
legal and tax counsel of your choosing.
BTW – and I think you know this, but just in case. A “Sub-S”
corporation is just another corporation as far as California is
concerned. The “Subchapter S” status is given to a corporation that
has certain specific attributes by the IRS which allows for
“flow-through taxation” which is to say that the business profits (and
certain losses) flow through to the shareholder’s tax return.
Good Luck, Jen. Although I took a different approach, I really feel
that it is an approach worthy of consideration.
I imagine you will need clarification. I will check back often.
And thanks for visiting us.
weisstho-ga
Search Strategy:
Small Business Administration:
://www.google.com/search?sourceid=navclient&ie=UTF-8&oe=UTF-8&q=sba
California Secretary of State:
://www.google.com/search?sourceid=navclient&ie=UTF-8&oe=UTF-8&q=california+secretary+of+state |
