The Three Most Important Questions Every Entrepreneur Should Ask Before Incorporating
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Every entrepreneur who is considering incorporating, should ask three questions:
The first decisions when forming a new company are the most important ones. Our flat charges include legal counsel to help you determine whether to form a corporation or a LLC. Contrary to conventional thinking, when choosing the right business entity, most entrepreneurs fail to consider the option of not incorporating. Our lawyers will help you evaluate whether forming a company is worth the cost, whether you should form a corporation or LLC, and where to form company.
Every entrepreneur should first carefully determine whether it makes sense to incorporate. To make that decision, it is important to understand the costs of maintaining a corporation or LLC. Most clients spend at least $2,000/year to maintain a company after it is formed. The following is a break down of the costs:
- Tax Returns – Business entities are obligated to prepare and file state and federal tax returns. Doing so is far more complicated than preparing individual tax returns, so it is essential to use an experienced accountant. Most accountants charge at least $1,000 to prepare even the simplest corporate tax return.
- Franchise Taxes – Nearly every state charges an annual franchise tax for the privilege of conducting business through a corporation or LLC. In California, the minimum franchise tax is $800.
- Secretary of State filings – All business entities must file an annual report with the Secretary of State in all states where the company is formed and qualified to do business. The annual fees vary substantially from state to state and by entity type. For example, in Delaware, the annual fee for corporations is $125, but for LLCs it is $250.
- Corporate Compliance – To maintain a company properly, it must be maintained. Corporations, for example, are required by law to hold annual meetings of the shareholders and authorize corporation action in Board of Directors meetings.
- Agent for Service of Process – All legal entities are required to have an agent for service of process in each jurisdiction where they conduct business.
When lawyers talk about forming companies, the “choice of entity” question refers to whether the business should be structured as a corporations (S or C) or LLC or perhaps a LP. However, “choice of entity” question should start with carefully asking whether the entrepreneur needs to incorporate at all. To learn more about how to decide whether you need to incorporate at all, read Most Entrepreneurs Should Not Incorporate
The best rule of thumb is that it makes sense to form the company in the state where you are doing business. Our lawyers will help you determine the best state for your company, but in the meantime, the following are some basic guidelines:
- Our clients frequently move from state to state. Because Delaware makes it easy to pick up and move a corporation, we love Delaware. If you plan to move to another state in the future, Delaware could save you a great deal of money, by making it easy to stop paying tax in the state you are leaving.
- If you form your company in a state other than where your business is located, you will be required to “qualify to do business” in your own state. Doing so, subjects your company to all the same fees and taxes as if you incorporated in your own state in the first place.
- For the most part, the notion of forming a company in Nevada is a myth. There is no benefit unless you are doing business in Nevada. And, you will likely incur additional costs.
Far too often, entrepreneurs are unaware that LLCs and corporations are very different. Although virtually the same from a liability protection standpoint, they are extremely different from a tax standpoint. Our lawyers will help you evaluate the pros and cons of corporations and LLCs, but in the meantime, the following are some basic guidelines:
- In our firm, we use LLCs as the entity of last resort, because of the extreme junk fees – called the “Gross Receipts fee” that apply to LLCs (but not to corporations) in California.
- In New York, LLCs (but not corporations) are subject to a one-time publication charge that varies from county to county. It can be as much as $1600 in Manhattan.
- In California, the initial $800 franchise tax is waived for corporations, but not for LLCs.
- LLCs are best where the company will own real estate.
- S-Corporations are best except where the corporation will have shareholders who are foreigners or other companies.
The Articles of Incorporation are the first step of a process. Many entrepreneurs believe that filing the Articles and placing them neatly in a corporate binder after they are returned from the Secretary of State means that the company is properly formed. Incorporation is not, however, completed until a unique set of documents is tailored to the new business. Read, What It Means To Properly Form a Corporation.
eMinutes is a law firm that is exclusively focused on incorporating. For nearly twenty years, we’ve formed corporations and LLCs for A-list movie stars, Grammy award-winning musicians, and athletes. You will find no nifty drop down menus on our website to decide between a LLC and a corporation, because our flat charges include legal counsel to help you determine the best structure for your business.