The How and Why of Incorporation

You could save hundreds of dollars by incorporating yourself without a lawyer. How? Is it advisable to do so?

1. This is Not Legal Advice!

The only ones who should be giving legal advice are those licensed to practise law (in other words, only lawyers). This article is not legal advice. If you need legal advice, consult a lawyer.

This article is being written simply to inform you that it is possible to form a corporation or limited liability company without a lawyer.

2. Why Use a Lawyer?

First of all, if you make a mistake incorporating yourself, who do you sue? You only have yourself to blame. On the other hand, a lawyer has insurance to cover errors and omissions.

Secondly, you could benefit from the expertise of your lawyer. Perhaps a corporation isn't the right vehicle for you under your circumstances. Be aware that there can be disadvantages as well as advantages to incorporating. Your lawyer can consider commercial law, securities legislation, limited liability, tax factors, estate planning, share structure, and a myriad of other business considerations. Sometimes the advice of a good lawyer can save you thousands of dollars.

3. Is it Advisable to Incorporate Yourself?

Is it advisable to perform surgery on yourself? It is illegal to perform surgery on someone else unless you are licensed to practise medicine, but perhaps in a wilderness survival scenario, self-surgery might be your only option. However, is performing surgery on yourself really a good idea in most instances?

Likewise, just because it is possible to incorporate yourself without a lawyer doesn't mean it is always a good idea.

In some jurisdictions, only lawyers can incorporate others. For a paralegal or other person to incorporate a company for you could be considered unauthorized practise of law. Thus, it may be legal to incorporate yourself but not others.

Some factors you might consider are: Am I really that short of cash that I can't spend the extra money for good legal advice that may save me thousands of dollars? Am I confident that my situation is one that really doesn't need the services of a lawyer to incorporate? Can the money saved on legal fees be better utilized in financing other aspects of my business?

Each person will have to make their own decision on whether or not to seek the services of a lawyer in forming a corporation.

"He who has himself as a lawyer has a fool for a client." I have often thought that perhaps a law firm originated this common expression.

4. How To Incorporate Yourself

Many books have been written by lawyers on how to incorporate yourself.

For example, in Canada, M. Stephen Georgas, LL.B., has written books on the subject of forming your own corporation. Published by International Self-Counsel Press Ltd., he has authored "Incorporation and Business Guide for Ontario" ("How to form your own corporation Includes tax advantages to incorporating") and "Federal Incorporation And Business Guide" ("How to form your own Federal corporation under The Canada Business Corporations Act").

The same publisher sells forms and minute books as well as titles for incorporating in other provinces of Canada.

Forms, corporate supplies, name searches, and kits are available from legal stationers and other sources.

In the United States, there are likewise many manuals available for incorporating yourself in various states. "How To Form Your Own Corporation Without a Lawyer for Under $75.00" by Ted Nicholas is one such book.

Sometimes helpful information on this subject is available from federal, provincial and state governments for free or nominal cost.

You can sometimes locate incorporation manuals at your local library for free. Be careful. Legal manuals become outdated very rapidly. You might consider very seriously purchasing the most up-to-date manual available; it might also include helpful reference material on maintaining corporate minutes and other helpful suggestions on operating your corporation.

Buy the appropriate manual and supplies and then follow the instructions. With a little effort, you could save hundreds of dollars incorporating yourself without a lawyer.

Resource Box

J. Stephen Pope, President of Pope Consulting Inc., has been helping clients to earn maximum business profits for over twenty-five years.

For profitable Work at Home Small Business Ideas, visit
http://www.yenommarketinginc.com/

To learn why you should incorporate yourself, visit http://www.yenommarketinginc.com/incorporation.html

Some persons resist the idea of incorporating themselves because the tax savings may not justify the added costs of incorporation, annual minutes, and extra tax returns. However, incorporation gives advantages that go far beyond tax savings.

Insurance may give you some protection against loss. However, you may suffer business losses and lawsuits that may not be covered. For extra protection, consider incorporating yourself. The limited liability of your own corporation alone may justify the additional cost and complexity.

Corporations may also be used for income-splitting with your family, as well as estate planning and retirement planning objectives. Additionally, corporations lend some credibility to smaller businesses and may enhance your image and prestige in the eyes of clients or suppliers.

Lower corporate tax rates will generally apply on small business income. Even in loss years, wages can be paid by the corporation to you so that you may utilize personal tax credits available. If unincorporated, these credits might be lost forever. The now larger corporate losses can be carried forward to future (hopefully more profitable) years.

A full analysis of the advantages and disadvantages of incorporation is beyond the scope of this report. However, being incorporated may give you more flexibility and advantages than you originally anticipated. Certainly, it is not prudent to reject it as an option simply because it is more complicated and costly. In fact, it may be one of the best investments you ever made.

Although incorporating your business may result in increased accounting and legal fees (for setup, extra tax returns, and annual minutes), the advantages of incorporation may justify this added expense. Not only will you enjoy limited liability by incorporating, but you may reap significant tax savings as well.

Corporations are often subject to lower tax rates on small business income. In Canada, sales of shares of qualifying small business corporations can obtain a lifetime $500,000.00 capital gains exemption. Certain tax incentives and government programs are only available to incorporated entities. Additionally, corporations can be used for income-splitting and estate, retirement, and succession planning objectives.

Copyright 2003 Wayne M. Davies Inc.

Are you still operating your business as a Sole Proprietorship?

Have you considered incorporating your small business or self-employment activity?

The tax advantages can put thousands of dollars in your pocket every year.

But the Number One reason to consider incorporating has nothing to do with tax reduction and everything to do with asset protection.

Here's a story to help you decide whether forming a corporation is worth it.

A few years ago, one of my clients, let's call him Jim, decided it was time to stop working for someone else and start working for himself.

Jim was a plumber, and a darn good one. He's fixed my toilet on several occasions.

It took a couple years of hard work, but Jim's reputation spread fast and he soon had all the work he could handle.

Jim finally had to hire an assistant, a young fellow named Tom.

One rainy Saturday afternoon, Jim got a service call and asked Tom to handle it. This job turned into several hours of lucrative labor, so by the time Tom was done it was dark. The roads were slick and Tom was tired.

As luck would happen, another service call came in as Tom was heading home. Jim offered Tom yet another chance to make some good overtime pay. Tom reluctantly accepted.

Tom thought about stopping for a cup of coffee, but he was eager to get done. As he drove through the torrential downpour, Tom noticed the brakes in the company truck weren't working like they used to. He remembered the mechanic saying something about it the last time he took the truck in for a tune-up, but he and Jim were so busy lately they just forgot to get them fixed.

As he came to the next stoplight, Tom knew he was in trouble. The brakes failed and the truck collided with another vehicle.

Tom's injuries were not nearly as serious as those of the other driver, who eventually died.

Jim's insurance policy covered all the medical costs, but the liability coverage wasn't enough to take care of the amount that the other driver's family sought via the negligence lawsuit.

End result: Jim suffered serious financial loss. Because Jim's business was a Sole Proprietorship, he had to use all of his personal savings to satisfy the claims of the lawsuit.

So it can happen. And it can happen to you.

Need I remind you just how prevalent lawsuits have become in our society?

So if you are a Sole Proprietor, like Jim, why run the risk of losing your personal assets from a business-related lawsuit.

If you have employees, you can be held responsible for their actions.

"But I don't have any employees", you say.

It could just as easily have been Jim rather than Tom who was driving in the rain that night. Likewise, it could be you who is the cause of unintentional damage or some other business-related accident.

Bottom Line:

If your business is a Sole Proprietorship you need to incorporate because all your personal assets are at risk.

Make the move from the world of Unlimited Liability to Limited Liability.

Resource Box

Wayne M. Davies is author of the new eBook, "Incorporation Tax Secrets Revealed: The Ultimate Small Business Tax Reduction Strategy", found in the Ultimate Tax Reduction Guide.

Copyright 2003 Wayne M. Davies Inc.

Let me introduce you to another client of mine, let's call him Tony.

Tony is a computer programmer who always wanted to be "on his own." One of his co-workers, Kevin, felt the same way. On their lunch breaks they often talked of the day when they'd be calling the shots and making all the money.

Before long, they got the guts to tell their employer they were quitting to start their own business. They didn't know much about paperwork, but Tony's brother-in-law, Kyle, who worked for an insurance company, always seemed to know a lot about "how things worked" in the business world.

Kyle told Tony that the business didn't need to do anything fancy to operate as a business. They could just run things as an informal partnership -- they each contributed 50% of the start-up funds and they agreed to share equally in the profits.

When it came to bookkeeping, Kevin's wife Jennifer agreed to take care of things. She was a bookkeeper at her regular day job and so that was fine with Tony.

The business took off and within a couple years Tony and Kevin were making more money than they ever made as employees. In fact, the partnership had to hire several employees to handle all the work.

Tony thought things were going fine until Kevin showed up at a job one day drunk as a skunk. A few weeks later, Kevin literally disappeared, never to be heard from again.

Turns out that Kevin, with his wife's help, had been robbing the business blind. Kevin had a drinking problem that he was able to hide from Tony. He was also able to hide that fact that the money he was stealing should have been used for payroll taxes. The partnership was now $18,000 behind in payroll tax payments.

Kevin and Jennifer were nowhere to be found.

And Tony was stuck with the bill from the IRS for $18,000 in unpaid payroll taxes.

How could this be? Because in a General Partnership, both partners are liable for the debts of the partnership, regardless of who might be originally responsible for binding the Partnership.

Each partner is personally liable for the debts of the Partnership, and each partner can be held responsible for the business-related actions of all other partners.

It doesn't matter that Kevin was handling the books and the payroll tax payments. It doesn't matter that Kevin was stealing from the Partnership.

Kevin was gone. And Tony was left holding the bag.

The IRS went after Tony even though he had nothing to do with Kevin's wrongdoing. Because he was a partner, he was liable for the debts of the Partnership and had to pay the payroll taxes out of his own pocket.

Tony had to cash in his retirement plan to pay off the IRS.

So, from a liability standpoint, the General Partnership is identical to the Sole Proprietorship: the owners have unlimited liability, and all their personal assets are at risk.

From a liability standpoint, in a 2-person Partnership, you could say that a General Partnership is at least two times more dangerous than a Sole Proprietorship. In a 3-person General Partnership, your liability exposure is three times greater than a Sole Proprietorship.

If you are a partner in a Partnership, do you realize how much risk you are assuming?

Bottom Line:

If your business is a General Partnership, you need to incorporate because all your personal assets are at risk, and your personal assets are at risk not only for your own actions, but also for the actions of all your co-partners, whether you like it or not.

Make the move from the world of Unlimited Liability to Limited Liability.

Resource Box

Wayne M. Davies is author of the new eBook, "Incorporation Tax Secrets Revealed: The Ultimate Small Business Tax Reduction Strategy", found in the Ultimate Tax Reduction Guide.