ACCURATE CORPORATE OR LLC RECORDS AND PERSONAL LIABILITY The most important reason to incorporate or form a company is to protect yourself from personal liability. When you form a company, you are forming a legal entity that is separate from yourself as an individual. The Corporation or LLC has powers vested upon it that allows it to make all the decisions that an individual may make. For example, the Corporation or LLC may enter into leases, may borrow money, it may buy goods and services on credit, and in all cases you are not personally liable for the transaction. If a problem arises, the only recourse would be against the Corporation or LLC, similarly, if anyone were to ever file a lawsuit for an action arising out of the business of the Corporation or LLC, that party would not be able to go after your personal assets such as your home, or car or boat etc., as long as you comply with the formalities of a Corporation. Therefore you have the peace of mind knowing that your personal assets are safe. WHAT SHOULD CORPORATE OR LLC RECORDS INCLUDE? Your Corporation or LLC records should include: The Articles of Incorporation or Articles of Organization, Corporate Bylaws or Company Regulations, Organizational Minutes, Annual reports, stock/membership register for keeping track of stock/membership transactions or a membership register for keeping track of membership transactions, Minutes of all shareholder and director meetings or all member and manager meetings, including the annual meeting. Corporate or company records help to substantiate that the Corporation or LLC is a different entity from yourself and that all formalities are being maintained. In addition, corporate or company records provide evidence to substantiate significant tax deductions, regardless of whether your Corporation or LLC makes a profit. Even if a Corporation or LLC does not make a profit, it may still generate significant tax deductions for you on your personal tax return. Corporate or company records provide a significant defense against anyone who would seek to pierce the Corporation or LLC veil and attempt to impose personal liability on you.
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Apply for "S" Election Differences Between Corporations and Limited Liability Companies in Structure and Management Corporations The owners are shareholders and receive stock certificates. The shareholders elect the board of directors annually. The board of directors sets the general direction of the corporation and votes on major decisions, but does not engage in day-to-day management. It also elects/fires the officers on an as-needed basis. *In Most States, if a corporation has one shareholder, there only needs to be one director (but there can be more). If a corporation has two shareholders, there needs to be at least two directors (but again, there can be more). If a corporation has three or more shareholders, there needs to be at least three directors (but there can be more). The officers run the business on a day-to-day basis. *In Most States, three officers are required: President, corporate Secretary and CFO/Treasurer. Other officer positions – CEO, Vice President, etc. – are optional. One person can fill all three (or two of the three) required positions, but banks often require that different fill the President and Secretary positions unless there is only a single shareholder. *In Most States corporations must hold one shareholders meeting annually and it is strongly recommended that they hold at least one board of directors meeting annually (actually, the resolutions simply can be signed by all directors) and whenever a major decision needs to be made. **With a corporation, each owner has the same percentage of ownership, voting power and, if the corporation is a Subchapter S, profits and losses.** Limited Liability Companies (LLC’s) LLC’s generally do not have shareholders, directors or officers. (Although an LLC can be organized to have these, it’s rare.) The owners of an LLC are members and frequently have membership "units". LLC’s can have one of two management structures: member-managed – where each member takes an active role in running the business and can sign contracts (like a general partnership) -- and manager-managed – where one or more managers operate the business and sign contracts (like a limited partnership). In any case, no meetings of the managers or members are required to be held. Often the operating agreement requires that extremely major decisions (such as sale or dissolution of the LLC) be made by a majority or super-majority (more than 50%) of the ownership interests. With an LLC, an owner can have different percentages of ownership (meaning the percentage of proceeds if the LLC is sold), voting power and profits and losses. For example, an LLC owner can have 25% of the ownership (meaning 25% of the proceeds if the LLC is sold), 10% of the voting power and 5% of the profits and losses. **You've finally decided to start a business of your own. Or maybe you have been running one as a sole proprietor, even moonlighting on the side, and have decided you need to protect your personal assets from those involved with your growing business. You might even decide there could be a tax break in it for you. Whatever your reasoning, you're likely contemplating a choice that many entrepreneurs face: should your enterprise be structured as a limited liability corporation, often called an LLC, or an S corporation, known commonly as an S Corp, which is named after subsection S of Chapter 1 of the Internal Revenue Code? These two organizational forms have similarities and differencesâ€“which can make choosing between them and others, like a C corporation (which includes publicly-held companies), confusing at best. **Each state might also have different rules that come into play. That's why you'll want to get some input from a respected accountant and/or attorney to help you decide what might be the best fit for your business.
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Why Incorporate? To decide whether or not to incorporate your business, you have to think about why you want to incorporate it. Some people want to incorporate their businesses because of the perceived liability protection of corporations - but directors of corporations can be held liable, especially if they've personally guaranteed loans for the corporation. Others want to incorporate their businesses because of the supposed tax advantages. However, unless you make more than $120,000 a year, incorporating your business for tax reasons doesn't make sense. And you need to bear in mind that incorporation is an additional expense. Not only does it cost more to incorporate your business, but maintaining a corporation costs time and money, too because of the additional paperwork. However, you may need to incorporate your business because of provincial requirements or to get the clients your business needs. Certain types of businesses need to be incorporated in some provinces, and some companies will only assign contracts to incorporated companies (because of liability issues). Should you incorporate your business? Go over the pros and cons (BELOW) of incorporating and think carefully. And remember, you can always incorporate your business later on, changing your sole proprietorship or partnership to an incorporated company. Every small business person considers whether or not to incorporate his business at some point. The form of a business isn't immutable; you can change the legal structure of your business as it grows. A common scenario is for small businesses to start out as sole proprietorships or partnerships and become incorporated at some later date when the business has grown. If you're one of the people considering incorporating your business, here are the main advantages of incorporation: 1. Limited Liability The main advantage to incorporating is the limited liability of the incorporated company. Unlike the sole proprietorship, where the business owner assumes all the liability of the company, when a business becomes incorporated, an individual shareholder's liability is limited to the amount he or she has invested in the company. If you're a sole proprietor, your personal assets, such as your house and car can be seized to pay the debts of your business; as a shareholder in a corporation, you can't be held responsible for the debts of the corporation unless you've given a personal guarantee. On the other hand, a corporation has the same rights as an individual; a corporation can own property, carry on business, incur liabilities and sue or be sued. 2. Corporations Carry On Another advantage of incorporating is continuance. Unlike a sole proprietorship, a corporation has an unlimited life span; the corporation will continue to exist even if the shareholders die or leave the business, or if the ownership of the business changes. 3. Raising Money Is Easier Corporations also have more ability to raise money, which may make it easier for your business to grow and develop. While corporations can borrow and incur debt like any sole proprietorship, they can also sell shares and raise equity capital, a big advantage because equity capital generally does not have to be repaid and incurs no interest. (Of course, by issuing shares, you are reducing your percentage of ownership in the company.) 4. Income Control If you incorporate your small business, you can determine when you personally receive income, a real tax advantage. Instead of getting your income when it's received, being incorporated allows you to take your income at a time when you'll pay less in tax. 5. Potential Tax Deferral Becoming incorporated gives you tax deferral potential. Because you can defer paying some tax until a later time, you may be able to realize tax savings if you are then in a lower tax bracket, or if the tax rates have fallen. 6. Income Splitting Another tax advantage of incorporating is income splitting. Corporations pay dividends to their shareholders from the company's earnings. A shareholder does not have to be actively involved in the corporation's business activities to receive dividends. Your spouse and/or your children could be shareholders in your corporation, giving you the opportunity to redistribute income from family members in higher tax brackets to family members with lower incomes that are taxed at a lower rate. 7. The Small Business Tax Deduction If you incorporate your business, it may qualify for the small business deduction. This annual tax credit is calculated at the rate of 16% on the first $200,000 of taxable income, which may be a much lower tax rate than that applied to your personal income. 8. Increased Business? Having Ltd., Inc., Ltee., or Corp. as part of your company's name may increase your business, as people perceive corporations as being more stable than unincorporated businesses. If you're a contractor, you may also find that some companies will only do business with incorporated companies, because of liability issues. Incorporating your small business sounds like a great idea, doesn't it? But there are also disadvantages to incorporating that you need to consider. While there are several advantages to incorporating a small business, there are also disadvantages that need to be considered. The main disadvantages of incorporation, I think, are the increases in paperwork and cost, which can be substantial compared to a sole proprietorship or partnership. 1. Another Tax Return When you incorporate your small business, you'll have to file two tax returns each year, one for your personal income, and one for the corporation. This, of course, will mean increased accounting fees. Unlike a sole proprietorship or partnership, corporate losses can't be deducted from the personal income of the owner. 2. Increased Paperwork There is a lot more paperwork involved in maintaining a corporation than a sole proprietorship or partnership. Corporations, for example, must maintain a minute book, containing the corporate bylaws and minutes from corporate meetings. Other corporate documents, that must be kept up to date at all times, include the register of directors, the share register, and the transfer register 3. No Personal Tax Credits Another disadvantage of incorporating is that being incorporated may actually be a tax disadvantage for your business. Corporations are not eligible for personal tax credits. Every dollar a corporation earned is taxed. As a sole proprietor, you may be able to claim tax credits a corporation could not. 4. Less Tax Flexibility A corporation doesn't have the same flexibility in handling business losses as a sole proprietorship or a partnership. As a sole proprietor, if your business experiences operating losses, you could use these to reduce other types of personal income in the year the losses occur. See "8 Tax strategies to Maximize Your Business Tax Deductions". In a corporation, however, these losses can only be carried forward or back to reduce the corporation's income from other years. 5. Liability May Not Be As Limited As You Think The prime advantage of incorporating, limited liability, may be undercut by personal guarantees and/or credit agreements. The corporation's much vaunted limited liability is irrelevant if no one will give the corporation credit. When a corporation has what lending institutions consider to be insufficient assets to secure a loan, they often insist on personal guarantees from the business owner(s). So although technically the corporation has limited liability, the owner still ends up being personally liable if the corporation can't meet its repayment obligations. 6. Registering A Corporation is Expensive A further disadvantage of incorporating is that corporations are more expensive to set up. A corporation is a more complex legal structure than a sole proprietorship or partnership, so it's logical that creating one would be more complicated and costly. Fees for incorporating a small business either provincially or federally range in the hundreds of dollars - and that's just for the set up. I've already mentioned the increased maintenance and related fees, such as increased accounting costs. Should you incorporate your small business? I've outlined the advantages and disadvantages of incorporating in this article, and you can find more information about how to incorporate your business in my Incorporating A Business library of links, but I strongly recommend that you discuss your personal situation with your accountant and lawyer before you decide. He or she will be able to give you a much more exact picture of how incorporation could benefit your business, and help you see whether or not the trouble and expense of incorporation will be worth it to you. At NestEggg Accounting Services, our goal is to help you find the solution that meets your needs. Whether you just need initial set-up services and will do the rest yourself, or whether you want to fully outsource your accounting/finance department, or whether you are somewhere in between, we can do it for you. Our rates are competitive, and our systems intuitive and customized to meet your demands. Our fully integrated outsource solution can save you almost 45% of the cost of a traditional in-house accounting department (includes nopayroll taxes), and will give you more time to be productive. Our services fees are between $75.00-$125.00. Our average bookkeeping rates $95.00 hour. NestEggg, works simultaneously with you, your employees, vendors and our tax affiliate EgggsAct Tax Inc. to ensure that our services are several steps above that of our competition. Don't underestimate the value of skilled, diligent bookkeeper/accountant. It's difficult to gauge the amount of time spent per client, as each client’s needs are different, but an open line of communication is priceless. Without prompt replies, answers are found by searching, online, the phone, via email or within historical data and this task can be costly. At NestEggg we “don’t round up”, our fees are billed by the hour, "if we are in your account for 11 minutes, that’s all we charge for"! If you decide to work with us, know that we want the work and want to stay busy, but also want you to maintain a proper accounting system and budget so you tell your friends about us. As a result, we strive for as many automated features as possible (to be discussed at an intake meeting) that requires feedback from each client on each email sent or message left. Compliance and transparency are what we are all about, The task of bookkeeping may seem easy, but wait until you have one make a mess of your books. It can cause troubles for years and cost thousands in unnecessary accounting fees and possible tax related headaches and penalties. Our specialty is QuickBooks Online, but we do use all desktop versions too. We are QuickBooks Certified Pro Advisors, and we provide you peace of mind, knowledge and information. We handle consulting, installation, set-up, training, and 3rd-party integration where required. Bookkeeping should be easy, even if you have no accounting or bookkeeping experience. We will make sure that you are prepared so there never should arise a situation that is considered an emergency or that requires anyone to “scramble”. Your accounting/bookkeeping system, if maintained correctly, should be easy and transparent. Everyone with access to the financials should be knowledgeable and up to speed at all times. We have implemented advanced technology to provide seamless accounting and bookkeeping for you and your business. We want you to participate as much as possible, so teaching you how to help maintain your own financials is extremely important to us. We can work remotely or even invite you to work from your home or office, on our networks for your peace of mind. We'll help you get your company set up in minutes. Once you're set up, familiar onscreen forms like checks & invoices make it easy to start working right away. We also have access to extensive help topics and tutorials and integrated applications. Your account manager is always there when you need them. Consider us your business partner. We have a tremendous amount of experience dealing with issues identical to the ones you and your business face, and we offer all the accounting and bookkeeping services most small and mid-size businesses need “under one roof.” Please take a few minutes to fill out this form. We will respond promptly to discuss the scope of your business and individual needs to reach your goals.
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