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Friday, August 17, 2007

We Don't Need no Stinkin' Corporation

If you are starting a business endeavor for the first time, or if you have started a company but have yet to incorporate, you need to consider the following. After getting into a debate with an acquaintance who has been working as an independent contractor for years, and who has never incorporated, I felt it necessary to share the reasons why you should.

A corporation is essentially a legal entity that is separate from its members. It can hold assets, hire employees or agents, it can sue (or be sued) and pass laws governing its own affairs (see wikipedia). The primary reasons for incorporating are limitations to your personal liabilities and tax advantages.

Reduced Liability
If you get sued for your business practices through the corporation, you are generally shielded from losing personal assets (like your home), provided you truly work as an agent of the corporation. Should you use your corporate checking account to pay personal bills like liposuction for your wife, this is known as "piercing the corporate veil". Doing so would compromise your protection from the corporation should it be proven in a court of law. However, certain personal expenses (like automobiles or cell phones) can sometimes be paid by the company. Check with an accountant and attorney in your area for specifics.

Reduced Taxes
Your goal with the new corporate structure should be to pay as many expenses as legally possible through the corporation, and to pay yourself a salary that is within reason for someone doing what you do. The amount paid to you by the corporation in addition to your salary is a dividend, and is taxed at a much lower rate (at least in the US).

There are advantages in most countries for forming a corporate structure, based on local laws. Of course, always consult a local expert. As for my colleague, I suppose he's not too concerned about building his personal wealth, or protecting it from lawsuits and The Taxman.

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