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Do that, and court will "pierce corporate veil" in a heartbeat, thereby exposing you to full personal liability on grounds that corporate structure is nothing but a sham designed to unfairly protect you from personal liability.
It is also particularly important that you follow all corporate formalities such as those set out in by-laws, passing board and/or shareholder resolutions for major decisions and holding annual meetings of shareholder(s) to elect directors and directors' meetings to elect officers.
Also, don't think "corporate veil" will protect you from criminal acts such as filing a false income tax return, because it won't.
SO HOW DO I GET MONEY OUT OF THE BUSINESS?
You are paid by corporation as an owner/shareholder in form of dividends and/or as an employee in form of a salary.
CORPORATION OR LLC?
While both corporations and LLCs limit your personal liability, there are differences between states when it comes to how other states' LLCs are treated in this regard. By contrast, corporations are treated uniformly when it comes to personal liability. Especially if you're operating an Internet-based business where you can be transacting with people from pretty much anywhere, for greatest certainty concerning your personal liability, a corporation is preferable to an LLC.
One of advantages of an LLC as a business entity is that profits and losses of LLC "flow through" to personal income tax return of members. However, if you make a "subchapter S" election when forming corporation (thereby forming an S-corporation), you can achieve same result.
S-CORPORATION or C-CORPORATION?
Although S-corporation's profits and losses flow through to shareholders (rather than S-corporation being taxed as a separate entity as in case of a C-corporation), S-corporations are limited to 75 shareholders and, generally, those shareholders must be U.S. citizens or resident aliens.
You would therefore not be able to have foreign shareholders with an S-corporation (but you can with a C-corp), which may be an issue, particularly for Internet-based businesses with shareholders from various countries.
Also, you cannot have multiple classes of shares with an S- corporation so this will not work if you want to issue preferred shares, for example. You'd need to form a C-corporation instead.
WHAT'S INVOLVED?
Forming a corporation is a relatively straightforward matter (at least for an attorney) and shouldn't cost you more than a few hundred dollars depending on complexity of corporate structure. Most attorneys would charge between $500 and $1,000 for a straight C or S-corporation.
At its simplest, a corporation can have a single director and shareholder with that same individual holding each of three required offices (president, secretary and treasurer). (If a corporation has three or more shareholders it must have a minimum of three directors but if it has fewer than three shareholders, it may have same number of directors.)
Your attorney will prepare and file articles of incorporation with your State's Secretary of State, and then prepare by-laws and organizational minutes. You'll need a Federal Employer Identification Number (SS-4) from IRS and, if you have more than one shareholder, a buy-sell agreement to ensure that shares do not pass to shareholders unacceptable to other shareholders.
Your attorney will also attend to annual filings with state (a statement of officers and directors is usually required to be filed every one or two years) and make sure you stay in compliance with state corporate requirements (such as annual minutes etc.).
Taking time and trouble to think about legal structure of your business may seem like overkill when all you're doing is running a fun little business out of your spare bedroom in your spare time. But fun little businesses have a way of becoming very unfunny major headaches when things go wrong. No matter how small or fledgling your business is, do yourself and your family a big favor and at least think about incorporating. What may seem like a pleasant past-time today could be anything but tomorrow.
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------ Elena Fawkner is an attorney and editor of A Home-Based Business Online ... practical business ideas, opportunities and solutions for work-from-home entrepreneur. She offers discounted, fixed-rate legal services to her ezine subscribers and site visitors within United States. http://www.ahbbo.com http://www.ahbbo.com/legalhelp.html
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