Set Up Corporation: Minimize Liability And Maximize Benefits

2007-03-08 10:33:40

( Business )



Your main consideration when you decide to set up corporation must be to minimize personal liability against debts incurred by the business. Indeed, your personal liability as a stockholder or member of a corporation is limited under certain conditions.

Before you set up corporation, like Household Finance Corporation, you should choose your business structure from three major types: the C-corporation (regular corporation), the S-corporation and the Limited Liability Corporation (LLC).

The C-Corporation

A corporation is a legal entity separate and distinct from its owners. Thus, when you register as a regular corporation, you will enjoy its limited liability feature. This means that should the corporation fail, you would lose only your investment but you would not be personally liable for unpaid obligations.

A C-corporation is a taxable entity; hence, it pays corporate taxes on realized profits. The dividends you receive from the corporation are also liable for personal income tax, resulting to double taxation on profits paid to you.

The S-Corporation

The S-corporation offers the limited liability advantages of a corporation but does not pay federal taxes. All the earnings and losses of an S-corporation are passed through to you (the shareholders). Hence, there is no double taxation in S-corporations. Note that S-corporations are limited to 75 shareholders and cannot have an owner that is another corporation.

The LLC

Limited Liability Corporations combine the tax advantages of partnerships and the limited liability advantages of regular corporations. However, LLC can be more expensive and time-consuming to organize. When you set up corporation of this kind, the law requires that you formulate an operating agreement containing specific information about the LLC with the other members.

You cannot afford any mistakes when you set up corporation. It is important, therefore, that you should discuss your choice of legal structure with your advisors including an attorney and an accountant when you set up corporation.


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