The personal responsibility of company owners may be limited by forming corporations, but managing a corporation is a lot of effort.
The majority of individuals are aware that creating a corporation offers “limited liability,” which means that it restricts your personal accountability for corporate obligations. You may not be aware of this, but forming and administering a corporation entails a lot more work than just turning in a few paperwork. You’ll need to maintain accurate records in order to complete the more challenging corporation tax return, and if you want to preserve your limited liability, you have to follow the proper procedures for making decisions and preserving corporate records. In a nutshell, you have to maintain some kind of organisation.
What exactly is a corporation, then?
Because a corporation is its own separate legal body, it is able to own property, pay taxes, and enter into contracts independently of its owners. A corporation’s ownership and management structure is distinct from that of other commercial organisations. Shareholders, also known as stockholders, are the individuals who own a corporation. Shareholders are the individuals who invest in the company by acquiring shares of stock. The board of directors is responsible for operating the corporation, and shareholders are the ones who elect them.
Personal Responsibility? That Is Restricted.
When a company is incorporated, the owners’ individual assets are shielded from the reach of the corporation’s creditors. This is one of the most significant benefits of incorporating a business. For instance, if a court judgement is obtained against your corporation stating that it owes a creditor $100,000, you cannot be compelled to utilise personal assets, such as your home, to pay the obligation. This is because a corporation is a separate legal entity from its shareholders and directors. Because only the assets of the corporation need to be utilised to pay off the obligations incurred by the firm, the most money you stand to lose is the money that you’ve already put into the company.
There are certain exceptions to limited liability.
There are various instances in which limited liability will not shield an owner’s personal assets from legal responsibility. If the owner of a corporation is found to have violated any of the following conditions, they may be held personally liable:
Personally and directly injures someone else; personally guarantees a bank loan or a business debt on which the corporation defaults; fails to deposit taxes withheld from employees’ wages; intentionally engages in fraudulent or illegal activity that causes harm to the company or to another individual; or treats the corporation as an extension of his or her personal affairs, rather than as a separate legal entity.
This very final exception is the most significant one. Under certain conditions, a court may decide that a corporation does not really exist and that the owners of the corporation should not be protected from personal culpability for the activities that they have committed. If you do not adhere to standard procedures and formalities required by the company, for example:
a sufficient amount of money being invested in (also known as “capitalising”) the corporation, legally issuing shares to the original shareholders, regularly convening meetings of directors and shareholders, or keeping business records and transactions distinct from those of the owners.
Insurance for Legal Responsibility
The decision to incorporate a firm should never be made in lieu of purchasing adequate commercial insurance. Even while creating a corporation would safeguard your personal assets, you need still get insurance to protect the assets of your corporation from any potential litigation or claims.
You may shield yourself from the majority of the dangers associated with running a company by purchasing a comprehensive liability insurance coverage. For instance, if you own a clothes store and someone trips and falls within your shop, proper business insurance should be able to cover the medical expenses associated with the incident.
In addition, even though the limited liability option won’t shield you from harm, insurance may. For instance, if you were to personally injure another person while conducting business on behalf of the corporation, say by causing a car accident, liability insurance would typically cover the accident. This would prevent you from having to use either the corporation’s assets or your own personal assets to pay the bill. However, insurance won’t assist if your corporation is unable to pay its payments since commercial insurance does not often cover personal or corporate assets from unpaid business obligations, regardless of whether or not the debts are personally guaranteed.
Making Payments on the Corporate Income Tax
When an owner of a corporation also works for that corporation, just like any other employee, the owner receives a salary and, depending on the company’s policies, may even get incentives. The proprietor is subject to the same taxes on this income as are normal workers; the tax is reported on and paid through the proprietor’s individual tax return.
After deducting all of the company’s expenditures, including wages, bonuses, and overhead costs, the corporation is responsible for paying taxes on the remaining earnings from the firm. In order to accomplish this goal, the corporation must submit its own tax return to the Internal Revenue Service (IRS) using Form 1120 and pay taxes based on the unique structure applicable to corporations. The Tax Cuts and Jobs Act imposed a new, uniform tax rate of 21% on companies in the form of a single flat rate. As a result, firms will no longer be subject to tax rates that ranged from 15% to 35% under the previous legislation.
Alternately, shareholders of a corporation have the option of submitting Form 2553 to the IRS in order to elect the status of a “S corporation.” This implies that for tax purposes, the corporation will be considered as a partnership (or an LLC), and the owners’ individual tax returns will be responsible for reporting any earnings or losses that “pass through” the corporation.
The Process of Establishing a corporation
In order to establish a corporation, you are required to submit “articles of incorporation” to the corporations division of your state government, which is often a department that falls under the purview of the secretary of state. In most cases, the filing cost is about one hundred dollars.
The articles of incorporation required by the vast majority of small businesses are brief and straightforward to draught. The majority of states will provide you a straightforward form to fill out, and it will often not need you to submit much more information than the name of your corporation, its location, and the contact information for one individual who is engaged with the corporation (often called a “registered agent”). You are also need to provide the names of the directors of your corporation, which is a requirement in certain states.
Along with the articles of incorporation, you will also need to draught “corporate bylaws.” Bylaws are important for a corporation even though they are not required to be filed with the state because they establish the fundamental rules that govern the ongoing formalities and decisions of a corporation’s life. These rules include how and when to hold regular and special meetings of directors and shareholders as well as the number of votes that are required to approve decisions made by the corporation.
In the last step, you will need to record who owns the ownership interests (shares or stock) in the company, as well as issue stock certificates to the founding owners (shareholders) of the corporation.
Maintaining One’s Status as a Corporation
Maintaining a corporation’s existence as a legally distinct body requires both the corporation and its owners to adhere to a set of prescribed formalities. To be more specific, businesses are required to:
Keep a record in the minutes of the important decisions made by shareholders and directors.
ensuring that corporate executives and directors sign papers in the name of the corporation, maintaining separate bank accounts from their owners, maintaining accurate financial records, and filing a separate corporate income tax return are all responsibilities that fall under this umbrella.