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I N CO R P O R AT I O N I N S I D E R

To Incorporate or Not to Incorporate?

Protect Yourself and Your Business


By Selecting the Right “Entity”
By DeAnn Flores Chase, Attorney at Law

I
f you are thinking about starting a busi- torney and your tax advisor. Business entities include:
ness, no doubt you have pondered the
question, “Do I need to form a business General Corporation (“C-Corp” or “S-Corp”): If properly
entity?” The answer is a resounding, “Yes!” formed and maintained, a corporation provides protection from
Unfortunately, we live in a very litigious personal liability for the debts and obligations of the corporation
society. Statistics tell us that an estimated for its officers, directors and shareholders.
50,000 lawsuits are filed daily in the U.S., “C” Corporation: A traditional “C” corporation involves the is-
with nearly 1.4 million filed in the State of
sue of “double taxation.” The corporation is taxed on its income at
California annually. You should take steps to protect your wealth
the corporate level, and its shareholders are taxed on distributions
before you ever get served with a lawsuit against your business. A
of income in the form of dividends on their personal income tax.
business entity provides personal liability protection from the debts
In order to maintain a corporation, corporate formalities must be
and obligations of the business because it has its own legal identity
maintained, such as annual meetings and the keeping of minutes.
separate and apart from its officers, directors, shareholders, manag-
A “C” corporation has some tax benefits, such as deductibility of
ers or members – even if the entity consists of only one person. If
health insurance premiums.
you are sued based upon an occurrence arising during your business
operations, a properly formed and maintained business entity can “S” Corporation: A corporation that has made an election to be an
limit exposure to a judgment solely to the assets of the business-- “S” corporation for federal income tax purposes is treated as a sole
and not your family. proprietor or partnership for tax purposes, known as “pass through”
It is imperative to form a business entity before you sign a lease, taxation; thereby, avoiding “double taxation.” “S” corporations have
contract, franchise agreement, or otherwise start to do business. many limitations in their structure, such as limits on the number of
Once the entity is properly formed, every agreement must be signed shareholders, citizenship requirements for shareholders, and issu-
in the name of your business entity. Forming a business entity be- ance of only one class of stock.
fore you start conducting business can not only provide personal
liability protection, but can also allow your entity to develop cor- Limited Liability Company (LLC): As with a corporation, a lim-
porate credit. ited liability company (LLC) provides personal liability protection
Many business owners defer the formation of a business entity for the debts and obligations of the business. LLCs also have “pass
until after they have done business for some time. By that time, through” taxation where the income and losses pass through to the
however, they have incurred start-up costs and debt that will unfor- individual members’ tax returns. An LLC may elect to be taxed as
tunately be reflected on the individual owner’s personal credit. At a corporation. It can be managed by all of the members or can have
that point, it is not possible to simply “roll over” the individual debt centralized management in one or more of the members, known as
to a “limited liability” company. And it is quite difficult to unravel “managers.” If properly formed, an LLC does not need to maintain
the business assets and obligations from the personal ones. Waiting corporate formalities, such as holding meetings and keeping min-
to form the entity until after you have been in business for a year or utes.
more means that you must in essence “start over” when forming the In California, an LLC may not render professional services, which
entity at a later point. include services lawfully rendered only pursuant to a license, certi-
Now that we’ve established that it’s best to protect your personal fication or registration under the Business and Professions Code,
and family assets and build credit, the next step is to determine the Chiropractic Act, the Osteopathic Act or the Yacht and Ship
which type of business entity is right for you. Whether you are go- Brokers Act. However, the California Attorney General has opined
ing it alone or with another person, the choice of a proper business that such services do not include services rendered pursuant to a
entity should be made in close consultation with a business law at- nonprofessional occupational license under the Business and Pro-

20 S o u t h B a y B u s i n e ss I n s i d e r M a g a z i n e 2 n d I ss u e 2 0 0 9
fessions Code. Notably, neither the Contractor’s State Licensing mation, but proper maintenance to provide the personal liability
Board nor the Department of Real Estate will issue a corporate protection provided by law. Failure to do so will allow a creditor to
license to an LLC. “pierce” the veil of liability protection in order to collect against the
personal assets of the individual owners of the entity.
Professional Corporation: A professional corporation is ap- In recent years, many companies have come into the marketplace
propriate for medical and therapeutic practices, accounting and telling you that you do not need a lawyer to form a business entity,
finance, and legal professions. The requirements for professional make a contract, or get a trademark. But the truth of the matter is
corporations vary according to the governing body regulating the that the money you “save” by doing it yourself can cost you thou-
practice of a particular profession. Some professions require cor- sands more dollars in the future. Why take the risk?n
porate registration with the governing body; others do not. Many DeAnn Flores Chase has spent the last 12 years counseling and de-
professional corporations are limited with respect to who can be of- fending individuals and businesses of all sizes. She has successfully de-
ficers, directors or shareholders in the corporation. Careful analysis fended her business clients against a broad range of claims, including
is necessary to ensure that a professional corporation complies with contract and lease disputes, trademark and copyright infringement, and
the requirements for its particular profession. catastrophic injury and wrongful death claims. Ms. Chase’s focus on
And now a word or two about DBAs. DBA stands for “Do- liability protection comes from the successful handling of all aspects of
ing Business As.” A DBA is formed by filing a Fictitious Business litigation for individuals and businesses of all sizes. To obtain a FREE
Name (FBN) statement with your clerk in the county (or counties) copy of Ms. Chase’s report on “The Four Common Mistakes Business
where business transactions will occur. A DBA is not a business Owners Make,” visit her website www.sbblmb.com and enter the promo
entity, and provides absolutely no personal liability protection for code, “BIM.” DeAnn Flores Chase A Law Corporation – South Bay
the individual or individuals conducting business. After a business Business Lawyers 310-546-8111. Email: deann@dfclawcorpcom.
entity is formed, it may be appropriate to file an FBN for the en-
tity if it is anticipated that the business entity will transact business
under a fictitious name that differs from the name reflected on its
A business entity provides
registration documents.
What else is NOT a business entity?
personal liability protection
Sole Proprietorship: A sole proprietorship is one person alone.
He or she will have unlimited liability for all debts of the business,
and the income or loss from the business will be reported on his from the debts and obligations
or her personal income tax return along with all other income and
expense he or she normally reports. A sole proprietor often does
business under a fictitious business name as a “DBA.”
of the business because it has its
General Partnership: In a general partnership, each of the two
or more partners will have unlimited liability for the debts of the
business. The income and expense is reported on a separate return own legal identity separate and
for tax purposes, but each partner then reports his or her pro rata
share of the profit or loss from the business as one line on his or her
personal tax return. apart from its officers, directors,
Limited Partnership: With a limited partnership, each of the
general partners has unlimited liability for the debts of the partner-
ship, but the limited partner’s exposure to the debts of the partner-
shareholders, managers or
ship is limited to the contribution each has made to the partnership.
However, a limited partner may be deemed a general partner if it
determined that he or she actively participated in the management members – even if the entity
of the entity; and therefore, he or she may then have the same un-
limited liability for the debts of the partnership.
Ultimately, liability protection depends not only upon proper for- consists of only one person.
2 n d I ss u e 2 0 0 9 S o u t h B a y B u s i n e ss I n s i d e r M a g a z i n e 2 1

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