Forming a Corporation

Forming a Corporation

Using each of the 4 criteria from the lecture, describe why you feel that the form of organization selected by your company is (or is not) in the company’s best interest.

Four of the main criteria that helped guide me in my decision to form an S-Corporation were: cost, liability, taxation and control. The S-Corporation has many advantages which work in my company’s best interest through careful evaluation of each of the criteria:

Cost: I have to admit that, at first, it was a lot of work and cost/fees to setup the S-Corporation for my business. There are many steps that are required, making it more difficult when compared to forming sole proprietorships and partnerships. I had to secure the proper formation documents, called the articles of incorporation. After that, I had to register those documents with the State of California Secretary’s Office and pay hundreds of dollars in filing fees. I could not have even started all this without the help of my accountant and attorney (more costs!). After the corporation was created at the state level, I then had to file the Form 2553 with the IRS and elect the S corporation status. It was a fairly long process, which took over 2 months to complete. However, now that I look back on the process of forming the S-Corporation, I feel that it was time (and money) that was well spent in terms of the extra tax savings and liability protection that my company receives as a result. The cost that I paid for the initial setup was in the best interest of my company and its future success. Another cost benefit is that I can always choose to change my S-Corporation status if my business becomes more profitable in the future. So to me, it is a “win-win” situation.

Liability: With the formation of the S-Corporation, I wanted to ensure that I (the shareholder) had the most protection if my business ever encountered a lawsuit. Shareholders of an S- Corporation are usually are not personally responsible for the debts and liabilities of the business. If there are debts from my business that are unpaid, creditors can still be able to reach corporate assets, but most of the time they cannot reach the assets of the corporation's shareholders (my personal assets). Although, as an owner, I can limit some of my personal liability, I can still be personally liable for my actions if I fail to observe certain corporate formalities. For example, I have to be careful to keep my own financial affairs separate from those of the corporation in order to maintain limited liability (and avoid commingling of assets). With careful guidance from my attorney, it has helped me to get the most protection from the liabilities of my business.

Taxation: I set up my own business as an S-Corporation because of the tax advantages. I didn't want my business to be taxed in addition to the personal taxes I have to pay on its income.

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