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What is incorporation?

If you are starting a business or involved in business ownership in Pennsylvania, you may be curious about incorporation. Entrepreneur explains incorporation is the process of creating a corporation, which is a standalone entity with its own legal rights. Incorporation is done at the state level, but you can incorporate in different states, usually through filing forms and paying a fee.

Creating a corporation requires a board of directors who are responsible for running the business. You also will issue stock to investors. One perk here is the obvious financing that can come from having investors. Another benefit is the limited liability faced by company shareholders. Because the business is an independent entity, it is liable in the case of a lawsuit or other issues.

Incorporating a business requires following specific rules. You must file an articles of incorporation with your state. You must file taxes on behalf of the business and keep the finances of the business separate from personal finances. You must also pay dividends to shareholders and register with the Securities and Exchange Commission if you distribute over a certain number of shares in your company.

The biggest disadvantage for incorporating is double taxation. Because you have to pay yourself a salary from the business, you will have to pay employment taxes and the company has to pay its own taxes. In a large company, this may not be an issue, but smaller companies may find this gets expensive and forming a corporation becomes less advantageous. This information is only intended to educate and should not be interpreted as legal advice.

What's your 'pie in the sky' business idea?

Business meetings - those two words can draw excitement or ire depending on your perspective. As you meet with your partners to discuss a new business idea, you can quickly tap into the creativity in the room, but as ideas become a reality, questions arise that can bog down progress in both business formation and product creation. How can you work past these roadblocks on the way to success?

Choosing a business structure

In the early stages of planning, you will discuss what kind of business structure you and your partners will utilize. You probably know what the company will do, but how it will run takes a little more discussion. The advantages of a limited liability company (LLC), an S corporation or a C corporation will be the subject of much discussion between you and your colleagues, and understanding the differences can help drive the conversation. 

LLC

  • Flexible and simple
  • Avoids double taxation of property and income

S corporation

  • Avoids taxes on profits outside of compensation
  • Limited shareholder and stock options

C corporation

  • Provides more benefits to both employees and shareholders
  • More deductions for employee expenses like health care

Whether you want a small, medium or large-sized business, LLC, S corp. or C corp. may change as the business grows, the prospects of which can be written into the business plan.

A business law attorney can assist in including the legal needs for growth in your business formation. Your legal professional can also act as a third-party voice to your business structure outside of the egos and emotions of the daily workflow.

Focus on the formation

As a soon-to-be business owner, you want to be efficient, and keeping discussions focused is often the key to early meetings. Even if you intend to develop a large business, the close company you keep is critical.

Amazon CEO Jeff Bezos was recently named as one of the richest people in the world. To help him reach his business goals, he relies on a "two pizza rule" to keep meetings productive. That is to say; he never invites more people to a meeting than two pizzas could feed. Could you use this same rule during the formation of your business?

Understanding the advantages of particular business structures can help drive formation discussion toward the 'pie in the sky' that is your business goal.

Preparing for a consultation with a business law attorney

One of the best pieces of advice for new business owners in Pennsylvania is to seek help from those more experienced. This can mean surrounding yourself with successful owners that you respect, but should also include consulting legal experts who have helped others create and guide their companies. We at Kisner Law Firm have been strategically consulting business owners and are prepared to help you overcome any obstacles that you may encounter.

 

If you have an appointment already made, there are certain pieces of information that are important to bring to the consultation. You will need to show as much as possible about your operations, including what products or services you will offer and what licenses will be required for those, as well as any state or federal regulations that may apply to your business. You should also be prepared to discuss equipment needs and other large purchases that are expected.

 

You will also need to explain structure of your company. This includes the number of owners that will be involved and what their level of activity will be, how profits and responsibilities will be divided, and what the financial positions of the owners will be. This information will be crucial in determining the type of entity that you need to create.

 

Once these facts are presented, you can make decisions such as the type of insurance that will be best, your employee situation and the most optimal way to minimize tax liability. You can focus your decisions on the goals that you have for your company now as well as in the future. For more information on preparing for your consultation, please visit our web page.

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Pittsburgh, PA 15219
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