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Many potential clients wonder about whether they should incorporate and the possible benefits or downsides of incorporation. It is important to think not only about whether to incorporate, but how to set up your corporation or LLC. Among the considerations to consider are whether you wish to form your corporation under California law, Delaware or Nevada law.
You can set up your corporation under any of the 50 states laws, but which state you choose will depend on multiple factors. One factor is where your actual business will be run from, meaning where your headquarters, employees, computers, factories, store front will be physically located. If your business is all virtual, then you should probably think more in terms of the individual persons and where they reside for this factor. A second factor is taxes because each state has different rules for corporate taxation.
Further, depending on whether you intend to keep profits entirely in the company, raise venture capital (or other equity investments), or distribute any profits this will also affect your choice of where and how you form your company. You should also make sure that you have a knowledgeable CPA who can advise you. If you don’t know a CPA, Attorney Heimlich can provide a referral. A third factor is the intended business and the projected revenue and expenses for the next 2-3 years.
The main benefit of incorporating is to try to protect your personal assets from corporate debts. If you form a corporation or limited liability company and properly run it and keep it separate from your personal finances then you may be able to protect your personal assets from corporate debts or obligations. It is important to note that you must keep corporate debts in the corporate name only, and no personal guarantees if you wish to keep them separate.
When you are forming a business, you have to carefully consider who will be a shareholder, officer, director, lender, or employee. The decisions about who you decide to start your business with, or grow it with can have major impacts on both your profits and whether the business can function well.
One example is the share structures and the types of stock you offer. There are many different types of stock that you can issue to either workers, founders or investors, it all depends on what your goal is. When you form your company you have the ability to shape the share structure to fit your goals with such items as voting or distribution preferences.
The main types of stock are preferred or common stock. Preferred Stock usually ranks higher in priority than common stock, which means that if the company becomes insolvent or bankrupt then the preferred stockholders get paid back before common stockholders. Preferred Stock can also have guaranteed accrued dividends before common stockholders get paid any dividends. While it may seem great to have preferred stock, if you design your company with too much power for the preferred stock, you make the common stock less desirable.
Since an important part of incorporation is protecting personal assets from business exposure, one should consider what potential liability one might have. Different types of businesses tend to have different exposures. One source of exposure is other shareholders/owners having disputes. Depending on the nature of the business, incorporation may help to detail what the owners are obligated to do, whether they would have to contribute additional capital or not. Another source of exposure is with employees or contractors used to provide services. These claims for wages or unpaid amounts can be a significant and common source of claims. Proper advice on classifying employees and contractors and detailing payments required, hourly rates and the relationship can minimize or at least clarify potential liability. In addition to those claims are claims from customers of your business who may claim a refund or damages from your product or service. In some businesses, disclaimers or contracts with customers can help to limit this exposure. However, despite trying to review potential exposure, no attorney can guarantee that you won’t have a legal claim if you are operating a business.
Mr. Heimlich also is able to use his experience being on an elected board (West Valley Mission College) and a non-profit director to advise corporations on corporate governance. He can help to draft agendas for your business for your annual meetings of directors or shareholders. Additionally, he can hold the meeting and take minutes for it. By properly documenting a corporate meeting, sometimes problems are resolved or minimized.
Mr. Heimlich also has experience dealing with corporate records requests from owners or shareholders who demand corporate information, such as annual reports or other items.
After taking into account all of these factors, and meeting with clients, I can work with you to see the corporate form that works best for your needs and to advise you going forward.