Tips on Forming a Corporation

There is some confusion between what constitutes an LLC and what constitutes a corporation - indeed this exists to the point where many people still erroneously refer to an LLC as a "Limited Liability Corporation" where the "C" actually stands for "company". There are close similarities between a corporation and a Limited Liability Company, but it is the subtle differences between the two that are important for an individual or grouping trying to decide which suits their needs better. Within the subtle differences lies the reason for picking a corporation and not an LLC - or vice versa. If you wish to form a corporation, there are steps you should always follow.

1) A corporation will generally have a three-part name consisting of what are legally described as a "Distinctive element", a "Descriptive element" and a "legal ending". In the US, the legal ending for a corporation will, more often than not, be either "Inc" or "Corp". The distinctive element and the descriptive element are more variable. Assume for a moment that you are at the head of a company that makes cakes. A similar company operating within the same jurisdiction as you may already exist and go by the name "Sweet Cakes Inc.". For legal purposes, you should choose a "distinctive" element that differentiates you and them. "Suite Cakes Inc." would be considered too close. "Delicious Cakes Inc." would, however, be more than acceptable. The descriptive element is the same, because you do the same work. The distinctive element ... well, distinguishes you.

2) You should inform yourself of the corporate laws as they pertain to your own state. There are fifty separate US states, and corporate legislature is finalized at state level. Do not assume that because you have gone through the process before elsewhere you can just do the same in a new state. Not only could you be operating illegally, you could find that you are costing yourself money unnecessarily. Neither of these situations is one that you want.

3) In a corporation, it is always advantageous to own assets such as shares in another company rather than owning cash. Corporate dividends are 80% tax-free, so you can save yourself and your company a great deal of money in tax dollars if you invest sensibly. Additionally, there is no limit on the amount of loss you may carry forward to the next tax year as a corporation. A sole proprietor cannot claim a capital loss of more than $3,000 unless this is offset by capital gains.

4) Founding a corporation can be a good deal cheaper than founding an LLC. It is worth checking with the state authorities to see whether this situation applies to you. The difference may not be much, but it could be the difference between operating at a higher or lower level. It is for you to decide which step is for you, but taking legal advice on which method suits your needs is certainly a worthwhile step. It may save you a lot of money later on.

Disclaimer: This article is for informational and entertainment purposes only, and should not be construed as legal advice on any subject matter.