Tuesday, February 15, 2005

Advantages of Incorporating

Separate Legal Entity Status

A corporation is a separate legal entity existing under authority granted by state law. It has its own identity separate and apart from its shareholders/owners.

Broad Range of Powers

As a separate legal entity, a corporation has the power to act in any way permitted by law and by its own corporate charter. For example, a corporation can enter into contracts, buy and sell both real and personal property, sue and be sued, and can even be responsible for breaking the law (i.e. committing a crime).

Small Claims Court

In most jurisdictions, any officer or director or employee can appear in small claims court on behalf of the corporation.

Separate Liability for Corporate Debts

As a separate legal entity, a corporation is responsible for its own debts. Normally, shareholders, directors, and officers are not responsible for corporate liabilities. If the corporation suffers losses, the corporation itself must bear those losses to the extent of its own resources, and not the personal assets of the individual shareholders. In effect, however, shareholders indirectly bear these losses by a decline in the value of the stock they hold in the corporation. Note however, that shareholders, directors, and/or officers may be held liable for the debts of the corporation where the court imposes "alter-ego liability" or where the individual has personally guaranteed the corporate debt.

Perpetual Duration

A corporation is capable of continuing indefinitely. Its existence is not affected by the death or incapacity of shareholders, directors, or officers of the corporation.

Duration of Corporation Compared to LLC

An LLC has a limited existence. Absent a contrary agreement, a limited liability company (LLC) is dissolved upon the death, withdrawal, or bankruptcy of a member unless the business is continued by unanimous vote of the remaining members. Although the operating agreement can be drafted to avoid such a result, the life of the LLC is still limited to the termination date in the Articles of Organization.

The DISADVANTAGES of INCORPORATING

Corporate Formalities

A corporation can be created only by compliance with General Corporation Law of the state of incorporation. This usually requires filing of Articles of Incorporation with the appropriate state entity (usually the Secretary of State) and payment of the requisite state fees and taxes. A corporation is required to have a board of directors, corporate officers, annual shareholders meetings, and to maintain separate books and records. Failure to observe such formalities may result in the personal liability of shareholders for corporate debts. However, where the corporation has only one shareholder, many states allow that one shareholder to act as director and all officers (President, Secretary, and Treasurer).

About the Author: Carl H. Starrett II, Esq., has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

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