<!DOCTYPE HTML PUBLIC "-//W3C//DTD HTML 3.2//EN"> <HTML> <HEAD> <META HTTP-EQUIV="Content-Type" CONTENT="text/html; = charset=iso-8859-1"> <META NAME="Generator" CONTENT="MS Exchange Server version = 5.5.2655.35"> <TITLE>Re: To incorporate or not. (Farrell)</TITLE> </HEAD> <BODY> To the List, I'd like to shed what I hope is a = little light on this topic of incorporation.  Let me preface this = with the comment that I'm not an attorney or an accountant (nor a piano = technician, for that matter, though I am a very interested = amateur).  My background is in setting up and working with = start-up biotech companies, which I've done for the last ten years or = so. As has been pointed out, the primary = benefit of "incorporation" to the small private business is = for liability protection.  That protection does not mean that the = business can or cannot be sued, or that in the event of a lawsuit that = the business (or its insurance carrier) must pay for its defense.  = It means simply that the potential loss of the corporation is limited = to the assets of the corporation.  All personal assets of the = stock holders, directors and so on are separate, and cannot be used to = satisfy any judgment against the corporation (but see = below). Let's consider the following = admittedly grossly simplified situation.  Say you have picked up = the only remaining original Cristofori for a careful restoration.  = Once in your shop, the building, including the piano, is consumed by = fire, due presumably to the (unknown) arsonist that has plagued your = town for the last year.  The owner of the piano sues to recover = the rather substantial value of that "irreplaceable" = instrument.  After defending yourself in court, you are found = liable for the value of the instrument, and that value far exceeds the = modest insurance you carry. If your corporate form is that of a = sole proprietor or a partnership, the owner of the Cristofori now has = the right to your (and your partner's) personal assets to fulfill his = judgment.  This includes personal property, real estate (like the = home you own), cash, collectibles, investments, and so forth.  If = instead your corporate form is that of a "C" corporation, = only the assets of your business can be used to fulfill the = judgment.  That includes the things you transferred into the = corporation initially to purchase its stock, and assets that the = company has bought or developed over its course, like your company = vehicle, tools, machines, buildings, intellectual property, customer = lists and so forth.  None of your personal assets can be used to = fulfill the judgment. Between the two extremes cited above, = there are subchapter S corporations and LLCs (Limited Liability = Companies).  Both of these offer substantial liability protection, = but it becomes increasingly difficult to "pierce the corporate = veil" as one moves from LLC or S Corp to C Corp.  The more a = business looks like a single individual, the easier it is for an = outsider to pierce the veil and go after personal assets for tasks not = sanctioned by the company (like gross negligence).  Still, the = protection is substantial, and having an S Corp or LLC may be = sufficient to prevent a law suit if the company's assets are = modest. As far as taxes go, earnings from sole = proprietorships, partnerships and S Corps (and LLCs I believe) are all = taxed as ordinary income.  Earnings from C Corps are subject to a = corporate tax, and any earnings passing to shareholders = ("dividends") are again taxed on the personal income tax = form.  Please note that salary and bonuses are deductible = expenses, so all of these can be highly lucrative to its employees, but = still show a loss for its owners. All S and C Corps and LLCs must = register with the state, and pay a yearly fee depending on the = form.  There are also modest requirements for annual shareholder = meetings, and certain requirements for the number of owners. Whether liability protection is = worthwhile for you or not, that depends on the nature and risks of your = business, the liability coverage you have (you do carry liability = insurance, don't you?), the sort of clients you have, and your = tolerance for paperwork and registration expenses.  My guess is = that most of you could limit your liability through carefully drawn = contracts that you would execute with your customers, and an = appropriate liability insurance policy.  I've never signed a = contract with any of my piano technicians over the years (but then most = of the services have been minor), and I don't know whether that would = be off-putting to your customers or not. If you deal with larger financial = amounts, you may wish to consider an S Corp -- they really are set up = for the very purpose of liability protection, and are transparent as = far as taxes go.  C Corps are set up for the big boys (like IBM, = GM and so forth), and would be useful primarily if you are garnering = substantial outside investments and are geared to a corporate liquidity = event (sale or an IPO).   LLCs are very flexible, can be = crafted in almost any way you wish (more like a partnership to more = like a C Corp) but I would guess are not really necessary.  My own = clients usually start out as S Corps, but once they take in the = substantial outside investments they need (millions to tens of millions = of dollars) they usually are converted into C Corps for reasons of = increased accountability, liability protection (these investors have a = TON of money), liquidation preference and loss carry-forward = provisions. One last thing to keep in mind.  = While everyone worries about law suits, remember that attorneys are = pure capitalists, and will get paid first.  A civil suit by a good = attorney, from filing through depositions, jury selection, expert = testimony and trial, costs at least $50,000.  Is your potential = adversary really willing to pay for that, win or lose?  Or is the = case worth three times that for an attorney paid on contingency?  = Really? I hope that the information here has = been as helpful and interesting to you as that which you share = continually with me.  If you are interested in incorporation, you = really should talk with an attorney, and the basic consultation should = not be that expensive (a few hundred dollars). Frank Jahnke, Ph.D. President, FMJ & = Associates Adjunct Professor, Chemistry and = Biochemistry, Arizona State University Auburn, CA </BODY> </HTML>=