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Incorporating Your Business

Q1: Is it recommended for a consultant to incorporate? What are the advantages?

Incorporation is really a question about liability. If you don't have much potential liability in your line of work then incorporating may not be necessary. If you are very concerned about protecting yourself, then consider incorporation. And if you choose incorporation, an LLC is the most recommended type of company.

The "nays" have it:

  • I have not incorporated as 1) I am strictly a sole practitioner and 2) decisions are ultimately the responsibility of the companies that I work for. After almost four years of consulting, I have not felt it is worth the expense of incorporating. [Nancy Carter, nacarter@earthlink.net]
  • I would not recommend a single consultant to incorporate as it may be to much paperwork for one individual. If the incorporation is to limit individual liability, look into insurance to protect yourself. However, if you have a group of individuals that look to do common work, then incorporate and the staff will be available to keep up with the required paperwork. We also recommend finding an umbrella company that will allow the individual consultant to do work in their specific field, under the protection and name of a particular corporation. Our organization does this for a few folks and it saves them overhead costs and provides them protection. [Justin W. Hitt, jhitt@osn.net]
  • I would not recommend incorporation. Incorporating can create a double taxation situation. If your type of business is relatively small and your revenue is generated from "typical" consulting services and you want to incorporate to limit liability, you may find creating an LLC (Limited Liability Company) is your best alternative. An LLC is, from a legal stand point treated like a corporation and from a tax stand point treated like a partnership. An LLC has more flexibility than an "S" corp but still allows for pass through income. The LLC gives much of the same protection as does a C Corp. but without most of the complexity.[Colleen M. Millsap, colleenm@aecplus.com; David J. Simonetti, djs@projix.com; Bob Laurence, RBLaurence@aol.com]

Those who recommend incorporation cite these reasons:

  • I offer professional services and chose to incorporate (as an S corporation) for a number of reasons:
    • separation of my personal finances from my business finances
    • limited personal liability
    • respectability
    • ability to easily sell part-ownership in the form of shares (if I ever need to)

[Seth Grimes, grimes@access.digex.net]

  • Incorporation is not terribly expensive and assuming one has some assets to protect, it's probably worth doing. [Marc Chafetz, marc@bozmanpartners.com]

Q2: Where should one incorporate?

  • Your nexus is defined by property, sales, and payroll. You may be able to arbitrarily pick a state (or even a county) in which to incorporate, but the courts quickly figure out where you're "doing business", and you will have to pay taxes there. Incorporate where you will really be working in order to save accounting, legal, and back-tax bills and penalties later. [Hans Tallis, Hans Tallis@ers.com; Seth Grimes, grimes@access.digex.net]
  • The state you incorporate in depends entirely on the tax advantages of the state itself. Some companies, for example, incorporate in Delaware because of favorable tax conditions. [Justin W. Hitt, jhitt@osn.net]
  • It is strongly advised not to incorporate or form a company in Washington, D.C. DC has some unusual tax practices. For example, DC taxes partnerships like corporations. DC taxing authorities are also difficult to deal with. The corporate laws are vague in DC and the courts are not supportive. Incorporate in DE, MD, or VA and register in whichever jurisdiction you want to keep an office. Make sure you are aware of the necessary business licenses and related taxes you should pay. These typically include a Business and Occupational License Tax ( gross receipts tax), Personal Property Tax, Sales & Use Taxes etc. [Colleen M. Millsap, colleenm@aecplus.com; marc chafetz, marc@bozmanpartners.com; David J. Simonetti, djs@projix.com]

Q3: What are some of the issues surrounding incorporation in Delaware?

Here are some points to consider:

  • Make sure that you really need to incorporate in Delaware. Does Delaware corporate law address certain needs which your locality does not? If so, it is pretty easy to get the articles filed and find an agent. If not, you're probably wasting time and money.
  • If incorporating in DE and maintaining offices in MD or VA, note that you will need to file as a Foreign Corporation.
  • Note that registering in both DE and MD or VA will probably cost $300-$400 more a year registering in MD or VA alone.
  • Virginia has very favorable corporate laws, second only to Delaware some would argue. Here are some pointers on VA:
    1. VA requires that major legal documents (such as issuing new stock, mergers, etc.) be approved by the state, this could add a delay of 2-3 weeks to process paperwork.
    2. VA requires that there be a unanimous agreement among every shareholder not to hold a meeting to vote on a major issue. DE allows for these decisions to be taken without the shareholder meeting given the same amount of votes as would be necessary to take the decision in the meeting.
    3. Many venture capital firms insist that a MD or VA company become incorporated in DE before investment.
     

Q4: What suggestions do you have regarding using a service to incorporate a company in Delaware? [Paul Albert, paul@routelink.com]

  • There is a company called Business Filings (http://www.bizfilings.com) which can be used to file for incorporation in Delaware.
  • You can avoid attorney's fees by completing and filing the incorporation papers yourselves, and consulting an attorney only for review and nomination of the agent. The process is not really that difficult, and there is plenty of available information about "how to" from the state and other sources. [Jeff MacConnell, IDeal Destinations, Inc.]

 

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