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Incorporating: Dispelling some myths

Barry and Howard
PBS Tax & Bookkeeping Service

There are many reasons why people feel they should incorporate their business. Some of those reasons are to make more money, for tax advantages, for asset protection, to protect against lawsuits, for ease of operation and to limit risk. Often, some of these reasons are based on misinformation.

There are many things being incorporated won't do for you. It will not automatically make you more profitable, nor will it necessarily limit your liability on all transactions or protect you from all lawsuits. However, being incorporated can limit risks, save taxes and protect your assets.

Should you incorporate?

There are many factors to be considered before deciding if incorporating is in your best interest. Every situation is different, and what is good for one trucker is not necessarily good for another. For example, some factors to be considered are soundness of the business, consistency and level of income, awareness of corporate tax and payroll requirements as well as stringent record keeping requirements. Many corporations formed by truckers are one-person corporations. Even if they are a one-person corporation, there are mandatory requirements to be met. You cannot simply file Articles of Incorporation within the state and expect to avoid personal liability.

If you do not follow the proper corporate guidelines you risk losing the benefit of "limited liability." If you are sued and the court determines that the shareholders are operating as individuals rather than through the corporation, the court can make shareholders personally liable for all corporate debts. The court will look to see if corporate formalities were followed, contracts were signed properly, personal and corporate funds were co-mingled, required meetings were held, stock was issued properly, the minute book was kept up properly, etc. If the court determines that shareholders are personally responsible for a corporation's debts, it is usually due to the fact that the proper corporate guidelines were not followed.

What state is best for incorporation?

Many truckers have incorporated their businesses in Delaware and Nevada, enticed by low state filing fees, lenient rules and minimal restrictions. However, minimal legal and regulatory standards are of little value if you're operating as a closely-held corporation (small or family corporation).

Delaware, for example, is and has been for quite sometime the most popular state in which to incorporate. Forty percent, if not more, of the corporations listed on the New York Stock Exchange are incorporated in the state of Delaware. Delaware definitely has advantages if you are a large publicly-held corporation or if you're a closely- held corporation which plans on having large numbers of directors, officers and shareholders (the larger you are, the more exposure you have). If not, there is no advantage over incorporating in your "home" or "domicile" state. Over the years the advantages of incorporating in Delaware have lessened as most states competing for business have updated their corporate statutes, allowing for more uniform corporate law. Although significant differences still exist in some states.

One problem for truckers incorporated in Delaware or Nevada is the additional costs of qualifying in their home state as a "foreign" corporation.

A corporation doing business in the state where it is incorporated is known as a "domestic" corporation. A corporation doing business in a state where it is not incorporated is considered a "foreign" corporation. For example, a trucker living and operating his company in Kentucky, but incorporated in Delaware, is a "domestic" corporation in Delaware and a "foreign" corporation in Kentucky.

As a "foreign" corporation you must register and qualify in the state which you plan to maintain and staff your office to transact business. A corporation wishing to do business in a state other than its state of incorporation must meet the licensing requirements of the state where it intends to do business. The usual procedure is to file an application with the secretary of state in the state where it intends to operate certifying to the corporation's name, date and state of incorporation, the nature of its business, the location of its principle place of business, and enclosing a copy of its certificate of incorporation, a certificate of good standing and other significant data. This information is usually accompanied by a registration fee payable to the intended state. Once operation commences, the "foreign" corporation is then also subject to all rules applicable to domestic corporations within the state, such as use of a corporate name and the payment of corporate income and franchise taxes.

The state fee to qualify a foreign corporation is never less than the normal incorporation fee for a domestic corporation. In some states, the fee is as much as ten times more to qualify as a foreign corporation than it is to simply incorporate as a domestic corporation in the first place.

Incorporating as a domestic corporation in your home state offers the same limited liability, personal asset protection and tax savings as a Delaware or Nevada corporation without the additional requirements, responsibilities and costs of operating as both a "domestic" and a "foreign" corporation.

Also, many tax and business issues are determined by the employer/employee and/or corporation's domicile state, such as, payroll and workers compensation requirements. A Delaware or Nevada corporation does not offer any advantages in this area either.

Get the proper guidance

Incorporating your business without being fully aware of all the tax and legal implications as well as understanding the requirements and responsibilities of operating as a corporation could be potentially damaging to your business.

Because of the increased costs of operating as a corporate entity, and because of the many legal and tax considerations, anyone considering incorporating should discuss the matter with both their accountant and attorney. LL

This article is presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over a quarter century. If you would like further information, please contact Barry or Howard at 800-697-5153. See our Web Site at www.pbstax.com