A corporation is a legal entity, allowable by law in all fifty states. As a separate legal entity, a corporation can own property, open bank accounts, and perform business activities in its own name. A corporation is formed by filing the Articles of Incorporation with the Secretary of State in the state one wishes to incorporate. One of the unique features of a corporation is that it is owned by shareholders. On creation, the corporation issues shares of stock to the owners. These shares give owners the right to vote on the management and operations of the corporation. It is allowable to have one person own all the stock of a corporation, act as the sole director, and hold all the corporate offices (president, secretary, treasurer).

Where to Incorporate

State law requires licensed professionals, such as doctors, accountants, and attorneys, to incorporate their practice in the state in which they operate. Non-professional businesses may incorporate in one state and do business in another. Corporate laws and statutes vary from state to state, so there can be advantages to incorporating in certain states. Nevada and Delaware are two states known for their strong corporate legislation, which provides greater lawsuit protection, tax advantages, and privacy to business owners.

Advantages of a Delaware Corporation

Because Delaware's corporate laws provide public corporations with protection and benefits not found in other states, more than half of all publicly traded companies are incorporated in Delaware to provide the best protection and benefits to their shareholders. These statutes include:

  • Corporation shareholders will not be personally liable for debt of the corporation.
  • The corporation can eliminate directors' and shareholders' personal liability for financial damages for breach of duty.
  • The director, officer, employee, or agent of the corporation may be indemnified by the corporation if he or she was acting in good faith and in the best interests of the corporation.
  • Directors can only be held liable if there is gross personal negligence.
  • The corporation is allowed to pay liability insurance premiums for directors and officers.
  • The law regarding corporate takeovers is the strongest in the country.

Advantages of a Nevada Corporation

While Delaware has created corporate laws designed to benefit public corporations, Nevada's corporate laws are designed to benefit private corporations. Advantages of a Nevada corporation include:

  • There is no state corporate income tax.
  • There is no state personal income tax.
  • There is no state franchise tax.
  • Directors and officers can live anywhere in the world.
  • One person can hold all corporate positions.
  • Shareholder names can be kept anonymous and private, and there are minimal reporting and disclosure requirements.
  • State statutes provide better liability protection than any other state for corporate officers and directors.
  • There is no information-sharing agreement with the IRS. Nevada is the only state where this is true.

Lawsuit Protection Provided by a Corporation

While the corporation can be a good management and tax reduction tool, it is a poor lawsuit protection tool. If your corporation is sued, all of the assets owned by your corporation can be taken to satisfy the judgment. For this reason, you want to minimize the assets owned by your corporation. You do not want your corporation to build up sizable assets only to see everything taken in a lawsuit. Assets can be owned by LLCs and family limited partnerships and leased to the corporation. The corporation does provide some protection of personal assets with what is called the corporate veil. The corporate veil is intended to prevent a creditor from going after personal assets to satisfy a business debt. However, the corporate veil is often pierced, enabling personal assets to be seized to satisfy a judgment against your business. For this reason, you should ensure your personal assets are not held in your name, but in family limited partnerships and LLCs.

Conclusion

The American Society for Asset Protection can help you decide which legal entities will work best for the state you live, your type of business, and your goals.