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Inc. Yourself:
How To Profit By Setting Up Your Own Corporation


How To Start And Run Your Own Corporation: S-Corporations For Small Business Owners

Incorporating Your Business For Dummies

Incorporating Your Business For Dummies

"Incorporating Your Business For Dummies" is an excellent book for people forming a corporation or for those serving on the board of directors of a small corporation. The book clearly explains the roles/purposes of articles of incorporation, bylaws, consent resolutions, minutes of shareholder's meetings, shareholders, officers, directors, and how not to inadvertently compromise the corporate structure and expose officers, directors, and shareholders to personal liability.

Corporations, as separate legal entities, have no ability to act on their own. Corporations are owned by shareholders who typically elect a board of directors who set general policy for the corporation. Typically, the board of directors selects officers who manage the day-to-day operations of the corporation (some states allow 'close corporations' which allow smaller corporations to eliminate a board of directors and some of the other corporate formalities).

"Incorporating Your Business For Dummies" has an excellent chapter about the need to document authorized corporate actions. If meetings are held, minutes of the meeting document actions approved by either the shareholders or by the board of directors. If you form a one-person corporation, documenting action will probably be done with consent resolutions.

Some smaller corporations may fail to document corporate decision-making properly. This is one factor that can be used to "pierce the corporate veil" and impose personal liability. "Incorporating Your Business For Dummies" does an excellent job of explaining compliance issues that are necessary to shield individuals from liability and keep a corporate structure intact.

A very short (3-page) chapter does an excellent job of discussing where to incorporate. Incorporating in Delaware is discussed. However, many people misunderstand state taxation of corporations. Corporations must qualify to "do business" in each state in which they have employees and property (the book does a good job of discussing qualifying to do business in other states). A corporation is subject to all state laws and taxation of every state in which it does business. So, if you do business in Minnesota and incorporate in Delaware, you're subject to Minnesota state income taxation. (In short, if you plan to "do business" in many states or go public, the authors argue Delaware is a good choice, but if your business "does business" in only one state, that one state probably is your best choice.)

Choosing a corporate name and forming a corporation are covered. The role of shareholder's agreements is discussed.

One weakness of the book is the lack of discussion of corporate taxation. (The book says consult your tax advisor, which is good advice. But, you might want to know more. Another good book with more of a tax-focus is "Inc. Yourself"). For example, the role of IRS Section 1244 stock is touched upon only briefly. Section 1244 stock allows a complete corporate failure to be offset against ordinary income, which makes the stock more valuable (in the event it becomes worthless) to income-rich investors who can deduct the loss from ordinary income, rather than needing to offset capital gains.

Similarly, the book mentions that many entrepreneurs who want to take a lot of money out of a corporation form S-corporations and pay themselves a salary up to a level acceptable to the IRS and then pay out as much as possible in employment-tax-free dividends, but no mention is made of just how significant a decision this is for S-corporation owners.

On the one hand, the more paid into Social Security, up to some limits, the more Social Security retirement benefits received in the future, assuming Social Security is around, of course. But, if a smaller, but reasonable, wage is paid, and the rest is paid in dividends, you'll have more money now that can be invested at your discretion. (I've worked it out for a moderately profitable business, and when compounding is considered, this is a million dollar plus decision for most S-corp business owners.)

A minor error in the book's discussion of this keeps referring to "self-employment taxes" within the context of an S-corporation. The authors write: "Because S-corporations are pass-through entities, the corporate level has no tax to pay...As a result, an S-corporation treats its shareholder much like a general partner for income tax purposes. ... This is significant because distributions from S-corporations are considered to be salary or dividends. For salary, recipients must pay self-employment taxes. For dividends, no self-employment tax is due."

Technically, an officer of a corporation is treated like any other employee. It's the corporation's responsibility to pay its portion of Social Security and deduct the employee's portion. "Self-employment" taxes apply to sole proprietors and non-corporation business owners. S-corporations pay employment taxes. Not self-employment taxes. This error doesn't affect a reader's understanding of the concept, but I found it annoying, nonetheless. Some sole proprietors become S-corps to reduce self-employment taxes. But, once a corporation, drop the 'self.'

Another error (p.159) is suggesting entrepreneurs who have the option of being given stock essentially for free might do better to pay for the stock because it increases their basis (which can be used to reduce taxes). The authors write: "If Nina sells her stock for $10,000, she has a $10,000 gain upon which she must pay tax. She may have been better off borrowing money to pay for stock rather than receiving it for services."

That's a bunch of hooey. Basis is nice. Money's nicer. Suppose she pays $2,000 for the stock. Her basis is $2,000. Her taxable gain on a sale is $8,000, rather than $10,000. But, she'll only save a fraction of that $2,000 difference in taxes. And, she's out the money she paid for the shares. Entrepreneurs contemplating taxes should work through some common scenarios to help them understand how much they'll pay in taxes.

In conclusion, this is a great book to help understand corporations, but, some of the little discussion of corporate taxation leaves something to be desired.

Review by Peter Hupalo, Author of "Thinking Like An Entrepreneur"

Incorporating Your Business For Dummies
Incorporating Your Business For Dummies

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