Tuesday, March 20, 2018

The Bottom Line: The incorporation trap

Monday, June 28, 2010
There are many factors to be considered to determine if incorporating will be in your best interest.
There are many factors to be considered to determine if incorporating will be in your best interest.

Beware of recommendations to incorporate your business unless the recommendation comes from your accountant or your attorney. Not everyone has your best interest at heart. Many businesses providing incorporation services will have you believe it’s the best way to operate for everyone. This is not true. When it comes to making decisions about business entity selection it is always best to get the advice of both a legal and tax professional. Many truckers have made the mistake of incorporating their businesses without proper guidance.

Important Factors

There are many factors to be considered to determine if incorporating will be in your best interest. Every business 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 and even with the one-person corporation, there are many mandatory requirements to be met.

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 not 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.

Where to Incorporate?

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 corporations). One big problem for truckers incorporated in Delaware or Nevada (if they don’t live there) 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 Georgia, but incorporated in Delaware, is a “domestic” corporation in Delaware and a “foreign” corporation in Georgia with requirements in both states. Incorporating your business out of state does not relieve you of responsibilities in your home state. What it does is create issues for your business in two states instead of one.

Beware of services offering quickie filings in Nevada and Delaware. Unless you actually live and do business in these states you are most likely better off to simply incorporate in your home state or not at all.

Major Issues

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. When it comes to tax savings many truckers do not realize that their business profit must be at a significant level before any tax savings will be realized. If you are not at the higher income level it will end up costing you more to operate your corporation properly than it saves you in income tax.

Those of you looking for liability protection must be aware that the courts can and have disregarded “corporate liability protection” in the case of one-person corporations and in cases where corporate guidelines were not followed.

Another issue specific to trucking is as a shareholder of a corporation whether a one-person corporation or a multiple shareholder corporation, you do not qualify for the “per diem” allowance and must adhere to a specific reimbursement process instead.

Anyone considering incorporating should be cautious and make sure to get the proper guidance. For those of you who are good incorporation candidates make sure to use a reputable service to handle your incorporation. For those of you who are not good candidates do not fall into the incorporation trap.

This article has been presented by MBA Tax & Bookkeeping Service, a company proud to provide Corporate/LLC filings, income tax, bookkeeping and IRS problem resolution services to truckers in all states. If you would like additional information or have questions, calls are always welcome. Contact us at (888) 407-1669 or visit our website at www.mbataxhelp.com or www.mbabizservices.com.

This article is provided for informational purposes only and is not intended as legal or tax advice. Each individual business situation is different and the information contained herein is meant for general information purposes only. Specific tax and legal recommendations can only be made after an individual has consulted his or her qualified tax or legal professional.

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