• Review the operations of the company during the past year, including review of compliance with state and federal laws.
• Document the corporate activity for the past year (leases, loans, other transactions).
• Troubleshoot, identify and /or address key legal issues for the coming year.

Although LLCs are not required by Statute to hold an annual meeting, it is a great idea to visit with your business attorney at least once a year to review the past year and plan for the upcoming year.

Corporations, whether C corporations or S corporations, are formed by filing articles of incorporation with the Secretary of State. So long as they are properly formed, properly capitalized and properly maintained, they should shield the owners from personal liability for the debts and obligations of the company, except for the amount of their capital contribution.

The owners are called shareholders, and are issued shares of stock. The shareholders elect a board of directors, who then elect officers to carry out the day to day business of the corporation. Often times in small corporations, the same individual or individuals can serve as shareholders, directors, and officers.

To be properly formed, a corporation must have an organizational meeting and issue shares. It is not enough to merely file articles of incorporation with the secretary of state. Each year it must hold annual meetings of shareholders and directors and file an annual report with the secretary of state.

When it comes to taxes, a corporation has its own tax identification number and pays taxes just like an individual. IT must file an annual form 1120 U.S. Corporation Income Tax Return as well as quarterly estimated taxes. A corporation generally is entitled to the same deductions as a sole proprietor and can take additional special deductions only available to corporations.

C corporations may offer several tax advantages, however, with respect to deductibility of retirement contributions, group insurance premiums, and other benefits. The main downside to forming a C-corporation is double-taxation: the corporation itself pays taxes on profits when the income is earned and the shareholder also pays tax on dividends. For this reason, few small businesses are C-corporations.

When people are starting a business, they are often very confused and overwhelmed as to how to choose an entity, or even whether they need one. Many entrepreneurs look at limiting their legal liability but never consider the tax implications of their business entity. The only entities which provide limited liability to owners (with respect to both tort and contract liability) are S corporations, C corporations, and limited liability companies. Before selecting the entity, it is essential to review the tax implications as well as the legal ones.

In a series of blog posts, I will discuss the various available entities (sole proprietorship, partnership, limited liability company, C-corporation and S-corporation) and some tax issues associated with each.

Sole Proprietorship:
Many entrepreneurs start their businesses as sole proprietorships, where the owner and the business are one and the same (sometimes known as “hanging out a shingle”). This is certainly the simplest way to begin. There are no formalities required. But, if the business is sued or has a hefty tax debt, you are financially responsible. Many risks of having a sole proprietorship can be addressed with insurance.

From a tax perspective, the business profits are reported on the owner’s personal income tax filings under his/her Social Security number, and the income will be taxed at the owner’s standard personal income rate. The owner must file form 1040, and 1040 ES Declaration of Estimated Tax For Individuals. The owner is responsible for paying self-employment taxes. There are many deductions available as well.

Once you hire employees, you should consider forming a limited liability entity to protect yourself from the acts of the employee.