Going from Sole Proprietor to Corporation
By Steven Kang, CPA, Steven Y.C. Kang, CPA & Associates, steve@taxsav.com, www.taxsav.com
If you are running your business as sole proprietor, you are personally exposed to all potential claims and lawsuits against the business. For this reason, many business owners opt to form a corporation to run their business. If properly run, a corporation would provide them with a legal shield to safeguard their personal assets. To provide this legal shield, a business owner must keep the form of the corporation. This is done by respecting the structure of the corporation. A corporation has three layers of authority, which separate the owners from the daily operations of the business. The three layers are shareholders, board of directors and officers. The shareholders are owners of the corporation, whose ownership is evidenced by stock certificates. The shareholders elect directors to represent them in the board of directors, whose authority comes from Bylaws. The board of directors appoints officers of the corporation to run day to day operations of the business. As long as the officers were operating within the guidelines set by the board of directors, the shareholders are protected from claims or lawsuits made against the corporation. In many small business owner operated corporation, the shareholder, the board director and the officer are often one and same person. However, same protection is provided to this small business owner, if he/she respects the formality of corporation. In addition to keeping the form of the corporation, the finances of the corporation should also clearly distinguish the expenditures of shareholders and the business. Some small business owners pay their home mortgages from his/her corporation, such payments may give ammunition to a smart attorney, wanting to pierce the “corporate veil”. As the formality of corporation was not observed, the attorney would argue that there is no distinction between the corporation and the owner (shareholder). Same results would also apply to personal expenses paid by the owner’s corporation. Forming a corporation is a relatively routine task and many online services provide the service. However, the do-it-yourself don’t provide you with the advice necessary to properly document your Bylaws, minutes and structure of the corporation. I recommend that you consult the professionals who regularly form corporations. Such professionals do not have to be attorneys. They could be enrolled agents or CPAs.