Originally created 01/08/01

Company exhibits incorporation benefits

When Rhian Swain-Giboney was laid off two years ago as a contract graphic artist at Savannah River Site, it was just the nudge she needed.

Mrs. Swain-Giboney decided to focus full time on her tiny graphics, marketing and fine arts project, RedWolf Unlimited.

The 39-year-old artist had worked free-lance on the side since 1979, designing company logos, illustrations and paintings for anyone who was interested. But within a month of working full time out of her Hephzibah home, her income had tripled.

Two years later, the business is still growing.

So in November, Mrs. Swain-Giboney and her husband, Scott, 41, incorporated the company to shield their personal assets, tap into tax advantages and improve their record keeping.

"There are huge advantages from a financial standpoint," Mr. Giboney said.

Incorporation is a common business strategy, and a smart one, said J.T. Cosnahan, partner with Augusta accounting firm Baird & Company.

"In just about every instance, it's better than a proprietorship, particularly from the standpoint of keeping clear financial records," he said. "Corporations ... put discipline in record keeping. It keeps business affairs from muddling with personal affairs, which happens easily with a proprietorship."

But the chief reason business owners incorporate is to protect their personal assets. In a sole proprietorship, personal and business assets are not distinguished - an owner's personal assets are vulnerable to business-related lawsuits.

If a corporation is sued, the lawsuit cannot extend to the owner's personal assets. In rare cases, a court will allow litigants to "pierce the corporate veil" and name individuals suspected to be using a corporation to disguise their actions.

Likewise, an individual's personal liabilities cannot extend to their corporate assets. Thus, the Giboney couple found they had more credibility with lending institutions after incorporating and were able to secure small-business loans previously unavailable to them.

"Any financial institution worth its publicly traded stock wants to back companies whose owners are shielded from personal liability," Mr. Giboney said. "... There's a certain sense of legitimacy in going corporate - a perception that is a very critical thing for a growing business."

Incorporating also offers tax advantages, depending on the corporate classification.

When RedWolf was a sole proprietorship, it filed a standard Form 1040 return. All revenue to the Giboneys was taxed as income, and all expenses were filed as deductions.

As RedWolf Inc., a subchapter S corporation, taxes on corporate salaries can be limited. The rest of the company's profits can be paid out to the couple as shareholder dividends, which are exempt from Social Security and Medicare taxes.

"So by electing to have minimal salaries and pulling money out of the corporation as dividends, you're saving about 15 percent in taxes right there," Mr. Cosnahan said.

Incorporating a business requires certain documents be filed with the state government. Several options are available, and experts advise business owners to consult an attorney and accountant before filing.

"You'll need to sit down with someone who can give you an idea of what your filing requirements and tax burdens are going to be with each form," said David Anderson, an attorney with Hunter, Maclean, Exley & Dunn.

Mr. Giboney, an engineering consultant, spent months talking to other business owners and lawyer friends, sorting out the different types of corporations and trying to decide if one was right for RedWolf Unlimited.

Then the couple sought out professionals they trusted.

"We didn't want to turn it over to a professional without doing any leg work," Mr. Giboney said. "One of the things I wanted the CPA to understand is the type of business we're in, our financial and corporate goals, and if he believed these were viable. If you work with people who don't believe in your work, they tend not to give it their best."

Corporate lingo

Limited Liability Company (LLC): An organization treated as a partnership for federal tax purposes; partners at state level are protected from loss of investment; subject to state franchise tax as a corporation.

Limited Liability Partnerships (LLP):Individual partners are protected from liabilities of the other partners; treated as a partnership for federal tax purposes.

Limited Partnership (LP):General partner or partners manage partnership; limited partners only contribute capital. This latter group assumes no liability beyond its capital contributions. Popular for real estate ownership to avoid double taxation.

S Corporation:Must have 35 or fewer stockholders to apply. Shareholders protected from double taxation, granted limited liability protection.

C Corporation:For larger, mature corporations; taxed under Subchapter C of the Internal Revenue Service code.

Incorporation checklist

Corporations are formed by filing articles of incorporation with secretaries of state. Each state has its own guidelines, which vary depending on the type of corporate entity being created, whether it is for-profit or nonprofit, C corporation or S corporation. Generally, the procedures are as follows:

1. Reserve a name for the corporation.

2. File articles of incorporation.

3. Publish notice of intent to incorporate in local newspaper that is the official legal organ of the county where the corporation is to be registered.

4. Contact state department of revenue regarding state tax law compliance.

5. Obtain tax identification number from Internal Revenue Service.

Source: The Augusta Chronicle research

Reach John Bankston at (706) 823-3352 or jbanks15@hotmail.com


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