Need Some Deductions for 2011?

Don't overlook these!

Updated for 2011

Business Structures

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Protecting Your Personal Assets

One of the main reasons for incorporating a business is to protect your personal assets from legal claims against the business.

Limited liability is provided to all shareholders of the corporation. In contrast, sole proprietors and partners in partnerships are personally liable for business debts.

If a business creditor sues the corporation, only the assets of the corporation may be used to satisfy successful legal claims brought against the business.

CAUTION! The act of incorporating, in and of itself, may not always guarantee limited liability protection.

Here's why:

A corporation must be administered in accordance with the incorporation laws of the state of incorporation.

For example, holding stockholder meetings, keeping minutes of meetings, documenting important economic events, such as opening a corporate bank account, and setting up a retirement.

Documenting the actions taken by the board of directors, shareholders, and corporate officers is critical in providing evidence that:

The appropriate actions were taken
Such actions were authorized, and
The required formalities were, in fact, carried out.

Documents might include corporate resolutions authorizing the opening of corporate bank accounts, or minutes of shareholders' meetings recording the election of a board of directors.

Lawsuits and Tax Audits

If a savvy attorney or IRS auditor discovers that you have no evidence (no documentation) to prove that you've complied with state corporation laws, they can assert that no corporation, in fact, actually exists.

This could jeopardize your limited liability protection as well as all other shareholders.

Possible consequences:

Your personal assets could be placed at risk.
The IRS can reclassify the business as a sole proprietorship or partnership (if you have partners) and recompute your taxes for previously filed returns. This could mean additional taxes plus interest and penalties.

The Corporate Records Book

BE PREPARED!

You never know when someone will sue your business or when the IRS may decide to audit your business.

This is why it is so important to be prepared!

Being prepared, in this sense, means being able to prove you've been conducting the affairs of the corporation in accordance with state laws.

Remember, without hard evidence showing that you've been complying with state corporation laws, an attorney or a tax auditor could use this failure on your part to try to defeat your limited liability protection.

If successful, not only are your business assets at risk, so are your personal assets!

DON'T MESS THIS UP!

Many people use a Corporate Records Book to file those all-important documents evidencing the fact that they have been complying with state corporation laws.

A Corporate Records Book is a handy item to have. If a request is made by an attorney or auditor to review your documents, they're all there, ready for review.

More importantly, you're protecting your limited liability!

Note: Learn about exchanging property for stock in a corporation, tax-free.

C-corporations: The Incorporation Process

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