Incorporation for Freelancers

National Academy for Television Arts and SciencesJune 25, 2008

Agenda

• Introduction to USA Corporate Services• What is Incorporation• Why would you want to consider

incorporation• Different options for setting up the

business• How do you do it

Introduction

USA Corporate Services Inc.• We are a leading professional service provider for

incorporate and post-incorporation services to domestic and international clients

• 25 years of experience helping lawyers, accountants and entrepreneurs– Offices in New York and Albany

John P. GordonCompany founder, CEO & Chairman

Columbia & London Business School MBAs

What is Incorporation?

“Incorporation (abbreviated Inc. in U.S. and Canadian business names) is the forming of a new corporation (a corporation being a legal entity that is effectively recognised as a person, albeit a fictitious one, under the law).”

--Wikipedia

Realistically, it’s the process of filing a new corporation or LLC with a state filing officer as a step in the creation of a new business, or as part of an asset protection strategy.

Why would a freelancer want to incorporate?

Benefits to freelancer– Ability to own, develop and sell a trademarked business name– Easier to get long-term freelance assignments (see benefits to

employer)– Tax benefits – enhanced deductibility of many benefits

• Benefits are specific to which entity type, and tax status– Legal benefits

• Can build up a business that can be sold, can pass along to next generation

• Limited liability• Benefits to employer

– No 1099– Stops IRS inquiries into ‘statutory employee status’– Ability to contract with a corporation– No worries about payroll overhead

Planning Stage

• The initial team• The “plan”• The name• The location• The structure• The entity type• The tax structure• Getting Investors

Here is what you need to consider when you start up your own Company

The Idea

Incorporation

Compliance Stage• Organizational mtg• Federal & State tax

filings /registrations• Bank account• Licenses & permits• Business insurance• Leases, Hiring, Marketing

Begin doing business

Choosing your Entity – Preliminary Questions

What level of commitment do you want?– How serious is this business?

• Glorified hobby? Testing the waters?– How many people?

• Employees? Partners? Investors?– How many locations?

• One office? Multiple Locations? Multiple States/Countries?– How much capital is involved? Are you looking for funding?

• Investors like commitment!– What’s the exit strategy?

• How easy is it to value your business? What exactly are you selling?

Entities come in different shapes and sizes, your choice should be determined by your needs.

Types of Entities

• Sole proprietorship – not an entity but a right to use a name not your own.

• Partnership – a group of trusting people– Joint and several liability

• Limited Partnership – where investors are not so trusting of management

• Business Corporation – Legal Separation of investment from management– S corp v C corp: taxation and ownership differences

• LLC – limited liability company. Ultimate in flexibility

Incorporated/Unincorporated Entities

Business Corporations are “incorporated entities” (owners can’t just take money out for themselves)

LLCs are “unincorporated entities” (owners can distribute earnings to its owners as allowed in the Operating Agreement

Both Entities have:• Perpetual existence (live until they are killed off)• Limited liability (pay their own bills)• Ability to sue and be sued on their own• Free transferability of ownership• Worldwide recognition of their existence

Business Corporations

• The standard business entity in the US for over 100 years

• Corporations are owned by shareholders, governed by directors and run by officers

• For simplicity, one person can be shareholder, director and officer

• Law requires a simple annual meeting that what, if anything, was done in the last year

ShareholdersBoard

of Directors

ElectCorporate

Chief OfficersAppoint

Traditional Corporation Structure

S Corp (alias Sub-S) v. C Corp

S Corp• Pass-through taxation:

– Profits and losses mostly go directly to the shareholders• Restricted ownership:

– Less than 100 shareholders*– No non-US residents– All natural persons or “qualified trusts”

• Only one class of shares allowed*• Owner-managers subject to special rules (can’t just avoid

payroll taxes by taking out only profits)

C Corp• Pays its own taxes, profits can only be transferred out by non-

deductible dividends• Completely unrestricted ownership of shares• Allowed a far wider range of deductible benefits

Limited Liability Company (LLC)

• Most recent major type of business entity• Based on partnership law, not corporate law,

and therefore more flexible• Can choose how to be taxed, and can

change that designation• Members can run the company – very simple

to administer• Most states don’t require an annual meeting

Where to Incorporate

• Entities are governed by the laws of the state of incorporation. Therefore, state of incorporation may be important to your company’s future. If you incorporate out of state, then you will have to maintain a registered office out of state and register your business to do business in your own state. You will be responsible for state corporate taxes (if any) whether you are a foreign company or domestic.

• The main decision is between the state you are located in, or Delaware.

• If you are setting up a small business within one state, just incorporate there.

• If you think that your company will be expanding out of your state, or you will soon be involved with venture capitalists, incorporate in Delaware.

How to Incorporate

• 3 Options:– Do it yourself– Call your lawyer or accountant– Use an incorporating company

• Time value of money– Do it yourself – climbing the learning curve

• Download corporate forms• Fill them in and submit them with choices of name• Order corporate outfit• Get tax number• Hold organizational meeting and adopt bylaws

– Call your lawyer or accountant:• Lawyers are more expensive, but should be providing you with guidance, and

understand your situation• Accountants can help you decide what is best for your finances and tax situation

– a good accountant will help you get the maximum value out of your company– Use an incorporating company

• Check them carefully for misleading pricing• How good are they at providing you with useful advice• They cannot give you legal or accounting advice

Post-Incorporation Steps

• Post-incorporation paperwork– Federal tax number– Open bank account– Corporate minutes, bylaws or operating

agreement

• Corporate Niceties– Bookkeeping for freelancers– Tax withholding -> Payroll service– Accounting for a business– Annual meetings for corporations

Thank You!

Q&A

Thanks for your participation! To learn more about how to take advantage of incorporating, contact us at (800)891-7432, or check out our website at

www.usa-corporate.com

Or contact me directly atj.gordon@usa-corporate.com