Mary Carollo: Corporate Attorney

Oftentimes people wonder whether they need a corporate attorney to help them with a case. If you have a corporation, limited liability company (“LLC”), partnership, or other entity, you may need corporate counsel.

Corporation

A corporation is a legal entity apart from its owners (shareholders). Corporations can establish credit, acquire assets, and enter into contractual engagements. Potential liabilities are incurred by the corporation, not by the owners themselves. This means that the personal assets of officers and shareholders are usually safe from the corporation’s creditors. However, if shareholders fail to follow corporate formalities, a court may “pierce the corporate veil”, allowing creditors access to personal property. Owners of corporations don’t pay tax on the corporation’s earnings unless they actually receive the money as dividends or as compensation for services (e.g. salaries and bonuses). The corporation itself pays taxes on all profits left in the business.

Benefits of a Corporation

First and foremost, there is limited liability for shareholders. This perk attracts investors, as an investor’s liability and exposure is limited to the amount of his or her investment – less risk! This makes raising capital for your corporation less challenging.
Forming a corporation also increases the credibility of your company, and provides an opportunity for prestige among business and corporate officers.
Finally, corporations have several tax, compensation and wage benefits.

Detriments of a Corporation

You have to observe corporate formalities. These are the basic operating rules that are necessary to ensure that the corporation maintains its status as a separate legal entity. Some of the formalities include appointing officer positions, electing a board of directors, proper documentation of the corporation’s activity, annual meetings, etc.
Reaching corporate status is not a monumental task, but one must be sure to ensure the process is done correctly.
Another downfall is that a corporation goes through double taxation. A traditional corporation must pay tax on all corporate income, followed by individual shareholders paying income taxagain on whatever distributions they received. One way to avoid the double taxation dilemma is to establish the corporation as a “pass through” entity. This way all corporate profits pass through to the individual shareholders, so they alone will be responsible for the tax burden. When a corporation elects to be treated this way, it becomes known as an “S” Corporation, which is discussed below.

Nonprofit Corporation

Nonprofit organizations are formed in the state where they intend to do business. Unlike a standard corporation, nonprofits do not conduct activities for the financial gain of shareholders. Preventing the distribution of profits to members/shareholders is what distinguishes the nonprofit from a commercial enterprise; yet nonprofits still provide asset protection and limited liability. A nonprofit corporation is not forbidden from making a profit — but if it does, that profit can only be used to further the overarching goal or mission of the organization. Nonprofits can also trade at a profit and accept, hold and disburse money; but all profit and things of value are to be used to further the nonprofit’s quest. Nonprofits are organized in many different ways: charities, service organizations, trusts, hospitals, universities, foundations, endowments and cooperatives can all operate as nonprofits. Nonprofits can have “members”, although many do not. They may have employees, and can compensate their directors reasonably, but only if compensation is documented ever-so-carefully.

Benefits of a Nonprofit

Nonprofit corporations generally have tax exempt status.
Once the recognized nonprofit entity has been formed at the state level, the nonprofit corporation can seek tax exempt status by applying to the IRS. The IRS, after reviewing the application to ensure the purpose of the organization meets certain conditions, will issue an authorization letter granting it tax exempt status for income tax purposes. The exemption does not apply to other federal taxes such as employment taxes. Charitable contributions made to nonprofit organizations by individuals and corporations are also deductible.

Detriments of a Nonprofit

The reliability by which a non-profit organization can hire and retain staff, sustain facilities, or create programs is an ongoing problem. Because nonprofits generally rely on external funding, they do not have much say over their precious sources of revenue. This leads to reliance on government funds such as grants, contracts, vouchers or tax credits to support their operations.

Free Consultation with a Utah Corporate Attorney

If you are here, you probably have a business law issue you need help with, call Ascent Law for your free business law consultation (801) 676-5506. We want to help you.