Advertisers beware, Google is stepping up efforts to enforce it’s interpretation of “quality” landing pages correlating to your AdWords.

Here’s an except from the Inside AdWords blog concerning the announcement:

While Google offers some landing page and site guidelines, the company admits that there are no “hard and fast” rules for creating a high quality landing page.

Even more interesting, however, is the fact that Google sheds absolutely no light on just what types of content would constitute a low quality landing page.

Why is all this so important? Simply put, a site’s quality rating will have a direct impact on its minimum bid required for its ads to run; lower quality equals a higher minimum bid.

Google provides no specific information on its quality grading scale. Are sites only classified has high quality and low quality, or are there scalable levels of measurement. If so, would these levels have a proportional impact on the minimum bid? In fact, how is the minimum bid penalty even calculated?

What steps can a webmaster take if he/she feels that their website has unfairly been deemed to have a “low-quality” landing page? Does Google have a resolution system in place for such an occurrence?

Questions upon questions abound in the face of Google’s announcement.

One would think that Google would offer a clearer picture of its criteria, given that the impact of its seemingly arbitrary method of quality rating will have a concrete impact on the financial bottom line for its advertising partners.

Google representatives, however, have declined to comment on the AdWords changes thus far.

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Joe is a staff writer for WebProNews. Visit WebProNews for the latest ebusiness news.

By default, you have a sole proprietorship, but this formation offers you little in the way of protection or tax benefits. So what about your other options?

Limited Liability Companies (LLCs)

The Upside: Your personal assets aren’t exposed in a lawsuit relating to your business. This is especially important if you sell products that are costly, or inherently risky, like heavy machinery or used manufacturing equipment. With an LLC, an unhappy customer can only sue your business; they cannot come after your personal assets, such as your home, cars, or personal bank accounts.

The Downside: You, as an owner, are legally unable to draw a salary. You may, instead, take a percentage of the company’s profits. This usually means that, after the business expenses are paid each month, you and any partners equally divide the remaining profits. But you need to remember that, because you don’t deduct taxes from a regular paycheck, you have to pay estimated taxes once a quarter. So you need to be escrowing between 30-40% of your gross income-otherwise, when your taxes are due, you’ll to be in serious trouble.

Corporations

The Upside: A corporation may work best for you if you have more than a few employees and are contemplating setting up a benefits program for them. According to attorney Cliff Ennico (http://www.cliffennico.com), “You may get a bigger bang for your tax dollar by setting it up as a corporation [because] you can do a lot more creative things with benefit programs. LLCs are limited in how they can deduct things.”

The Downside: Forming a corporation is significantly more costly. It can cost double or more than forming an LLC.

How Do I Get Started?

“There are some excellent services online right now that can help you [get] set up,” says Ennico. http://LegalZoom.com and http://MyCorporation.com both have solid reputations. However, be very careful because there are also many sites that will only take you through two or three of the five or six steps that are required for you to become fully incorporated. You don’t want to find yourself being audited because your “service providers” didn’t tell you that you have to register for sales tax in your state.

An attorney is a more costly alternative, but they take you through every step of the process. If they miss anything, they’re liable for malpractice and can lose their licenses, so they’re very motivated to make sure you’re set up correctly. When forming an LLC or corporation, you should never pay an attorney by the hour. Any lawyer who’s been practicing for any length of time knows exactly how long this process will take them, and should be charging you a flat rate that includes all out-of-pocket costs and filing fees.

People are often surprised and somewhat nervous to realize there are legal implications to establishing a business, but it’s not all that complicated. It’s just a matter of choosing the business structure that provides the best tax advantages and legal protection, and then getting set up accordingly.

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Each of these benefits of incorporating can easily be taken away by making any one of the three typical mistakes new corporations make. There is no guarantee that just because you incorporate all your individual assets are protected from the business. In addition there is no guarantee that all the benefits a corporation offers will automatically happen.

There is some work involved on the owners part to put the corporation in compliance and meet specific standards of the tax agencies and the courts. The three mistakes that I often see small business owners making in this area are:

Mistake #1 – No stock certificates are issued and shareholders recorded. After forming a corporation shares need to be issued to the owners of the company. Without issuing the shares, there is a potential of having the corporation veil pierced in a lawsuit because the court will claim the company is just an alter-ego of the individual.

Issue shares for the business by filling out a stock certificate and recording the transaction in a stock register.

Mistake #2 – The initial meeting of shareholders and directors is not held. Every corporation when it is first formed needs to have an initial meeting with the shareholders and directors in order to adopt the Articles of Incorporation, Bylaws and to issue the shares for the company.

Even if you are a one person corporation it will benefit you to have the meeting.

Mistake #3 – No resolutions and other documentation is kept. Every corporation needs to maintain corporate resolutions and meeting minutes. A corporate resolution is a written document that gives someone in the company authority to perform a specific action. For example, if the business needs a loan, a resolution would be written and signed by the Director of the company giving authority to an individual to open the loan and use it for business purposes.

You can tack your corporate records with a corporate record book or corporate management software.

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When incorporating, you must first ensure that your corporate name is available in the state in which you want to incorporate. Your corporate name must not be deceptively similar to a name that is already in use in that state. A name check must be performed in the state of incorporation.

You must also prepare and file all the necessary documentation. the Articles of Incorporation, with the appropriate state agency in the state of incorporation.

Additionally, you must pay all state filing fees, initial franchise taxes and any other initial fees. Each state charges a filing fee to form your corporation in that state. These state filing fees vary greatly by state. They range from under $100 to over $400.

Do It Yourself. Use An Incorporation Service Provider Or Use An Attorney. If you decide to incorporate on your own, you need to be well versed in the laws of the state of incorporation. You will need to prepare and file your own documentation and undertake all communications with the necessary state agencies.

If you use an incorporation service company, you submit the necessary information, and the company checks your name, prepares and files your documents and pays the initial state filing fees on your behalf.

Incorporation service companies charge a nominal service fee on top of the state filing fees, and you can submit all the necessary information to them over the Internet. Attorneys will also undertake all of the necessary steps for you. If you use an attorney to incorporate, you can expect to pay their hourly fee on top of the state filing fees.

How long this will take depends on the time the state requires to approve and return your completed Articles of Incorporation varies by state. On average, it takes 4-6 weeks to become incorporated.

Most states will allow you to expedite the filing process for an additional charge. Expediting filings typically take about 1 week. Those charges also vary by state.

After your corporation is formed, an organizational meeting of directors must be held. At this meeting bylaws are adopted, stock is issued and the incorporation process is completed. Minutes of the organizational meeting should be kept in a corporate record book.

Incorporation is an important step in the life of a business, but unfortunately the true value of incorporating a business is often not seen until the business faces a negative situation such as a law suit or bankruptcy. A primary advantage of incorporation is the limited liability the corporate entity affords its shareholders “The Owners”.

Typically, shareholders are not liable for the debts and obligations of the corporation. Creditors will not come knocking at the door of a shareholder to pay debts of the corporation. In a partnership or sole proprietorship the owner’s personal assets may be used to pay debts of the business.

Other Advantages include

- A corporation’s life is not dependent upon its members. A corporation possesses the feature of unlimited life. If an owner dies or wishes to sell their interest the corporation will continue to exist and do business.

- Retirement funds and qualified retirement plans “like 401k” may be set up more easily with a corporation.

- Ownership of a corporation is easily transferable.

- Capital can be raised more easily through the sale of stock.

- A corporation possesses centralized management.

Corporations are not without disadvantages. The primary disadvantage to a corporation is double taxation. Profits of a corporation are taxed twice when the profits are distributed to shareholders as dividends. They are taxed first as income to the corporation, then as income to the shareholder.

All reasonable business expenses such as salaries are deductions against corporate income and can minimize the double tax. Further, the double tax can be eliminated by making the S corporation election with the Internal Revenue Service.

Other Disadvantages Include

– There is a certain level of complexity and expense of forming a corporation.

– Corporations have extensive record keeping requirements.

– Operating a corporation across state lines requires the corporation to qualify to do business in the other state.

Both the Limited Liability Company “LLC” and “S” corporation also provide the limited liability to the owners/shareholders of the company, without the potential disadvantage of double taxation. While like corporations these two entities also have advantages and disadvantages, it is a good idea to learn about all three when deciding what form your business should take.

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Management teams must not rush to incorporate each potential investor’s comments. Instead, have several investors, partners and other business colleagues review the plan and provide feedback. Then incorporate common concerns and probe other comments to determine if they are valid.

Always try to understand the rationale behind an investor’s comments. For instance, an investor may poke holes in a business plan if it doesn’t have enough funds to fully fund the opportunity. In this case, the investor’s criticism is solely for them to save face.

However, if you are hearing the same feedback from multiple investors, it is probably valid. In such cases, be humble. Tell investors that you appreciate their feedback and modify your strategy and plan appropriately. You may then be able to re-approach these investors with great success.

Many investors have significant operating and investing experience and can quickly and expertly find potential flaws in a business plan. Seek out investors who have such experience, and be open to their suggestions. Just don’t take one point of feedback and blindly follow their advice. It is also important to note that even the most successful and largest public companies have Boards that provide similar feedback and advice, so don’t take criticism and feedback as a sign that something is wrong with your venture. Rather, use it as a launching pad for an even stronger business.

As President of Growthink, Dave Lavinsky has helped the company become one of the premier business plan development firms. Since its inception, Growthink has developed over 200 business plans. Growthink clients have collectively raised over $750 million in financing, launched numerous new product and service lines and gained competitive advantage and market share. Growthink has become the firm of choice for venture capital firms, angel investors, corporations and entrepreneurs in the know. For more information please visit http://www.growthink.com.

His book, High Tech Startup is a classic guide for entrepreneurs from idea to IPO.  According to these Cliff Notes, we are at stage 9:

Stage 1:   Getting the Idea
Stage 2:   Meeting Around the Kitchen Table
Stage 3:  Getting the Founders’ Commitments
Stage 4:  Pullout from Employer
Stage 5:  Creating the Business Plan
Stage 6:  Filling the Management Team
Stage 7:  Raising Seed Capital
Stage 8:  Incorporating and Cash in the Bank
Stage 9:  Finding a Home
Stage 10: Starting Up
Stage 11: Raising Secondary Rounds of Capital
Stage 12: Launching the First Product
Stage 13: Raising Working Capital
Stage 14: Initial Public Offering

The best advice Nesheim repeatedly gave me was to think bigger. But more on that later, as it is a dangerous thought process when measuring square feet. Real Estate is the leading cause of death for startups.

The thing is, Socialtext has purposely leapfrogged a few of these steps through net-enabled bootstrapping. We started with a wiki, me in Palo Alto, Pete in Foster City, Adina in Austin and Ed in Ann Arbor. Today we are ten, and hiring, spread throughout North America. We have had product in the hands of paying customers for two years now, served them well, and with almost zero overhead. Everyone works from their home office, with a social fabric made of broadband and social tools:

I am convinced that being virtual is the best way to start a company. The benefits go beyond cost (although the culture of frugality can go a very long way). In our case, it improves the product. But generally it is more productive. When the bandwidth for collaboration is constrained at times, you gain a certain focus. And with wiki, you develop a group memory to draw upon as you go forward.

The biggest downside is it is more difficult to celebrate victories. Pete Kaminski has a saying: time F2F is to valuable to be spent on work. I can order a pizza to be delivered to everyone’s home, and we have had our pizza parties, but it’s not the same as being able to have that bash when you hit a big milestone. So instead, we celebrate our victories with the people we our working for. Our friends and family.

Which brings me to perhaps an even bigger upside.  Working from home has given me an opportunity to be around while my kids are growing up.  Work does bleed into off hours, joyfully, and you have to be careful not to let it turn into Perma-work.

Interestingly enough, being virtual was seen as a plus by customers and employees, but seen as a risk factor by VCs. In a sign of not getting it, one even used it as a reason to pass. But you can learn about risk factors, perceived or real, from VC feedback so we took it seriously. Even considered consolidating the team earlier. Basically there are two risks:

As we start office hunting while growing the team, our challenge is maintaining the practices and culture we have fostered over the last 2+ years. Our approach is to have at least half of the team remain virtual and for those the main office to have flexibility to work at home at times as well. We will encourage travel not just to the headquarters for cheerleading, but for people to get together in the field and various on-sites. The big risk is bifurcation between “the office people” and “remote people.” Not as in warring tribes, but collaborative practice.

Adina is in town to work with Pete and me this week. One of our better practices is collaborative note taking sharing for meetings. For our real estate tour, we are sharing photos of places we like. With an evenly distributed team, the incentives for sharing are easy — it is a by product of daily work. With a partially distributed team, the norms must evolve based on new incentives.

This is more than finding a home, it’s raising a barn that is shared by the builders. I’ll try to share more about this transition and the journey itself.

Reader’s Comments…

Ross Mayfield is CEO and co-founder of Socialtext, an emerging provider of Enterprise Social Software that dramatically increases group productivity and develops a group memory.

He also writes Ross Mayfield’s Weblog which focuses on markets, technology and musings.

There’s no question that saving money on taxes is high on everybody’s list of financial priorities—especially self-employed business owners.

However, unlike individuals who work as employees, business owners actually have the “luxury” of choosing how much in taxes they pay each year by picking one form of business entity over another—such as a sole proprietorship, partnership, corporation, or limited liability company.

Unfortunately, the majority of business owners choose a business entity once—usually when starting out—then keep the same entity for the life of the business.

This isn’t necessarily always the smartest thing to do.

While some companies can get away with sticking with the same form of business entity throughout the life of the business, countless others are just throwing money away by paying more in taxes than they have to.

For some smaller business owners, this financial nonchalance can actually cost an extra several thousand dollars in unnecessary—and avoidable—taxes each and every year.

If you’re a business owner concerned about reducing your tax liability, here’s a way you can dodge the tax bullet by utilizing what’s known as a Subchapter S corporation:

FIRST SOME BACKGROUND:

When starting a new business most entrepreneurs focus on simplicity: that is, the less paperwork and regulations to contend with the better. What this means is that most new businesses start out as “unincorporated” entities such as sole proprietorships (73%) and partnerships (6%).

While management and administrative costs of running the business might be easier and less expensive initially, the tax burden—especially the self-employment tax—can be anything but.

For many business owners who wait until year-end to do their tax planning—or who do no tax planning at all—the self-employment tax is an unwelcome surprise—and a very large expense.

Newly self-employed individuals are shocked even more once they realize that they’re responsible for the self-employment tax all on their own. That’s because when they worked as an employee their employer was responsible for paying one half of the self-employment tax.

SELF-EMPLOYMENT TAX PARTICULARS:

** The self-employment tax is simply a version of the same Social Security and Medicare taxes you pay as an employee. However, instead of paying 7.65% as you do when you’re an employee, as a self-employed business owner you have to pay double: 15.3%.

** In 2004, the Social Security portion (12.4%) is levied on the first $87,900 of net profits. There is no limit to the Medicare portion (2.9%).

** Self-employed individuals are also entitled to a one half-credit of the tax.

** As an example, a self-employed individual with $100,000 in net profits in 2004 would be required to pay approximately $12,766 in self-employment tax.

NOTE: This tax is in ADDITION to federal, state and local taxes!

HERE’S WHAT YOU CAN DO TO SAVE MONEY ON THE SELF-EMPLOYMENT TAX:

Incorporate and elect Subchapter S status. You can elect Subchapter S status even if you have a pre-existing C corporation.

Operating your business as an S corporation is one of the very few four leaf clovers still left in the tax code. The reason for this is simple: The net income from an S corporation is NOT currently subject to the self-employment tax.

If structured and implemented properly, an S corporation could save you thousands of tax dollars per year. As an employee-shareholder of your S corporation, you pay yourself wages just like you would any other employee.

But instead of taking profits out through payroll, you take cash distributions called nontaxable dividends.

Nontaxable dividends are called nontaxable, because they aren’t double taxed like the dividends paid to shareholders in a regular C corporation (although beginning in 2008 most dividends will no longer be taxed).

You’re still paying taxes on the net income of your S corporation when you file your personal tax return, but the tax is federal tax and NOT the self-employment tax.

For the sake of simplicity, if an S corporation with $100,000 of pre-tax and salary profits pays its owner a reasonable salary of say $50,000 and non-taxable dividends of $25,000, the tax would be $7,650.

** This is a whopping $5,116 savings in tax compared to the $12,766 a sole proprietor would pay on profits of $100,000!

Even if you factor in additional costs such as workman’s comp insurance, incorporation costs, professional fees and incidentals, the savings is still more than adequate.

CAVEATS:

** The key to successfully implementing this strategy is that your salary must be REASONABLE under the circumstances surrounding your business. It’s also much better for salary justification purposes if your business is not limited to the delivery of personal services by you.

** At personal income levels close to the Social Security wage base ($87,900 for 2004), the benefits of using this strategy diminish.

BUT HERE’S SOME MORE GOOD NEWS:

If you happen to already own a regular C corporation and you live in a state that has a high corporate income tax rate and a low personal one, you’ll come out ahead even more if you elect S status.

Additionally, if you have children aged 14 or older, you can save even more taxes by giving them shares in your S corporation and having them pay the tax at their lower tax rates.

By giving away shares you also reduce your estate tax obligation.

So you see, there are plenty of good reasons to incorporate and elect S status. I’ve only touched on a few minor points. In my small business strategy guide — http://www.goldminetactics.com/successmanual.htm — I devote three chapters to MASSIVELY reducing business income taxes.

Just keep in mind that you should ALWAYS consult with your tax advisor and attorney before making any important business or financial decision.

Your financial situation is unique and the information in this article may not be appropriate for your particular situation.

Always look before you leap.

When it comes to your business, you should make it a point to assess the validity of your type of business structure on a yearly basis.

Incorporating is definitely not just for startups. There are plenty of unincorporated businesses that are missing the boat when it comes to saving money. Don’t be one of them.

Alex Goumakos CPA is the author of “Gold Mine Tactics:
The Business Owner’s Success Manual”. To learn more about
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Legal Protection Of Owners From Business Liabilities This is perhaps the most sought-after benefit of operating a corporation. A corporation is a separate legal and taxable entity. For this reason, a corporation incurs debt or liabilities on its own behalf, shielding its owner (s) from the responsibility of business debt. This can be especially important if the business venture is risky or for a wealthy owner. However, this protection is eliminated if a lender requires the corporate shareholders to guarantee corporate debts.

Tax Deductions For Fringe Benefits

A major benefit of incorporation includes greater tax deductions for the business, your employees, and potentially for family members of business owners. Even if you’re the only shareholder and employee of your business, benefits such as health insurance, life insurance, travel and entertainment expenses may be deductible. For example, corporations can deduct 100 percent of medical insurance premiums. Incorporating may also eliminate self-employment taxes and lower your payments for social security tax and Medicare tax. Your individual tax liability may also be reduced, as you will become an employee of the corporation.

Tax Deductions For Business Losses

There are no limits on the amount of capital or operating losses that a corporation is allowed to carry back or forward to subsequent tax years. Unincorporated entities, however, are subject to stricter rules regarding corporate losses. For example, an individual owning a sole proprietorship can’t claim a capital loss greater than $3,000 – unless he or she has offsetting capital gains.

Income Shifting

Income shifting is one of the greatest benefits of incorporating. Income shifting is the act of dividing income between a corporation and its shareholders in a way that lowers overall taxes. If you run a profitable, small business with shareholders in higher tax brackets, you stand to benefit the most from this practice.

However, smaller corporations with fewer than 100 employees may not necessarily be concerned with corporate tax rates, since profits are usually paid out as tax-deductible salaries and fringe benefits to corporate employees. But paying out all profits may not be the best option for a corporation that plans to retain earnings to expand its product line or increase its advertising budget next year. Fortunately, profits retained within a corporation are taxed at the initial rate of only 15 percent. And it’s this ability to retain earnings within the business – without bringing tax liability to shareholders – that provides an invaluable tax advantage to growing corporations.

Dividends From Other Corporations

If a corporation is cash-heavy and shareholders would prefer not to withdraw the cash assets, the “dividends received” exclusion can be very beneficial. Here’s why: A corporation can receive dividends from stock it owns in another unrelated corporation 70 percent tax- free. In other words, where an individual may be required to pay taxes on all of $10,000 corporate stock dividend, a corporation that falls within the “dividends received” exclusion is taxed on only $3,000.

Leasing Assets to your Corporation

Leasing real estate, an automobile or other personally owned property a corporation can provide significant tax savings. This strategy, which offers benefits similar to income shifting, is often closely scrutinized by the IRS. So be sure that the lease terms are fair to both parties in the transaction – to you and the corporation.

For more information about the tax benefits and other advantages available to corporations, consult your tax advisor or an attorney.

Alex D. Patel, Esq., is a licensed attorney and a member in good
standing with the California State Bar. Mr. Patel is a co-founder of
LegalFilings.com, Inc., a nationwide corporate and LLC formation
service company. www.legalfilings.com

Let me take a few minutes to explain what you need to know about incorporating your business. While it certainly isn’t a move every business will want to make, there are definitely some large benefits associated with incorporation.

MYTH
Incorporating means I can’t take money whenever I want it.

TRUTH
Yes you can! This is a MYTH that holds a lot of small business owners back from incorporating. If you set a payroll amount for yourself, then decide you want/need more money, you simply write yourself another check and call it an “owner distribution” or a “draw.”

MYTH
There’s too much paperwork involved once you incorporate. I don’t have the time.

TRUTH
There are some additional forms you have to complete. There are some additional taxes you have to pay. HOWEVER… read this carefully… for the three or four extra forms and the cost of the additional taxes, most businesses will still save when compared to counting every dollar you make toward personal income.

MYTH
The only good reason to incorporate is for personal protection. The difference in taxes isn’t that much.

TRUTH
While incorporating your business will help protect you from lawsuits and from having your personal property seized, there are more benefits than that. The tax savings can be quite significant.

MYTH
With the attorney’s fees, the CPA’s fees, the additional income tax returns, and the forms I have to file quarterly, it’s just not worth it. I won’t really save any money.

TRUTH
Every case is different; however, most small businesses will more than make up the $1500 – $2000 it costs to incorporate within the first six months to one year. Also, most small businesses will save about 50% on taxes after they incorporate. (A qualified CPA will be able to look at your books and give you a more accurate figure.)

MYTH
I’ll have to hold meetings and keep lots of records that I don’t have time to keep.

TRUTH
Not if you register as a “closed” S-Corporation. This means you have waived the requirement to hold all those meetings and keep all those records.

How Do You Get Specific Details?

Contact a qualified CPA in your local area. He or she can give you detailed information on how much it will cost to set everything up, and – most importantly – how much you will save in taxes.

Incorporation is not something to be afraid of. In fact, if you’re one of the many who will save 50% off your taxes in the next year, it’s something to go after with a vengeance!

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The downside is equally steep, just in the wrong direction — potential financial ruin if you’ve staked everything you own on your business’s ultimate success and thrown your career down the proverbial to boot. If you’re running your business as a sole proprietorship or a general partnership, make no mistake — everything you own is on the line.

There’s a lot that can go right and wrong in a business. A lot of it out of your control. But the extent of your personal financial liability for what goes wrong is one thing you can and should control.

The answer is to form an entity separate from yourself to run the business.

WHICH BUSINESS ENTITY?

As you probably already know, you have several choices when it comes to your business entity. The most basic is a sole proprietorship, followed by a partnership (general or limited), a limited liability company (“LLC”) and a corporation (either a general “C” corporation or an “S” corporation – more about these later).

Although sole proprietorships and general partnerships are relatively straightforward and inexpensive business entities to establish and maintain, hence their popularity, neither of them protects you from personal liability.

If you’re a sole proprietor, you’ve probably made this election by default – by doing nothing other than starting a part-time Internet business out of your spare bedroom, most likely.

A limited partnership will protect the limited partners from personal liability beyond the extent of their capital contribution to the partnership, but limited partners cannot participate in the management and control of the business so that’s not a good option for most of you reading this article. Needing to control and manage your own business is most likely non-negotiable.

As an attorney, I generally recommend that small business owners, including (especially!) home-based and Internet entrepreneurs, incorporate at least as soon as they are generating sufficient profits from the business that the amount of tax payable on such profits equals or exceeds the minimum franchise tax payable in the state in which the business is being conducted. In California, for example, one of the most onerous states in the U.S. when it comes to taxes, the annual minimum franchise tax is $800 per year. Therefore, as soon as you’re generating profits the tax on which is $800 or more in a year, there is no tax disadvantage to incorporation and every advantage.

HOW DOES INCORPORATION PROTECT AGAINST PERSONAL LIABILITY?

Quite simply, when you form a corporation (or an LLC), you’re forming a separate legal entity. This separate legal entity has the power to enter into contracts, own and dispose of assets, hire and fire employees and generally do anything that a sole proprietor could do. The difference between the corporation and the sole proprietorship, however, is that only the corporation’s assets are at risk, not the owner/shareholder’s (beyond the shareholder’s contribution to share capital, that is).

Let’s take an example. You run a part-time Internet business. You’re still working a day job and this is really just a way to make a little money on the side to save for your annual Hawaiian vacation and even more expensive spa stay for your dog while you’re away. To you, this is only a pocket-money venture and so you don’t really think of it as a business at all, really. So you don’t give a second’s thought to the fact that you’re running a business as a sole proprietor.

You register a domain name that, unbeknown to you, violates a Macrohard trademark. You create a website for that domain and, lo and behold, overnight (of course, because this is the Internet) your business becomes successful beyond your wildest dreams due, in no small part, to site visitors mistakenly believing they are doing business with Microsoft’s arch-rival.

Macrohard, meanwhile, sees all of this and figures your gain is its loss and sues you for an account of profits based on your misuse of its trademark. And wins. It gets a judgment for $100,000. Then it executes on its judgment. And you lose your house, your savings and your business.

Now let’s look at a slightly different scenario. You’re fortunate enough to have read this article before you established your business and formed an S-corporation, Hawaii Here We Come, Inc. The only asset of HHWC, Inc. is the domain name and website. So, when MarcoHard gets its judgment against HHWC, Inc., the only asset it can touch is the domain name and website. That’s bad enough, of course, but you did, after all, violate their trademark. But get this. Because they’re in your name, not HHWC, Inc.’s, you still have your house and your savings.

HOW LIMITED PERSONAL LIABILITY CAN BE LOST

Merely incorporating is not enough to avoid personal liability, however. As a director and shareholder, you must run your corporation or company (if an LLC) as a separate legal entity, NOT your alter ego! This means you can’t just siphon off cash from the corporation’s bank account to pay your house mortgage.

Do that, and the court will “pierce the corporate veil” in a heartbeat, thereby exposing you to full personal liability on the grounds that the corporate structure is nothing but a sham designed to unfairly protect you from personal liability.

It is also particularly important that you follow all corporate formalities such as those set out in the by-laws, passing board and/or shareholder resolutions for major decisions and holding annual meetings of the shareholder(s) to elect the directors and directors’ meetings to elect the officers.

Also, don’t think the “corporate veil” will protect you from criminal acts such as filing a false income tax return, because it won’t.

SO HOW DO I GET MONEY OUT OF THE BUSINESS?

You are paid by the corporation as an owner/shareholder in the form of dividends and/or as an employee in the form of a salary.

CORPORATION OR LLC?

While both corporations and LLCs limit your personal liability, there are differences between states when it comes to how other states’ LLCs are treated in this regard. By contrast, corporations are treated uniformly when it comes to personal liability. Especially if you’re operating an Internet-based business where you can be transacting with people from pretty much anywhere, for the greatest certainty concerning your personal liability, a corporation is preferable to an LLC.

One of the advantages of an LLC as a business entity is that the profits and losses of the LLC “flow through” to the personal income tax return of the members. However, if you make a “subchapter S” election when forming the corporation (thereby forming an S-corporation), you can achieve the same result.

S-CORPORATION or C-CORPORATION?

Although the S-corporation’s profits and losses flow through to the shareholders (rather than the S-corporation being taxed as a separate entity as in the case of a C-corporation), S-corporations are limited to 75 shareholders and, generally, those shareholders must be U.S. citizens or resident aliens.

You would therefore not be able to have foreign shareholders with an S-corporation (but you can with a C-corp), which may be an issue, particularly for Internet-based businesses with shareholders from various countries.

Also, you cannot have multiple classes of shares with an S- corporation so this will not work if you want to issue preferred shares, for example. You’d need to form a C-corporation instead.

WHAT’S INVOLVED?

Forming a corporation is a relatively straightforward matter (at least for an attorney) and shouldn’t cost you more than a few hundred dollars depending on the complexity of the corporate structure. Most attorneys would charge between $500 and $1,000 for a straight C or S-corporation.

At its simplest, a corporation can have a single director and shareholder with that same individual holding each of the three required offices (president, secretary and treasurer). (If a corporation has three or more shareholders it must have a minimum of three directors but if it has fewer than three shareholders, it may have the same number of directors.)

Your attorney will prepare and file articles of incorporation with your State’s Secretary of State, and then prepare by-laws and organizational minutes. You’ll need a Federal Employer Identification Number (SS-4) from the IRS and, if you have more than one shareholder, a buy-sell agreement to ensure that the shares do not pass to shareholders unacceptable to the other shareholders.

Your attorney will also attend to annual filings with the state (a statement of officers and directors is usually required to be filed every one or two years) and make sure you stay in compliance with state corporate requirements (such as annual minutes etc.).

Taking the time and trouble to think about the legal structure of your business may seem like overkill when all you’re doing is running a fun little business out of your spare bedroom in your spare time. But fun little businesses have a way of becoming very unfunny major headaches when things go wrong. No matter how small or fledgling your business is, do yourself and your family a big favor and at least think about incorporating. What may seem like a pleasant past-time today could be anything but tomorrow.

2003 Elena Fawkner

Elena Fawkner is editor of A Home-Based Business Online … practical business ideas, opportunities and solutions for the work-from-home entrepreneur. http://www.ahbbo.com/