Monday, December 01, 2008

"Incorporating" an Opportunity

Last week I mentioned that I own another company called Law Firm Incubator Suites (, a professional office suite business. Essentially, we lease a large commercial office space and rent individual offices to lawyers and other professionals. When I started the business, I had to make an assessment about the best corporate entity to use. The analysis I completed for my business is the same that I use my law practice with our clients.
Essentially for this business, I had three choices, work as a sole proprietorship, as a limited liability company or as a corporation.
In a sole proprietorship your personal assets are not protected from the creditors and liabilities of your business. Essentially, if the business gets sued and you lose, your personal assets like your car and personal savings are at risk.
In my real estate business, I have many vendors and I rent office space to several people. I have employees and there are guests who visit the office who could possibly get injured. All these items are potential sources of liability and I didn’t want to be on the hook personally for any business-related debts or lawsuits.
Even more importantly, one of my goals is to build the business and sell it. There’s also a good chance that I may need to raise capital to grow the business down the road. Both would be tough to do as a sole proprietorship.
Ultimately, working as a sole proprietorship was not an option.
An LLC’s management is governed by contract (as opposed to a corporation that is governed by statute). This makes the LLC very desirable when thre is more than one owner. Essentially, contracts can be much more flexible than statutes. Also, in an LLC, business income is taxed at your personal tax rate only. In a corporation, business income is taxed once in the corporation and a second time if you distribute any of the remaining profits to owners through a dividend.
Since I was going to be a one-man-army, I didn’t need the flexibility management that an LLC provides, and my business is qualified to make a S-Corp election (preferential tax treatment for certain small businesses). This allowed me to get the same one-time tax treatment as the LLC.
Also, the State of New York requires that all LLCs publish the formation of the LLC in a local and regional newspaper for six weeks, and make an additional filing with the state when you complete the publishing. For me, the added expense would have been about $1,800. Since my business was going be located in New York, I decided to save my money and form a corporation.
When I filed my Certificate of Incorporation with the Secretary of State via fax, I requested 24-hour expedited service. If you get your documents in before 2PM, your business will be organized by the next day. If you do not use expedited service, it can take 10 to 15 business days to process your filing. The extra cost for expedited service was $25--money well spent. FYI, you can also pay for same-day ($75) and two-hour expedited service ($150).
I filed, and got my response the next day. LFIS, Inc. was officially organized.


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