Making It Legal: The Benefits of
Incorporating Your Video Business

Steve Yankee

I'm always surprised to learn that most small business aren't incorporated, that many are just Doing Business As (DBA's), meaning that you, an individual, are simply doing business under an assumed name.

I understand the reasons most video business aren't incorporated. A lawyer will tell you it's going to cost you $1,000 and up to establish a good corporate shell and the high price of admission alone is enough to scare most people off.

But before you decide that you're fine just the way you are, doing business under an assumed name -or no name at all -let me throw out a few benefits of being incorporated, and then tell you how to do it for a fraction of what the typical attorney firm would charge you!

(The usual disclaimers apply: The author is NOT a lawyer and this is not to be construed as legal advice; it is merely the author's opinion.)

Why Incorporate In The First Place?

The major reason I originally chose to incorporate my businesses is the traditional reason: I wanted to protect my personal assets, such as my house, car and any meager savings I have on hand. In the event of a lawsuit, or if my business should fail, my personal assets generally can't be touched. This limited liability feature of corporations is not available in a sole proprietorship or partnership, where the individual or partners are personally liable for all business debts.

There Are Tax Advantages To Consider, Too.

Corporations and LLCs can take advantage of tax savings options that are not available to sole proprietorships or partnerships. For example, as a corporate owner, you can establish pension, profit sharing and stock ownership plans, which can lower the corporation's taxable income. Medical, life and disability insurance premiums are also completely tax deductible for corporations. In addition, a corporation can own shares of stock in another corporation and receive 80 percent of the dividends tax-free.

Corporations can also raise capital by issuing stock, bonds or other securities.

Corporations and LLCs are the most enduring form of business structure.

If a corporation owner dies, their portion of the business can be transferred quickly without interruption of the corporation's operations.

Estate and family planning is simplified since shares of a corporation can be easily distributed to family members.

Corporations and LLCs often experience a greater ease in doing business. Many stores and banks favor corporate accounts and offer discounts.

I'm Sure You've Heard About the
Advantages of Incorporating in Delaware

I remember a few years back when I was producing a big show for a major contract furniture company, and how surprised to learn that they -like my own corporation -were incorporated in Delaware. Corporations and LLCs, large and small, domestic and foreign, choose Delaware for their corporate headquarters, even though few have any sales or manufacturing facilities located in the state. You might be surprised to hear that the second smallest state in the nation is the home of nearly 60 percent of the companies listed on the New York and American Stock Exchanges -and more than half of the Fortune 500 firms! Many international companies interested in doing business in the United States and in other jurisdictions worldwide choose Delaware because of its favorable corporate law structure, stability, and reputation as the "American Corporate State."

More reasons? Well, it's easy to form a Delaware corporation or LLC by phone, fax or mail. I'll give you more information in a minute on how you can get help to check and reserve your preferred corporate or LLC name within minutes, and form your new Delaware corporation or LLC that same day.

The cost to incorporate in Delaware is less than in any other state. We're talking rates as low as $99.

There is no minimum capital investment required to form a corporation or LLC in Delaware. While other states require an investment of $500 or more, there is no capital investment required in Delaware.

One individual can hold all the corporate offices, including president, treasurer and secretary, in a Delaware corporation. Other states may require different individuals for these offices.

The bylaws of Delaware corporations can be formulated or changed at any time by the directors.

Delaware is the only state with a special court system dedicated to corporate law. Through the years, the Delaware Chancery Court has built an unsurpassed body of case law that is often cited as precedent in other state courts. The court has a history of pro-management decisions, and often the outcome of legal actions is predictable.

The corporate headquarters and the records of Delaware corporations can be located in any state or country as long as you maintain a registered agent to represent you in Delaware. Many owners of Delaware corporations -like me, for instance -have never set foot in Delaware.

There is no Delaware sales tax, property tax or state income tax for corporations and LLCs formed in Delaware that do not transact business within the state.

Delaware's annual corporation franchise tax is as low as $30 plus a $20 filing fee (for LLCs, the annual tax is a flat $100). These annual state fees are kept among the lowest in the nation to attract and maintain corporate business.

There is no Delaware inheritance tax on shares of stock held by nonresidents.

Delaware corporations and LLCs do not need to maintain a Delaware bank account or Delaware business address as long as you are represented by a Registered Agent. Currently, over 300,000 companies are registered in Delaware, and few of their officers have ever visited the state.

Whew. Enough advantages for me!

Different Types of Corporate Structures:

Corporation
Although the most formal corporate structure, a general business corporation is the most widely used by both small and large businesses and offers the fewest restrictions. A general business corporation may have an unlimited number of stockholders/owners whose personal assets are generally protected in the event of a lawsuit against the corporation or if the business fails. A stockholder's liability is usually limited to the amount of investment in the business and no more.

Limited Liability Company (LLC)
Limited Liability Companies are a type of business entity. An LLC is a legal entity separate and distinct from its owners, who are called "members." The rights, duties and obligations of LLC members are governed by an "operating agreement." The provisions of the operating agreement are extremely important as they can have a direct impact on how both the LLC and its member-owners are taxed for federal income tax purposes. In addition to tax matters, the operating agreement typically deals with issues of management of the LLC by either members or non-members, transfer of interests in an LLC and termination of the LLC.

When properly structured under applicable state statutes, LLC members have the same limited liability protection, which is afforded stockholders in "C" or "S" corporations. This means that, absent any specific personal guarantees, the amount at risk for members of an LLC is limited to their investment in the LLC. Thus, the personal assets of members are generally beyond the reach of the creditors of the business. This liability protection is enjoyed by all members, unlike a limited partnership where at least one general partner must remain liable for partnership debts. And, unlike limited partners, LLC members may be active in the management of the LLC without risking their limited liability status.

S Corporation
Many business owners find the S corporation attractive because all earnings or losses are passed directly through to their personal income tax return. This avoids the double taxation aspect of a general business corporation. There are, however, certain requirements that must be met to qualify for S corporation status. It's probably best that you talk to your accountant before choosing this type of business structure.

"If I incorporate in Delaware, Can I Do Business in Other States?"

Yes. Your Delaware corporation is known as a domestic corporation in Delaware. In other states, it is considered a foreign corporation. Depending on the nature of the business, you may have to register your Delaware corporation in the state(s) where you plan to maintain offices, hire employees and transact business. This is the way it works in Michigan, which is my principal state of operation, However, many businesses prefer to operate as a Delaware business in their home state because of Delaware's many corporate advantages and low annual franchise tax.

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