Volume 3, Number 3, Sept. 1981, p.1

A Brief Discussion of Incorporation

In the following discussion, I shall briefly summarize in layman's terms some of the factors that for me made incorporation a desirable form of business. One should keep in mind that the positive and negative aspects of incorporation depend entirely upon one's individual situation. Those contemplating it should seek the assistance of reliable professionals in analyzing their particular case and in weighing the alternatives offered by recent legislation. Generally speaking, the main reasons for the formation of a close corporation by a private conservator are two-fold: The first is the possible financial advantage of such an enterprise, and the second is limitation of personal liability.

A professional service corporation which is organized under a state's general business corporation statute can qualify as a corporation for federal tax purposes. The formation of a corporation results in the creation of two distinctly separate and independent taxpayers. The corporation in its own right receives payment for the conservator's services when the corporation contracts to furnish those services. Thus, the corporation will be taxed for all fees received in compensation for them. The conservator can be paid a salary for his efforts by the corporation, and he will be taxed in turn on an individual basis. This may sound excessive, but it may be an effective tax- minimization device. The total amount that is separately taxable income to the conservator, and to the corporation, with its deduction for the salary paid to the conservator, may total less than the applicable tax rate of the individual were he or she taxed on a personal basis. Further benefits of incorporation such as the more favorable vesting available with corporate retirement plans, savings in employee coverage made possible by Social Security integration and other factors, the available of deductible life and health insurance benefits, greater potential for financing, and so forth, may make this form of business worthwhile in spite of the double taxation.

It is well to consider, however, that the corporate form of business immediately requires scrupulous record-keeping and the additional expense of professional assistance. The conservator is required to maintain the business as an independent financial unit and take care not to mingle its assets with his own. He must provide the corporation with adequate capitalization, that is, determined by the nature and magnitude of the corporate undertaking. Put simply, the corporation must never be left without sufficient assets to meet its obligations.

The conservator must observe the formalities of corporate procedure, including the holding of director's meetings and the keeping of corporate minutes. For example, should the corporation decide to purchase for itself a major piece of expensive equipment, a meeting of the board of directors should be able to approve and authorize such a purchase. Thus, the conservator avoids the appearance that the business is being run by the director in his individual capacity.

A second advantage of forming a corporation is limitation of personal liability. Whether or not he is incorporated, the most important element in affording legal protection to the conservator remains his contract with the client. The conditions of the contractual agreement of every treatment should shift the responsibility for the risks involved back to the client requesting the treatment, as much as effectively possible. The clauses and conditions of agreement forms for services in this field have already been adequately discussed. The fact that a client has contracted the services of a corporate entity may offer one more argument to shield the personal assets of the conservator in the event of unsuccessful litigation against him.

Once again, the decision to incorporate is not for everyone. It is a personal matter which relies on the expert advice of attorneys and accountants qualified to evaluate the advantages and ramifications of such a form of business for each person.