Overview

The first consideration in structuring a sound asset protection plan is deciding which form of entity should be used to operate your business. The possible choices include general and limited partnership, sole proprietorships, trusts, limited liability companies, and corporations. Each has different legal characteristics, tax attributes, and asset protection features. The right combination is based upon the nature of your business, whether you will have outside investors, the degree of liability protection needed, and which entity creates the greatest tax benefits. Many physicians use a Professional Corporation (PC)—an entity with special features, determined by the state where the practice is conducted. In this chapter, we will examine the advantages and disadvantages of a corporation and see how it fits in with the overall plan we will develop.

Corporations are a form of business organization permitted by law in every state. A unique feature of a corporation is that it issues shares of stock. A share of stock entitles a shareholder to vote on the election of a board of directors, which is charged with the overall management of the corporation. The board of directors elects the officers—the president, secretary, and treasurer, who are authorized to conduct the day to day business of the corporation. Many states permit a single individual to serve as sole director and to hold all of the corporate offices. One of the unique features of a corporation is that it is intended to have a perpetual existence. The death of an individual director or officer does not terminate the existence of the corporation. Instead, the corporation carries on indefinitely until it is dissolved by a vote of the shareholders.

A corporation is legally formed and begins its existence upon the filing of Articles of Incorporation with the Secretary of State of the state of incorporation. You can choose to incorporate in any state you wish. It is not necessary to incorporate in the state where your business is located. A disproportionately large number of corporations are formed in Delaware. Most large public companies are incorporated there. Delaware has encouraged corporate formations by adopting laws that favor incumbent officers and directors against attack from dissident shareholders, has a long history of decided court cases interpreting its corporate law, and has no state income tax. These are attractive features to consider when choosing a state for incorporating. Nevada is another state without corporate income tax, and its laws are also designed to actively encourage new corporations.