<< Previous  |  Next >>

• Home

• How to Incorporate:

    - Contents

    - Section 1

    - Section 2

    - Section 3

    - Section 4

• Incorporating Forms
 
• Links to Other
  Incorporating Sites

• Glossary of   Incorporating Terms

• Email Us

Dissolve the Existing Business

When incorporating an existing business, you must first formally dissolve the old business. Any property held by the existing business will again be held by you personally. After you regain title to the property, there are basically two ways of proceeding:

1. You can keep some or all of the of the property in your name or

2. You can simply transfer everything to the corporation.

If you choose to keep some of the business assets in your name, you may do so for the following reasons:

1. To help maintain control when you are not the only shareholder and

2. To receive personal income at a lower tax rate by leasing the property to the corporation, such income not being subject to FICA withholding.

Transfer Assets

In a corporation where you are not the only shareholder, it is important to retain as much control over the corporation as possible. One way of exercising control is through your voting stock. Another way is to control the assets that the corporation needs to operate. Simply stated, when the equipment needed to operate is under your control, you will usually be treated more fairly by other shareholders because you have the ability to “take your equipment and go home” when things don’t go your way.

Secondly, keeping property out of the corporation can be very tax advantageous, especially if your salary income is high. When you retain title to property the corporation needs to operate, you can lease the property back to the corporation, and in return, receive lease payments. You can then lower the taxable effect of these lease payments with depreciation and other expenses related to the property’s operation.

Usually, when a preexisting business is incorporated, everything, or most everything, is transferred to the corporation. This might include all the company assets, liabilities, and other contracts. Assets are usually transferred by conveying your title in them to the corporation. Liabilities, and other contracts are transferred to the corporation when the corporation formally adopts them.

Basically, you will “transfer and assign all your rights” in an item to the corporation with a written agreement stating that you do so. If the item has a title or deed, new documents must be prepared to show that the corporation now legally owns it.

The corporation must then formally adopt and approve everything that is done. To do this you will need to prepare director’s consents to corporate action stating that the directors “approve and adopt” everything that is done. Also, if deeds or titles are involved, the corporation president will sign the documents needed to transfer the assets to the corporation. If you “transfer” all your business assets to your corporation, you should do so in return for the stock that the corporation will issue to you. This way, you will reduce or eliminate any chance that the transfers will cause tax problems. Assets to be transferred will include things like:

•  Cash in the bank

•  Accounts receivable (Money your customers owe)

•  Notes receivable (Other monies owed)

•  Inventory

•  Prepaid Expenses (Insurance)

•  Deposits

•  Cars and other vehicles

•  Plant equipment & machinery

•  Office equipment & computers

•  Buildings

•  Land

Cash
Transferring assets like cash is an easy thing to do. It’s done by opening a new bank account in the name of the corporation, and putting the cash from your old account into the corporation’s. You will actually close your old account and transfer all the funds with a check made payable to the corporation. You will then be authorized by corporate resolution to write checks on this new account. You will no longer “own” this money the corporation will.

However, by owning the stock of the corporation, you still indirectly “own” the money. But, you will no longer be able to dip into this cash whenever you please, because it now is the property of the corporation. But don’t worry, the tax advantages gained by incorporating will make it worth the inconvenience.

Accounts receivable
Accounts receivable is a formal contractual agreement between you and your customers in which they promise to pay you for goods and services provided to them. Since your business has actually ceased to exist, you’ll need to assign your “rights” to collect this money to the corporation. All monies received in the future should be deposited into the corporate account, and you should notify your customers to make their checks payable to the corporation. This is a good chance to let your customers know that you have incorporated your business.

Notes receivable
Notes receivable are like accounts receivable, except that notes receivable usually have promissory notes to back them up. For example, if you own a car lot where you sometimes finance your customer’s purchases, your customers will sign a note promising to pay a fixed amount of money at certain intervals. When these promissory notes were made, they were made on behalf of your old business, which no longer exists. Therefore, you’ll need to “assign the rights to collect payments” to the corporation, and similarly, tell the borrowers to make their payments to the corporation.

Miscellaneous assets
Miscellaneous assets like inventory, prepaid expenses, office furniture, computers, and deposits are usually transferred to the corporation when the stock is issued. Documentation will include a listing in the corporate records that the property is being transferred to the corporation in exchange for corporate stock. For things like computers, and other small, yet expensive items, you will also need to give the corporation a “Bill of Sale” so that the corporation may prove it has legal title to the property. This is necessary to enable the corporation to sell the item in the future.

Assets with titles or deeds
Some assets, like cars, machinery, buildings, and other larger items, have a title or a deed that shows who legally owns them. The titles or deeds to these items will need to be re-drawn and re-filed in the name of the corporation. This may involve lawyers, title companies, and local governments, all of which will cost you time and money. However, for reasons listed above, these are sometimes not transferred to the corporation.

Liabilities
For a minute, lets discuss the other side of the balance sheet, the liabilities side. Before incorporating, you are personally responsible for all your business’s liabilities and loans. Since you now want your corporation to make these payments, the corporation will need to formally adopt the debts as its own. To do this, you will need to meet with your banker and other creditors to arrange for the notes and other liabilities to become the corporation’s.

At best, the creditors will totally release you from the debts in exchange for new promissory notes signed by the corporation. This is ideal for you, because you will no longer be responsible for the payments, and your personal assets will probably not be taken to collect the debts.

In reality however, the creditors will not only want you to stay on the notes, but they will also insist that the corporation be made responsible as well. Of course, the corporation must become liable for the loans. Otherwise, the corporation will be making payments on your personal debt. Obviously, the corporation can’t do this, because the IRS would consider these payments as taxable income to you.

Other contracts
Since there are many contracts involved in operating a business, it will be easy to overlook some. Contracts entered into by you will not be enforceable by the corporation, and this could cause problems. Some contracts, like insurance policies, may be changed by transferring the policy to the corporation and having the corporation formally adopt it. Other contracts, like leases or employment agreements should be formally rewritten and entered into by the corporation. This will make enforcing these contracts easier for the corporation, while reducing some of your personal liability exposure. While the incorporation of an existing business includes many variables, I hope that this short discussion on the subject has been helpful to you.

Partnership agreements
A partnership agreement is a special contract entered into by the partners of a business that is organized as a partnership. A partnership agreement is used to outline the basic “rules” by which the partnership will operate. All partners are bound by this agreement. The following list outlines some, but not all of the items covered in a typical partnership agreement:

•  Who “owns” the business and how much of the business each partner owns

•  How income and expenses will be split between the partners

•  What happens to business assets if the partnership splits up

•  Who will manage the business

•  Who takes care of the money

•  Whether one partner can sign contracts without the other’s approval

•  Salaries and other compensation

•  The length of time for which the partnership will exist

•  The purpose of the partnership
 

If you are currently operating your business as a partnership and want to incorporate, you’ll need to do things a little differently. You see, corporations do not have “partnership” agreements. Instead, corporations have bylaws. Corporation bylaws should address most of the items listed above. After incorporating, your bylaws will determine how the business is operated. Accordingly, you should no longer use a partnership agreement if you incorporate. All of the items addressed in your current partnership agreement should be addressed by your corporation bylaws instead.

<< Previous  |  Next >>

  [ Home ]  [ How to Incorporate ]  [ Forms ] 
[ Links ]  [ Glossary ]  [ email us ]

[ Corporate Kits ]  [ Minute Books ]  
[ Corporate Seals ]  [ Embossers ]
[ Stock Certificates ]  [ Corporate Stock Certificates ] 
[ Blank Stock Certificates ]  [ Custom Stock Certificates ]
[ Downloadable Stock Certificates Software ]  [ Goes Stock Certificates ]   

Copyright © 2010 TheCorporationSite.com

incorporate, incorporation, incorporating, corporation, incorporate your business, articles of incorporation, incorporating in california, s corporation, incorporate online, business incorporation, incorporating, c corporation, incorporate in nevada, nevada incorporation, incorporating a business, ohio corporation, incorporate in Delaware, delaware incorporation, incorporating in nevada, ca corporation, how, how to, why, small business, stock certificate, llc, limited liability company, which is best, best state, reason to, offshore, yourself, advantages