Step 1: Transfer Assets and Liabilities to the New Corporation
The mere act of incorporation doesn't actually transfer assets and liabilities from an existing business to the new corporation--even when it's clear that's what you intend.
Accordingly, you'll want to document the transfer of assets to the corporation in exchange for stock. If you're transferring liabilities, you'll want to document this, too, at the same time. For example, if you want to transfer a truck worth $10,000 along with a $5,000 bank loan secured by the truck, you want to document this in the stock ledger and subscription records.
Two quick, tax-related cautions about transferring assets and liabilities to a new corporation: First, you really do need to re-title the assets and liabilities in the new corporation's name. Sometimes, you may be able to do this using a simple bill of sale. But for assets that are taxed by the state (cars, real estate and so forth in Illinois), you'll need to get the state to provide a new title to the asset. And for liabilities, you need to work with the lender to update the loan documentation.
And now a second tax-related caution about transferring assets and liabilities to a new corporation: If you're transferring liabilities to the corporation, you need to be careful that you don't inadvertently transfer any personal liabilities (like a personal credit card) and that the total liabilities you transfer is less than or equal to the depreciated basis of the assets you transfer. If you fail to pass either of these two tests (the "personal liabilities" test or the "excess liabilities transferred" test), the actual incorporation itself may trigger income taxes.
Tip: Confer with your tax adviser if incorporation will possibly trigger income taxes.
Step 2: Obtaining Any Business Licenses You Need from State or Municipal Government.
Often, states and municipalities require businesses to have a business license. Therefore, if your new corporation will operate a business, the corporation will need its own business license.
Sometimes, even experienced entrepreneurs forget to acquire a business license. But remember this: If you previously operated your business as a sole proprietorship, the business' license was your personal business license. However, your new corporation is, legally, a new person, and will need its own business license. There is quite a bit of general information on these licenses on the business.illinois.gov web site.
Also note: The Illinois Assumed Name Act requires you to register your business with the county clerk's office, no matter what the structure of your business.
Step 3: Setting Up an Accounting System
Many sole proprietors keep pretty simple financial records. And this works reasonably well--as long as you don't have heavy transaction volumes. But you'll need, with a corporation, to setup a real accounting system.
Here's why: While a sole proprietorship only needs to report its profit and loss and provide starting and ending inventory balances, a corporation needs to provide balance sheet information. In fact, if a corporation's revenue or assets exceed $250,000, the corporation needs to supply a solid balance sheet as well as several supplementary financial schedules as part of the annual corporation tax return.
In order to supply this information, you need to install and operate a real small business accounting system--something like Intuit's QuickBooks program.
Note: Just to make this point clear--having an accounting system isn't just a good idea. You are required to supply information as part of doing your tax return that can only come out of a real accounting system. And further you are required to use accounting methods that let you clearly reflect the corporation's income.
Step 4: Finding a Good, Local Accountant
A final, quick comment: You want, if you're running a corporation, to find a good local accountant right at the start. You will richly benefit by having someone help you setup and run your accounting system and help you minimize the taxes and red tape burden that politicians of all stripes lay on the back of small business owners and managers.
One thing to try when looking for the right accountant: Look for someone who handles clients in the same business or a similar business as yours. You'll gain the most benefit from an accountant familiar with the tax law and regulations specific to your industry.
Stephen L. Nelson is the author of such small business guides as QuickBooks for Dummies and Quicken for Dummies. A CPA and small business owner himself, he has written two downloadable corporation setup kits for small businesses, Setting Up an Illinois Corporation, available at http://www.scorporationsexplained.com/doityourself_IllinoisS Corp.htm and Setting Up an Illinois LLC, available at http://www.llcsexplained.com/doityourself_Illinois.htm
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