Why form a Rhode Island Corporation?
There are many advantages to forming a Rhode Island corporation for your business. First and foremost is the liability protection of your personal assets. When you form a corporation it helps separate your personal assets from that of your business. A legal corporate entity exists separately from its owners or shareholders. Typically, shareholders are not liable for the debts and obligations of the corporation or from any litigation where the company is the defendant. In a partnership or sole proprietorship, the creditors can go after the owners personal assets if the company's assets are not enough to settle a claim.
Limit your Personal Liability by Forming a Corporation
When you form a corporation in Rhode Island, you form a separate entity from the owners of that company. Therefore, when a Rhode Island Corporation is named in a lawsuit, there are legal provisions and UCC Code to protect the owners, directors, shareholders, and employees from personal liability. If you operate your business without the protection of a corporation, you can find yourself personally liable for any and all debts and obligations of the business.
Other advantages of forming a corporation are:
- The life of a corporation is not dependent on its owners, or it possesses the feature of unlimited life. If an owner dies or wishes to sell their interest, a Rhode Island Corporation will continue to exist and do business;
- Like a corporation, a LLC will provide limited liability for its owners.
- Ownership is easily transferable, as long as it does not conflict with securities laws.
- And finally, under certain circumstances, forming a corporation for your business can reduce taxes.
Name requirements for Corporations
Corporations must have and ending on their name stating their entity status, for example using Incorporated, Inc, Corp, or corporation. The following is does not provide distinction between company names and will be rejected. An article (a, an, the), plural forms of the same word, and phonetic spelling of the same name or word (For Example, Cat - Kat). An abbreviation in place of a complete spelling of the name (For Example, Northeast Industries, Inc. – NE Industries, Inc). A suffix or prefix added to a word or any other deviation from or derivative of the same word (For Example, Finance Specialists, Inc. – Financing Specialists, Inc.). The addition of a geographic location or place, or a numeric designation, unless consent is granted (For Example, Gourmet Bakery, Inc. – Gourmet Bakery of Providence, Inc. or Gourmet Bakery I, Inc. – Gourmet Bakery II, Inc.). Differences in punctuation, capitalization or special characters.
Corporate Debts - Who is Liable?
A Rhode Island Corporation, if operated correctly, is a separate legal entity from its owners. If the company has a debt it can not pay or a claim from a lawsuit, the Rhode Island corporation is responsible for that debt and not the owners. This is not the case for a sole-proprietorship, a limited-partnership, or a general partnership, where the owners are directly responsible for the debts and obligations of the company. In Rhode Island, if you plan on having a store, employees, or sell goods you need to be protected by rights afforded to either an LLC or a Corporation. If anybody is to become seriously injured as a result of being in your store, working in your store, or using the items your sell, your company could find itself in a serious lawsuit. You must keep in mind, that you will be held responsible for any debts or obligation that you personally guarantee.
What is required to maintain Corporate Status?
Rhode Island Corporations have directors, owners, shareholders, and employees. Most states require only one person, who can hold all positions, to form a corporation. To properly operate your Rhode Island Corporation you are required to hold and document the minutes of annual shareholders and directors meetings. You must be careful that your personal and corporate funds are not commingled. You should take extra care to avoid paying obligations of your company with your personal assets, and personal debts with your company assets. If you fail to maintain a very clear distinction between your corporate entity and your personal assets, the courts can find you liable for corporation debts. A requirement for this separation is having a distinct federal tax id number and a distinct bank and checking account from your personal assets. You want to be certain not to use your social security number on your bank account, credit card, or on signed contracts.
How do I set up a company as a subchapter S corporation?
Once you have established your corporation according to your states requirements, you elect S corporation status for federal tax purposes by filing Form 2553 (PDF), Election by a Small Business Corporation. Several requirements must be met before you can elect S corporation status.
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