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Incorporation Revisited

Author: Brad Howland
First Posted: December, 2002

Last month's article "Should You Incorporate?" prompted a few responses from readers in the United States. Here is additional discussion on liability and Sub-Chapter "S" Corporations.

In "Should You Incorporate" I discussed the pros and cons of incorporation for musicians, and I mentioned that one advantage to incorporation is "limitation of liability," although most musicians probably wouldn't benefit much from it. Al MacDonald wrote in to point out that limitation of liability doesn't provide a lot of protection in the U.S.

1. Here in the U.S., the "Limitation of Liability" is very weak for very small corporations. The "corporate veil" is easily pierced when it can be proven that all of the work and management are done by only one or two people.

2. There *is* a type of corporation in the U.S. which may make sense for musicians, the "S" corp, or "flow-through" corporation. There are some tax benefits, mainly having to do with lower social security payments, as well as a (small) amount of liability protection. It's a sort of intermediate step between unincorporated status and a full-blown corporation ("C" corp).

In my case, I have a business which provides technical services, software, and equipment to sports events (mainly cycling and skiing). In addition, I have income from playing and teaching. Until this year I have operated as a sole proprietor, but as of January 1, 2003 I will be operating under S Corporation rules.

The most important advice, I think, is to find an accountant you can trust and respect, and follow their lead. The fees you pay will be repaid both in terms of your own finances as well as simply keeping you out of legal trouble.

Al MacDonald

I'm a tax preparer, not a lawyer, but I believe that in Canada limitation of liability isn't that weak. For example, take a person acting in his/her capacity as the owner of a company, who fails to pay suppliers money owed for purchases of business supplies. They would not be personally liable for any damages. The suppliers could sue the company, but not the owner.

Or, take a situation where somebody contracted with the business of an incorporated musician to perform certain services and the musician didn't show up: the business and not the musician would be sued.

However, if the musician did perform the services and engaged in some kind of criminal act while doing so (such as trashing the contractor's premises), the owner of the business would be liable for the damages. The musician would be personally responsible and could be sued.

Al pointed out another difference between the two countries: U.S. citizens can form a "Subchapter S Corporation," which means business income flows through to be taxed on their personal return rather than on a corporate return. One advantage of doing this is to avoid double taxation of dividend income. In Canada we use the dividend tax credit to solve this problem, so a flow-through corporate entity isn't required.

Related Web Sites

My original article
Should You Incorporate?

Money Matters/Joseph Anthony
More pros than cons to becoming an S corporation

An article by California lawyer Marc Weissman
Limited Liability Companies

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