Legal: Protect What's Yours — Incorporateby Quenda Behler
A lot of small construction companies are incorporated. There
are so many advantages to being incorporated, it surprises me
everybody doesn't do it.
The Corporate Veil
The main reason to incorporate is to protect your personal
assets. Even the best-run companies can get into financial
trouble. The cost of lumber might suddenly double, or you could
face a big liability because an employee runs over someone with
the company truck or a past customer discovers mold growing
behind the bathroom drywall. When problems like these occur,
incorporation keeps creditors from garnishing your personal
bank account or seizing such personal assets as your home,
boat, or car.
The protection that incorporation affords is referred to as
the "corporate veil." The corporate veil draws a bright line
between the company's assets and cash and your personal assets
and cash. This is true even if you are the only stockholder,
which is entirely legal. Many corporations have only one
Some contractors reject the idea of incorporating because they
think it's too complicated. However, it's not as complicated or
expensive as you may think, and if things go wrong it could be
the cheapest insurance you ever bought. There are kits you can
buy at the office-supply store and Web-based services that will
help you self-incorporate, but I personally recommend hiring a
lawyer to help you file your articles of incorporation. Each
state is different, so you need advice from someone who
understands the ins and outs of the laws in your state. These
are legal documents, and you can lose the protection
incorporating affords if you do not cross all the T's and dot
all the I's.
Do you lose any control over your company by incorporating?
Not exactly. Your corporation might have only one shareholder
(you), but there must be a board of directors to vote on
management decisions. Some states require a minimum of three
directors, while others require only "one or more." Does having
more than one director mean losing control? No, because guess
who picks the members of that board of directors: the
shareholders. One of the directors could be your wife, and the
others could be friends or relatives of your choosing.
But — I hear you asking — won't I really be
this corporation's employee? Yes, technically you will be, but
you own the company. If you fire yourself, you can hire
What about a contractor's license for that corporation? How
does that work? If a corporation is a fictional person, how can
a fictional person show up for a test?
Yes, a corporation does have to have a license. Here's how it
works: The board of directors designates an officer to take the
test on behalf of the corporation. Again, that should be
Taxes Made Easier
Lots of guys say they don't want to incorporate, because of
the more complex and expensive tax structure. But it doesn't
have to be a big problem. True, if you are taxed in the way
that most corporations are taxed, it can be a big deal. A
straight Subchapter C corporation is taxed on its income. After
it pays taxes on that income, if it then passes out that income
to its shareholders, they pay taxes again on the same
Is this a good deal? Sometimes it is, thanks to the mysteries
of the tax code, but it's probably not a good deal for you.
There's a solution: You can elect to have your small
corporation taxed as a Subchapter S. That means your
corporation would be taxed in the same way as a
As a Subchapter S corporation, your company would report (not
pay) its income and its deductions at the end of the working
year. Then it would issue a K-1 (think of this as a kind of
W-2) telling each shareholder what his or her share of the
company's net income is. Or, as the case may be, what his or
her share of the company net loss is.
The term Subchapter S corporation does not refer to a
particular kind of company. It simply refers to a corporation
that has filed a form with the IRS, asking to be taxed under
Subchapter S of the Internal Revenue Code.
Can just any corporation do this? No. The corporation must
have no more than 75 shareholders and only one class of
But — I've heard some guys say — I don't
want everybody and his brother knowing my business. Don't
worry. That's an issue only for corporations that sell stock to
the public. They are highly regulated and by law must open up
their books. None of these rules kick in unless you're actually
selling shares in your corporation to the public. I assume you
are not, because there aren't many publicly held corporations
in the construction industry.
Don't Lose the Veil
Is there any other problem that could come up with a
corporation? Yes, it's possible to lose the protection of that
corporate veil. There are typically two ways this could happen.
The first and most common occurs when whoever is in charge of
the company papers forgets to file the required annual reports
with the state. In most cases you have to file annual reports
that describe where you do business, what your business address
is, and who serves on your board of directors. In some states
you have to list the corporate directors, the people who run
the company. If you don't file the correct paperwork, you could
lose your corporate charter.
The second way people get into trouble with their corporation
is that they don't treat it any differently from how they
treated their sole proprietorship. A corporation is supposed to
have a separate existence from the person who controls it. This
means you should not mingle personal and corporate funds. If
you need something to live on, pay yourself a regular salary.
Do not pay your mortgage, income taxes, or boat payments out of
the corporate account. If you do, and someone sues the
corporation, he or she may be able to get at your personal
assets by "piercing" the corporate veil. The court will look at
how you run the corporation, and if you mingled funds or
engaged in sloppy recordkeeping, it may find that the
corporation is merely your alter ego, not a separate
A good lawyer can tell you exactly what papers you need to
file in your state and what kinds of records you need to keep.
You will probably be required to hold an annual meeting, elect
officers, create corporate bylaws, and keep records regarding
major business decisions and executive compensation.
Whenever you sign anything on behalf of the corporation, be
sure to sign in your capacity as a corporate officer. If you
sign a lease or a contract, never sign your name alone. Instead
of signing "Joe Smith," sign "Joe Smith, President of XYZ
Construction, Inc." There have been cases where mistakes like
this have allowed creditors to get at the personal assets of
company officers who were conducting legitimate corporate
Quenda Behler Story
has practiced and taught law for over 25 years and is the
author of The Contractor's Plain-English Legal