          
          
          
          
                         FORM YOUR OWN CORPORATION
          
          
               There have been some full-page ads in magazines
          promoting ordinary corporations as the "ultimate tax
          shelter."  It may not be the "ultimate" but by forming
          a corporation one can reduce taxes substantially.  Here
          is how the tax reduction features of your own
          corporation would work.
               A corporation is considered a "legal person," just
          like a human being.  But corporate incomes are taxed at
          a different rate than those of individuals.  
               The obvious logic is that if you are a self-
          employed plumber, you can form a corporation to handle
          the retail pipe sales (or some segment of your business
          earnings).  Presto, your tax is lower.  
               To eliminate taxes entirely, you can then use the
          accumulated income in the corporation to contribute to
          a variety of allowable "tax-free fringe benefits" for
          you, your employees and your family.  These include
          health insurance, pension plans, company cars, group
          life insurance, educational programs, and so on.  Only
          owners of corporations can provide these tax-free to
          themselves and their employees.
               If there is any money left after the fringe
          benefits, the corporation pays a tax on remaining net
          profits at the low corporate tax rate.  One can also
          look around for existing corporations in similar
          businesses who have large tax loss carry-forwards.  You
          can totally shelter your corporation's earnings with
          the carried-forward losses of an unrelated entity, a
          "shell corporation" you purchased from someone else and
          merged into your corporation.  A merger is a legal
          process in which two corporations become one
          corporation, with all of the assets and liabilities of
          both being the property of the remaining corporation. 
          Through this process the tax loss of the other
          corporation becomes the property of your corporation. 
          An individual can't create tax losses like that either.
          
               The main disadvantages of incorporating are:
          
               1.  It costs money.  Though you can do it yourself
          for $50 to $75 (in most states.  A few states are much
          higher.), an incorporating service will do it and
          provide you with a registered office for under $100 per
          year.  There are also minimum annual state fees, though
          these can be kept to under $100 per year in most
          states.
          
               2.  If you are an employee of your own
          corporation, the Social Security tax will amount to
          about double what you would pay if you are self-
          employed.  But the increased cost of Social Security
          can be avoided by making sure the corporation doesn't
          pay you anything but director's fees, fringe benefits,
          reimbursements for expenses, and dividends.  None of
          these are subject to Social Security.  If no salary or
          wages are taken you can actually use a corporation to
          totally avoid Social Security taxes.
          
               3.  The double taxation feature:  The corporation
          pays income tax on its earnings, but when these
          earnings are paid out to you as salary or dividends,
          you are taxed on the distributions as unearned
          investment income at your individual income tax rate. 
          Moral:  You can't form a corporation and expect to save
          taxes by just passing cash through it.  You do save
          taxes if you set up fringe benefit plans or if you want
          to use accumulated profits taxed at the lower corporate
          tax rate to expand or wheel and deal.  Generally
          corporations help the self-employed or professional,
          but are not of much use to real estate investors, who
          get a much better deal without them.
          
          
          Everything you need to know about corporations
               (and a little bit more...)
          
               To understand what a corporation is, lets start at
          the beginning.  We had Merrie Old England, with a king
          and knights, and life was filled with many of the same
          events still going on today.  There were births,
          marriages, deaths.  There were storekeepers, butchers,
          bakers, and candlestick makers.  But there were no
          corporations, because none were needed.  Then one day
          some explorers discovered Africa, India, America and a
          few other little places -- and it wasn't long before
          many people realized that a lot of money could be made
          by establishing plantations, settlements, and large
          scale industrial enterprises.  But few people in those
          days had enough money to own more than a few merchant
          ships.  Even kings and queens didn't have enough
          capital to start and maintain mines, ranches and so on
          10,000 miles from home.
               Early corporations were always chartered by the
          sovereign or king to engage in trading, exploitation of
          mineral deposits, or other business activity that
          required more money and personnel than the normal sole
          proprietorship or small partnership.  From the start,
          the general public was offered an opportunity to invest
          in "shares" of the corporation.  In England, all
          corporations ended their name with the word "Limited"
          or "Ltd." to distinguish them from partnerships or sole
          proprietorships in which the owners were personally
          liable if anything went wrong.  The new form of
          enterprise, the corporation, was liable for damages due
          to negligence, failure to perform a contract, etc. --
          but only up to the assets of the corporation. 
          Liability for the officers and shareholders was
          LIMITED.  The concept of limited liability was, and
          still is, an important consideration.  Another feature
          of the corporation was its perpetual life.  Officers
          could die, retire, resign or be fired -- but the
          shareholders would elect directors every year.  The
          directors would appoint the officers, and the officers
          would run the company -- forever!  The Hudson Bay
          Company, Ltd. was started about 400 years ago and it
          still runs trading posts in Canada.  As might be
          expected, they are called department stores these days. 
          When shareholders die, their heirs inherit the shares.
               Some corporations made a lot of money for their
          shareholders.  Others went into bankruptcy.  Things got
          more complicated over the years, but the basic idea was
          always the same: any individual could apply to the
          government (any government) for a corporate charter. 
          With the application, the promoter of the corporation-
          to-be submitted a plan telling the government what sort
          of business he intended to go into, how many shares he
          intended to sell, and where a representative of the
          corporation could be found.  This form of application
          to start a corporation is called the articles of
          incorporation.  Today, a charter is issued as a matter
          of course to all applicants who pay a small
          incorporation fee to the state. 
               For free information on a national service that
          can form a corporation for you in any state, write to
          Incorporation Information Package, 818 Washington
          Street, Wilmington DE 19801.
               In many states a corporation can be a one man (or
          woman) operation.  Usually one person can be the
          president, secretary (who keeps the records) and
          treasurer (who signs the checks).  That same person can
          be the only director, and the only shareholder.
               A resolution is required when your corporation
          does something like enter into a major contract, open a
          bank account, or give you the tax free fringe benefits
          already mentioned.  A resolution is simply a written
          statement in the corporation's official record book,
          making a decision the official act of the corporation. 
          It is signed by the president and the secretary, and
          often copies of it will be required for things like
          opening a bank account.  (Most banks will provide you
          with a copy of the form of resolution required by their
          bank.)  For instance, if you are going to buy yourself
          a car, your corporate resolution should make it clear
          that the car is being purchased by the corporation, in
          the corporate name, and is to be used for business
          purposes only.  If your company is going to adopt a
          plan to pay all your medical bills, health insurance,
          life insurance or educational expenses, the IRS
          requires some formalities.  To get the federal tax
          advantages of a corporation you are expected to
          actually have documented shareholders and director's
          meetings -- even if just you are involved.  This is
          called observing the formalities of the corporate form. 
          Receipts and disbursements are expected to be
          transmitted in and out of the company checking account.
               As an employee of a corporation you can, by
          resolution, set up a pension plan.  Into this plan you
          can deposit part of what the corporation pays you.  The
          deposit into the pension plan (which is just another
          bank account) is deductible to the corporation, but not
          taxable to you until you take it out.  You can invest
          the pension fund, put your best deals in the pension
          fund, and make millions in capital gains, interest, and
          dividends -- all accumulating tax free until you close
          out the pension fund.  All profits made by the pension
          fund are tax free. 
          
          
          
