Becoming Incorporated – The Pros and Cons Of Incorporation

So you currently have your own business and you’re pondering over whether or not you should incorporate it, or carry on as a sole trader?

Before you make the incorporation decision, you need to consider all of the advantages and disadvantages that incorporating brings.

This article will set out to explain the benefits and downsides to incorporation, starting with the benefits …

Benefits of Incorporation:

Personal Liability Protection

An incorporated company is a separate legal entity responsible for its own debts. Shareholders only have responsibility for servicing debts and liabilities up to the value of their equity in the Company.

Creditors of a corporation can only seek payment from the assets of the incorporated business and not from the personal assets of shareholders, directors and officers.

As a small business owner of a non incorporated company, your personal assets are at risk if your business fails to service it’s debts.

Personal liability protection is therefore a major benefit of business incorporation.

However, owners forming new corporations with small amounts of invested capital may well be asked to provide personal guarantees that credit will be honoured to reduce the risk of the lender.

Also, owners of incorporated businesses are required to personally ensure that the company makes its required tax repayments.

Protection From Legal Action

As with personal liability protection from debts above, the personal assets of the company’s owners is protected by the separate legal entity status in cases where the incorporated company faces legal action.

Note, incorporation does not protect a company’s officers from liability and prosecution in cases where the company is found guilty of criminal negligence.

Tax Advantages

Some incorporated businesses can enjoy lower taxation rates following business incorporation compared with partnerships and sole traders. One way of achieving lower taxation is to minimise the salary paid to the owners to reduce higher rates of personal taxation, and draw income from the business in the form of dividends which are taxed at a lower rate.

Obviously professional advice from a qualified taxation expert should be sought in all instances as all personal circumstances are different.

Other taxation benefits of incorporation are that once incorporated, many additional items of expenditure become tax deductible. For example medical expenses, entertainment expenses, vehicle and travel costs, recreational facilities and pension costs all become tax deductible. This can be a significant cash benefit. In particular money placed in an approved pension plan is tax free as is the funds growth.

Raising New Capital

Once you’ve incorporated your business, the ability to issues shares simplifies the process of raising capital investment. It’s also easier to get loans and other finance approved from financial lending institutions if you are an incorporated company.

Transferring Ownership

The existence of shares also simplifies the sale of your business in the future. Also should an owner or director die, the business can continue to operate indefinitely.

Business Credibility

Having the words Inc or Corp in your business name gives a positive perception of long term financial stability.

Disadvantages of Incorporation

Double Taxation

Once incorporated, earnings are subject to double taxation, whereby, company profits are taxed, and then the dividends paid to shareholders from the “net” profits are also taxed.

With a non-incorporated business, the income the owner receives from the business is only taxed once. Double taxation can be avoided if the corporation is registered as an “S-Corporation”

Statutory Compliance Costs

Compliance with legal and accounting requirements places a significant burden on companies in terms of staffing, cost and time. There are also fees associated with the initial company incorporation, and ongoing operations.

Loss of flexibility The separate legal entity status of incorporation also means that the company finances are separate from the individual’s, therefore the individual cannot “borrow” money from the accounts of the corporation, and statutory requirements in general reduce the flexibility of what can and can’t be done with the business and its finances.

The above are some of the key advantages and disadvantages that you as a business owner need to consider before you begin the process of incorporation. You should always seek legal advice as all cases are different.

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What Are the Basic Employment Entitlements to Employee Pension Plans?

One of the key employment rights is the right to security in retirement. In the developed world, there is basically universal acceptance that there is a right to a pension plan which can meet one’s need for security in retirement. In America there is legislation which offers broad protection to the rights of employees in respect of pensions and therefore security in retirement and freedom from dependence on social security. The Employee Retirement Income Security Act of 1974 was a landmark piece of legislation which established the statutory right of employees to the payment of pension plan entitlements by their employer. It subsequently became Title 29 of the United States Code.

The act provides significant tax benefits for employees in relation to the operation of s.401(k) of the Internal Revenue Code. It means that there need to be disclosures to employees of the financial details of the retirement plans which are operated by their employer. There are norms and rules for the conduct of the fiduciaries of the employment plans and it also has legal options for access to United States federal courts in a situation where there is non-compliance with the act.

There are a number of government agencies which share responsibility for the application and oversight of general adherence to the terms of the legislation. The Department of Labor, the United States and Treasury and the Pension Benefit Guaranty Corporation which is a special statutory corporation that provides for a situation where a private employer collapses without making adequate provision for the pension entitlements of their staff.

There was a long period of historical development for the piece of legislation. As far back as the period of the Kennedy administration the committee on corporate pension plans was established. However, the event that gave the impetus for reform was when Studebaker collapsed and it had failed to fund its pension plan sufficiently for its former employees to have any security in retirement without reliance on social security.

It is important to remember that this legislation doesn’t specifically require that an employer establish a pension plan. However it does establish rules for the administration of employer pension plans including the need for employers to fund the plan at certain levels. Employees also need to be aware that this legislation requires pension plans to pay benefits in a specific manner. One of these requirements is that if a participating employee has a spouse there is automatic passage of the benefits to a surviving spouse unless there is a specific waiver.

Veterans Aid and Attendance Pension Benefit – Long Term Care Benefits for Veterans

Veterans Aid and Attendance Pension Benefit — Long Term Care Benefits for Veterans What Is the Aid and Attendance Benefit? The Veterans Benefits Administration offers a disability income available to veterans who served during a period of war or to their surviving spouses. This special benefit is officially called “pension” but is more popularly known as the “veterans aid and attendance pension benefit”. For a pension benefit for veterans younger than 65, evidence of total of disability must be provided. Veterans 65 and older do not have to disabled.

The National Care Planning Council estimates that as much as 30% of the US population over the age of 65 would qualify for the aid and attendance pension benefit under the right circumstances. That’s how many war veterans or surviving spouses of veterans there are. The benefit is such a well-kept secret that only a small fraction of these eligible veterans are actually receiving it. Death pension — a benefit available to a surviving spouse– is a lesser amount based on the same rules for applying for a living pension claim. In other words, the deceased veteran must have met the rules for pension — with the exception of being totally disabled or over age 65 — or have been receiving pension in order for his or her spouse to receive the lesser benefit. In addition, in order to be eligible or keep receiving the benefit, the surviving spouse must remain single.

Who can submit a claim? A claim is submitted by the veteran or by the veteran’s single surviving spouse in the case of a death claim. A duly appointed service organization, an employee of the local regional VA office, or a VA approved agent may file a claim on behalf of the veteran or the spouse. A claim cannot be filed with a general or durable power of attorney. The application will be sent back requesting proper documentation for a VA power of attorney. The veteran must sign a document specifically authorizing a power of attorney for someone to submit an initial claim for him. Many chagrined children with a durable power of attorney have submitted claims on behalf of a parent only to have the claim rejected by VA.

What happens if the veteran is incompetent? If the veteran cannot submit the original application or sign a power of attorney for a surrogate to file an application, then a duly appointed guardian can complete the application. VA also allows the spouse, a parent or next of kin, or a friend to complete and submit an application on behalf of an incompetent veteran if that person submits the proper power of attorney request and indicates the applicant could be considered incompetent for financial affairs. Even though the veteran or surviving spouse may be incompetent for financial affairs, he or she should always sign the power of attorney request if he or she is competent to do so. VA may appoint a fiduciary to take over the claim and the affairs for the claimant if VA determines he or she is incompetent.

How does VA handle power of attorney? Employees of VA and veterans service organizations already have authorization for power of attorney to file an application on behalf of the veteran. They have forms for the veteran to sign to allow this to happen. An attorney representing the veteran in other affairs can also request a power of attorney in the proper format and on his or her letterhead. Any single individual may also submit a letter requesting power of attorney to submit an application if it is signed by the veteran and if the letter provides certain required information. There is also a VA form in the book support packet that can be submitted for power of attorney. All attorney requests submitted for power of attorney must state that the veteran is not paying a fee to file the application on his or her behalf.

What is an “aid and attendance” or “housebound” rating? A “rating” is granted by a veteran service representative where a condition exists that makes the disability more severe. Medical evidence is required unless someone is a patient in a nursing home, and then the requirement is waived. The rating allows VA to pay an additional monthly amount of pension or compensation to a veteran or a surviving spouse for additional costs associated with this disability.

How does one qualify for aid and attendance or housebound rating? The application form has a block allowing for a request for either rating. Submitting medical evidence in advance instead of waiting for a request from VA can help expedite the process of getting this rating. We have provided in the book support packet, a sample form that might be used for this purpose. This form is also designed around information that VA is looking for and may be a more effective presentation of the facts than typical medical records from the doctor.

What is the effective date? The effective date is generally the day VA receives an original application. If it takes three months for the process of approval or six months, it doesn’t matter. The effective date still reverts to receipt of the original application.

When does payment begin? Generally, payments start on the first day of the month following the month of the effective date. This means that if it took six months to get approval, at least five months of benefit will be paid retroactively. VA requires automatic deposit of awards in a checking or savings account.

What happens if the veteran dies during the period of application? If the veteran dies during the period of application and the application was not approved prior to the death, there may be accrued benefits. If the regional office had all of the information in its possession that would have led to an approval, then there is an accrued benefit payable. Otherwise there is none. The full benefit is available for the month of death of the veteran and to a surviving spouse through an application on Form 21-534. This is the same form a surviving spouse uses for a death benefit claim for himself or herself. VA will award either an accrued benefit or death benefit to the surviving spouse whichever is larger. If there is no surviving spouse or dependent child, VA will pay the unreimbursed costs of last illness and burial to the person who paid those costs. A special claim must be submitted for these costs, not Form 21-534.

What is a veteran’s federal fiduciary, and does that affect the application? For a veteran who is considered incompetent to handle his own financial affairs, VA will appoint a fiduciary to receive the money and pay the bills. A federal fiduciary is an individual appointed for this purpose, usually a spouse or a family member. In most cases — except for the spouse living with the veteran — there is an interview required and mounds of paperwork. This process can take a long time, and it is to the advantage of the person filing an original claim to request the appointment of himself or herself as a fiduciary or for some other appropriate person or organization to help expedite the process. VA always makes the final decision on whom it appoints as a fiduciary. In fact, the agency might well ignore court appointed fiduciaries. In general, the decision favors declaring the veteran competent and avoiding a fiduciary where at all possible.

What is the income test for pension? If the household income adjusted for unreimbursed medical expenses and a deductible is greater than the maximum allowable pension rate — MAPR — there is no benefit. In 2007, the maximum allowable rate for a couple with aid and attendance allowance is $21,615 a year. For a single it is $18,234 a year. Without aid and attendance or housebound allowance the maximum couple’s rate is $14,313 a year and for a single it is $10,929 a year. Death pension rates are lower. People seeking a benefit with adjusted incomes greater than these levels will be denied.

Can a household with income above the maximum limit qualify for pension? A quirk in the way benefits are calculated can allow individuals and couples earning between $24,000 to $60,000 a year to still qualify for a benefit. It has to do with the treatment by VA of the very large recurring medical costs associated with home care, assisted living, or nursing home care.

What is the pension household asset test, and what can be done if the asset test is not met? As a general rule assets cannot exceed $80,000. A veteran or spouse occupied-house, a reasonable amount of land upon which it sits and a vehicle are exempt from the asset test. In reality there is no specific test in the regulations. Veterans service representatives are required to file paperwork justifying their decision if they allow assets greater than $80,000. Thus this amount has become a traditional ceiling. The service representative is encouraged to analyze the veteran’s household needs for maintenance and weigh those needs against assets that can be readily converted to cash. In the end, the decision as to allowable assets is a subjective decision made by a service representative. In certain cases a benefit award could be denied even if assets are below $20,000 or $10,000 or even zero dollars. There are legal ways to get around the asset test if assets are too high. These are described in our book.

What proofs and documents are required with the pension claim? We have already discussed the requirements for power of attorney and fiduciary if they apply. In addition, an original copy of the discharge from service — typically DD 214 or form WD — is required and the discharge must have been honorable. If there is a question about the marriage relationship, a marriage certificate or other proof may be necessary. Birth certificates of dependent children are usually not required but may be necessary under certain conditions. A dependent child is a minor, a dependent student under age 23, or a totally dependent adult child. There are certain documents that need to be submitted to prove future recurring medical expenses and to prove need for aid and attendance or housebound allowances. VA does not furnish these documents nor provide any information that they are required. Sample documents that could be used for these purposes are included in our book.

Can someone charge to help fill out the form? Federal code and VA regulations prohibit an agent, advisor or attorney from charging a fee to fill out and file a claim for pension. Most practitioners or providers help their clients for free, sometimes in the context of solving other retirement issues or providing long term care services. Some practitioners offer application advice for a fee (which is legal) but will send their clients to a veterans’ service organization to complete the application. Some assisted living facilities or home care providers also offer free advice or help and this seems to be an acceptable practice. An agent or attorney can also be paid by a disinterested third party under certain conditions to complete an application. However, a home care agency, assisted living facility or nursing home that pays an agent or attorney to complete an application on behalf of a resident or client does not meet the definition of a disinterested third party is in violation of the prohibition for charging a fee

How are assets, income and unreimbursed medical expenses determined? The applicant must submit details on the application of all income and all assets including retirement savings accounts such as IRAs. Almost any type of money received or anything received that can be converted into money is income. The only exclusions for assets are a personal residence (occupied by the veteran or spouse) and a reasonable amount of land it sits on as well as vehicles and other personal possessions. Personal possessions used as an investment such as a coin collection are counted as assets. Unreimbursed medical expenses can be almost any expense related to medical needs.

Are there any other reporting requirements? VA requires that any change in income or assets be reported immediately. The award is calculated for 12 months in advance, but at the beginning of each calendar year, a formal report called an EVR (Eligibility Verification Report) must be filed detailing all income, assets and unreimbursed medical expenses for the coming calendar year. For example if the award is granted in April for 12 months in advance, an EVR must be submitted in January of the next year that could affect the award amount for the remaining four months of the initial 12 month period. The EVR will be used for determining benefits for the calendar year on which it is based.

What is a veteran’s federal fiduciary, and does that affect the application? VA can appoint a number of different types of fiduciaries to manage the funds on behalf of an incompetent veteran. A federal fiduciary is typically an individual such as the spouse or a child whom the VA is most likely to appoint. If VA is not notified with the application that the veteran may be incompetent and that a fiduciary appointment is requested, this could slow down the application and approval process.

Will the pension benefit pay a nonlicensed homecare provider? VA does not pay providers directly but provides extra income to make up for the cost of licensed medical care. Medical conditions or injuries or diseases that require a need for ongoing licensed homecare will allow the applicant to reduce household income by the cost of homecare making it possible to receive the additional income from a pension award. If the beneficiary has an aid and attendance or housebound allowance, VA will allow deductions for nonlicensed providers as well.

Will the pension benefit pay a member of the family to provide care at home? As explained above, VA will not pay providers directly but only indirectly through extra income. If the beneficiary receiving care in the home has received a rating for aid and attendance or housebound, VA will allow expenses paid to a family member for care to be counted as unreimbursed medical expenses to qualify for the benefit. The care arrangement must be legitimate and appropriate evidence must be provided.

Does the pension benefit pay the costs of a nursing home? The application form has provision for indicating residency in a nursing home and whether or not the applicant is eligible for Medicaid. VA will automatically apply the monthly cost of the nursing home in determining the pension benefit. If the applicant is single with no dependent children at home and is eligible for Medicaid, VA is required to stop any payment of full benefits and only provide the veteran with $90 a month.

Does the pension benefit pay the costs of assisted living? As explained above, VA will not pay providers directly but only indirectly through extra income. If the beneficiary receiving care in assisted living has received a rating for aid and attendance or housebound, VA will allow expenses paid to assisted living for aid and attendance or housebound ratings — including room and board — to be counted as unreimbursed medical expenses. The cost of assisted living being used as a retirement residence is not considered a medical expense. It does not warrant a rating and cannot be deducted.

What are the requirements to receive a death pension benefit? The applicant must be a surviving spouse or a dependent child of an eligible veteran. VA form 21-534 is used to apply for death pension, death compensation, accrued benefits, or dependency and indemnity compensation (DIC). The surviving spouse must be single. A surviving spouse of any age is eligible as long as the deceased veteran served at least 90 days during a period of war. They had to be married at least a year prior to death or have a child as a result of the marriage. There is no requirement for total disability for the surviving spouse nor for the deceased veteran to have been totally disabled or older than age 65.

How does one prove that unreimbursed medical expenses will recur every month? VA has specific rules for proving future recurring medical expenses. Information in our book outlines the type of paperwork that must be submitted for each type of long term care service. The book also contains appropriate forms for this purpose. Neither the claims form nor information from the regional office provides any guidance on the rules for proving future recurring medical expenses for home care or assisted living. One simply has to know how to do it. This one crucial step often makes the difference between a successful claim and a denial.

What if the veteran or spouse is currently receiving Medicaid? Our interpretation of the rules leads us to believe that VA will not consider Medicaid payments as income. However, Medicaid will consider the nonallowance portion of the pension to be income. This could affect Medicaid eligibility in income test states. There is evidence that some income test states count the entire pension benefit including the allowance as income. According to federal Medicaid rules this should not happen.

What happens when the veteran or spouse wants to receive pension & Medicaid together? Federal law requires that a single veteran receiving Medicaid with no spouse or dependent children can receive no more than $90 a month from VA. Veterans in state veterans homes are exempt from this requirement. The veteran with a spouse can receive the benefit to help defray the costs of a nursing home. As a general rule, the pension benefit would probably not work if Medicaid were paying the bill. But the benefit does work well for non-Medicaid nursing home beds and while the recipient is going through the Medicaid spend down.

State Pension Reform Stymied by Court Opposition

Although many states have chosen to take divergent paths, courts have stopped several of them from restructuring, forcing administrations to work within the confines of their employee retirement plans. As a result, public employers are not afforded the flexibility to adjust the rate at which a worker may accumulate benefits, even in regards to work that an employee will do in the future. This constraint inhibits pension reform and the ability to manage the high cost of underfunded, and frequently, unrestrained, public employee pensions.

Contract ISSUES

Why do courts have the authority to block the public sector from making changes to their pension plans?

In an October 16th Bloomberg article, Steven Malanga, Senior Editor of ‘City Journal’ and a Senior Fellow at the Manhattan Institute think tank, wrote, “Many legal protections given to public-sector pensions arise from court decisions that treat laws governing public retirement systems as a contract between the state and a worker.”

“That puts pensions under the jurisdiction of the contract clause of the U.S. Constitution, or under state contract law,” according to Malanga.

For decades, California courts, including the California Supreme Court, have been sticklers on upholding contract law to preserve pensions. Not only does the worker’s contract commence on the first day of employment, according to Amy Monahan, a professor at the University of Minnesota Law School and author of a 2012 Iowa Law Review article about California’s stance, but it safeguards both past and future pension accruals.

Even though federal court decisions have held that prospective changes to contracts are not unconstitutional, Monahan points out that 12 other state Supreme Courts, have, in essence, created a bloc that embraces California’s rule on pension law. These states include: Alaska, Colorado, Idaho, Kansas, Massachusetts, Nebraska, Nevada, Oklahoma, Oregon, Pennsylvania, Vermont and Washington.

In addition, California courts have stretched the rule to include other benefits such as health care. In 2011, the California Supreme Court applied the precedent to retiree health-care benefits, ruling they-like pensions-are a vested contractual right that cannot be changed. In September, a Los Angeles judge decided that the city could not freeze its retiree health-care benefits.

Other States’ Efforts

There has been a concerted effort to amend state constitutions so that governments can modify public employee retirement plans.

Not surprisingly, a leading proponent of pension reform comes from California. Chuck Reed, the mayor of San Jose, has launched a proposed ballot initiative to specifically address and abolish the Supreme Court precedent to enable pension reform. Annual payments by San Jose to fund government pensions have jumped from $73 million in 2002 to $245 million in 2012.

New Jersey voters are starting with small steps. They approved a minor change to their constitution related to the pension reform of judges. In 2011, judges disputed state legislation requiring them to contribute more to their retirement. When a state judge blocked the proposal in court, the legislature put an amendment on the ballot to change its constitution, and 83 percent of voters approved it.

The state with the unfortunate title of “worst state pension crisis in the U.S.” by Moody’s Investor Service is Illinois, where public-union leaders argue that the Illinois constitution denotes that the state cannot make changes to its pension system for current workers. Prominent Chicago law firm Sidley Austin LLP challenged that line of reasoning in a brief, saying the clause only protects benefits that have already been earned. Advocates of pension reform have advised the Illinois legislature to at least enact changes and see if the state Supreme Court rules that they meet required standards. If the court does not, amending the state constitution may finally gain some strength this time as Illinois is spending $6 billion from its $31 billion general fund on pensions, mushrooming from $1.8 billion in 2008.

Even Colorado, a supporter of the California approach, is looking at alternatives. After the state legislature reduced annual cost-of-living increases for pensions in 2010, retirees sued to stop the changes. In 2011, a district court ruled in favor of the reduction, but a superior court reversed that ruling. Colorado’s Supreme Court is now considering the case.

If Reed succeeds with his California voter initiative plan, other states may follow suit. In the meantime, difficult struggles lie ahead in The Golden State and elsewhere. However, without the ability to adjust retirement benefits yet to be earned, state taxpayers can look forward to burgeoning pension costs in the years ahead while public employees and retirees likely will see their benefits reduced through bankruptcy.