Although Tel-Law information is periodically reviewed, it is important for you to realize that changes may occur in this area of law. This information is not intended to be legal advice regarding your particular problem, and it is not intended to replace the work of an attorney.

If you do not have an attorney, the Oregon State Bar Lawyer Referral Service can help you. Online Lawyer Referral Service information and a fill-in form is available. Or you may contact the service by phone: The number to call from the Portland area is 503-684-3763 or toll-free from anywhere else in Oregon, 1-800-452-7636.

The following information regarding incorporating is brought to you as a public service by the lawyers of the State of Oregon. The material presented is general legal information intended to alert you to possible legal problems and solutions.

First: Liability. A person generally becomes an owner of an interest in a corporation by investing cash or other property in exchange for stock issued by the corporation. A person with that ownership interest is called a stockholder or shareholder. A shareholder's liability is limited generally to the value of the cash or other property contributed to the corporation in exchange for stock. Therefore, as a general rule, the shareholder's assets not invested in the corporation are safe from the corporation's creditors. However, a shareholder may become personally liable for corporate debts if the corporation is not formed in compliance with or it operates in violation of applicable statutes, or if the corporation is operated as a mere front for its shareholders rather than for corporate purposes. A shareholder also may become personally liable, if, during the performance of a corporate act, the shareholder does something negligent that results in injury to a third party or its property, such as from a car accident. Under some circumstances, corporate officers may be held personally responsible for the corporation's failure to pay state and federal income tax withholdings. In addition, a shareholder often personally guarantees obligations of the corporation in order to satisfy a lender or vendor, and if a shareholder does so, his or her liability is no longer limited to the value of his or her investment in the corporation.

Second: Control. The business affairs of a corporation are managed by its board of directors and its officers. The directors are elected by the shareholders. Therefore, while shareholders have the ultimate control of a corporation because of their stock ownership, the day-to-day management lies with the board of directors through its officers.

When a corporation has a large number of shareholders, such day-to-day centralized management by the board of directors can be an advantage. This division of responsibility and possible conflicts of interest between the shareholders and directors can also create the risk of dissension. However, in small corporations the shareholders, directors and officers are often the same person or persons.

Third: Transferability of ownership interest. A corporation can have a perpetual existence, and it is not affected by the death, withdrawal, or entry of shareholders, officers, or directors. The corporation can simply continue its business uninterrupted by such events, and only the ownership of the shares of stock in the corporation is involved. This ease of transferring of shares of corporate stock may facilitate family estate planning, gifts to children, intra-family sales, transfers between shareholders, and compensation of key employees. Shareholders can enter into an agreement limiting the transferability of shares of stock and providing for the sale and purchase of the stock on death, disability, withdrawal from the corporation, or other such circumstances. This ease of transferring shares of stock also facilitates the financing of the corporation through the issuance of stock to the general public. Public offerings of stock are subject to numerous federal and state requirements and generally require the assistance of counsel familiar with these requirements.

Fourth: Taxes. Corporations may enjoy certain tax advantages and are subject to certain tax disadvantages: Because of the complexities involved, anyone considering incorporation should consult with a qualified tax adviser prior to incorporation.

The corporation or a non-corporate business entity can adopt a pension or profit-sharing plan for the benefit of the employees. If certain requirements are met, contributions of cash or other property by a corporation to such a plan will be deductible by the corporation for federal income tax purposes, the earnings derived from contributions to such a plan will not be currently subject to tax, and the employees will not be taxed on their share of the funds until it is distributed to them. Under current tax law, there is very little difference between the types of plans that a corporation may adopt compared to a non-corporate business entity. The corporation may be able to provide for its employees tax free: (1) group-term life insurance benefits; (2) medical and dental insurance benefits; (3) so called cafeteria plans; and (4) death benefits. While a non-corporate business entity can provide these same benefits, if the shareholder is also an employee, the shareholder becomes eligible to receive these benefits. Those benefits may be treated differently for shareholders in an “S” corporation.

The corporation pays income tax on the profits that are not distributed to the shareholders-employees as salary or in some other form deductible by the corporation for federal income tax purposes, and the shareholders-employees also pay a tax on that same money when it is later distributed to them as a dividend. This disadvantage can be avoided if distributions are made to the shareholders-employees in a form that is deductible to the corporation for federal income tax purposes, such as salary.

Operating losses of corporations cannot be deducted by the shareholders unless the corporation has made an "S" election.

If the shareholder is an employee, the shareholder's compensation is subject to state and federal payroll withholding requirements.

In 1993, Oregon law authorized the formation of a business entity called a limited liability company or LLC. A LLC is not a corporation. A LLC can be taxed as a partnership or like a corporate entity.

It is important to keep in mind that the factors that have been discussed are the principal considerations to be evaluated in determining whether a business should be organized as a corporation. However, they are not the only considerations.

This information is from the Oregon State Bar's Tel-law service, a collection of recorded legal information messages prepared by the lawyers of Oregon. In addition to being online, the Tel-law service is accessible by telephone at 503-620-3000 or toll-free in Oregon only, 1-800-452-4776. A touch tone phone allows direct access 24 hours a day, 7 days a week. To receive a free Tel-law brochure listing the subjects available call 503-620-0222, ext. 0.