ShareIn the United States the process of incorporating a company is needlessly difficult. Entrepreneurs get to make a bewildering choice between a sole proprietorship, a general partnership, a limited partnership, a limited liability partnership, a c-corporation, an s-corporation, a limited liability company, and a host of other choices.
Each type of legal entity has different attributes and requires a multitude of different forms and procedures. Whether you can choose one of these entities is based on some strange and unusual criteria you must meet, which often can be cleverly circumvented by the proper paperwork (for example, although an s-corporation is limited to 100 shareholders, those shareholders can be companies or trusts themselves, allowing you to indirectly expand the number of owners). Each of these entities gets treated differently by the taxation system on the federal, state and local level, and on an income and payroll level.
Google returns 39 million documents for the word “incorporate” but do any of them cleanly and simply explain how to go about it? The process is so complex and the source material for how these rules get decided is so dispersed across different federal and state agencies that the advice given is often wrong. The advice lots of lawyers give can be wrong too. I know, I’m a former large firm lawyer, and I’ve seen people misunderstand the consequences of certain choices.
Incorporation is so complex that various different services of highly different levels of quality have sprung up to tackle it. These vary from $50 incorporation services that often offer poor explanations of the consequences of different incorporation choices to $3000 services at large law firms. The complexity of the incorporation system is really only to the advantage of the advisors.
Hernando de Soto has explained that for a country to unleash its capital and generate wealth it needs to remove the barriers to entrepreneurs seeking to pool and use capital (see my review of his book). Muhammad Yunus has explained and demonstrated (wikipedia) even those in great poverty are entrepreneurs, if only they are given access to the opportunity. It is past time for the incorporation process to be reformed. Even an incorporation process that costs $100 bars the entry of many people who would like to start their own company (and in California incorporation carries government and tax fees of at least $900, not including advisor’s fees).
How should reform be implemented? Some principles to ponder:
- There should be a single federal website (company.gov) you go to to start a company in any of the 50 states or on a federal level.
- The website should give you a checklist of attributes you would like your company to have. Check whether it is a nonprofit, for profit, a social business, limited liability, pass through taxation, etc.
- Each attribute you choose should clearly list the prerequisites and effects (pros and cons) of choosing it.
- Regardless of what attributes you choose for your company, there should be a single form you fill out to file taxes for the company. This form should be the same across all companies.
- Servicing a lawsuit against a company should be as simple as uploading a claim on the federal website. Companies, the press and the public would easily and freely be able to find out about new claims.
- States should have the freedom to add new attributes to the federal website for companies incorporated in their state, so that innovation in corporate forms is not curtailed.
- Incorporating on the federal website should automatically create your unique taxpayer identification number, and potentially provide further plain language information on how to start and fund your business.
Complexity in the incorporation processes is similar to complexity in the taxation process, creating unfair advantages for those who can afford the best advice. Refining the incorporation process could be a stepping stone to tackling reform of the tax system.
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