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A Guide To Incorporating
Your Startup
Forming a C Corporation, S Corporation or LLC
LawTrades.com
Benefits of Incorporation - How to Maintain a Corporation - C Corps v. S Corps v. LLCs

Introduction 3...................................................................
Sole Proprietorship 3...........................................................................................................
General Partnership 4..........................................................................................................
Corporations 4.....................................................................................................................
S Corporations v. C Corporations 4....................................................................................
Advantages of Incorporating Your Business 6..................
Limited Liability 6................................................................................................................
Tax Savings 6.......................................................................................................................
Perpetual Existence 7..........................................................................................................
Accessing Loans and New Revenue 7.................................................................................
Increased Business 7..........................................................................................................
Ease of Transfer 8................................................................................................................
Operating a Corporation 9...............................................
Shareholder and Director Meetings 9.................................................................................
Separate Business Finances 9..............................................................................................
Annual Reports 9.................................................................................................................
Tax Returns 9......................................................................................................................
Limited Liability Companies (LLCs) 10..............................
Limited Liability Company (LLCs) Compared to S-Corporations 10....................................
Where to Incorporate 12..................................................
LawTrades Incorporation Service 13.................................
1. Get Introduced 13...........................................................................................................
2. Compare 13.....................................................................................................................
3. Hire 13.............................................................................................................................
Table of Contents
Introduction
!
Every startup founder considers whether or not to incorporate his or her business at
some point. The legal entity you choose for your startup may be changed; you can
change the legal structures of your business as it expands. A common scenario is for
small businesses to start out as partnership or sole proprietorship and become
incorporated at some point later when the business has grown.
Incorporating a startup has many benefits for the founders. When a company or a
business turns into a corporation, it becomes a legal entity separate from the
individuals who own it. It has the same legal rights as the individual, but these are also
separate from the owners.
Incorporating a startup gives a long lasting business basis. For instance, if there were
only one owner of the business, the demise of that owner would usually mean the end
of the business. It could additionally mean legal battles with relatives and family
members who could claim legal rights to the business. Incorporating the business
means that it can continue regardless of the death of any shareholders, managers, or
executive officers. What’s more, the ownership of the company can be transferred by
selling stocks in the corporation.
Sole Proprietorship
A sole proprietorship is a form of business owned and managed by one person. Sole
proprietorship is one of the simplest and easiest businesses to start. It’s also the most
common and widespread form of business all over the world. Major characteristics of
this form of business organization include: The owner contributes all the capital plus
other resources, the owner gets all the business benefits, and lastly the owner shares all
the debts and obligations.
However, even with the low starting capital and simple operation, other factors can
make sole proprietorship the most expensive business type in the long run. First, you
are personally liable for all the business debts since your business liability is unlimited.
Second, you may not be enjoying the benefits of a variety tax savings, such as the
power to reduce self-employment taxes. Lastly, when it comes to passing on or selling
your business, it can’t be done. This form of business cannot continue beyond the
death of the owner.
General Partnership
Partnership is a relationship that it exists between two or more individuals jointly
carrying out business with the aim of making a profit. There are two types of
partnership that on can operate namely Limited Partnership and general Partnership.
A general partnership is one in which all the members of the business have unlimited
liability. Limited partnership is one in which the liabilities of some members is limited to
the amount of capital they originally put in the business. Just like the sole
proprietorship, when the owners of a general partnership die that marks the end of the
business. In addition, if they fail to repay their debts in time, all their assets can be sold
to account for the debts.
Corporations
A corporation is a separate legal entity that has been incorporated either directly
through a registration process or through legislation established by law. The key
benefit of a corporation is that its owners (shareholders or stakeholders), are not
personally liable for the liabilities and debts of the corporation.
Despite not being human beings, corporations are legal persons and have many of the
same legal rights and responsibilities as normal human beings do. Corporation can
exercise human rights against the state and real people, and they can themselves be
liable for human rights violations. Corporations can own and operate a business, buy
and sell goods and services, hire employees, enter into contracts, lease or buy real
estate, maintain its own savings and checking accounts, and sue and be sued. A
corporation is not affected in any way by the bankruptcy or death of any stakeholder,
director or officer. Instead, it continues to operate as long as it complies with the
corporate formalities and state requirements.
S Corporations v. C Corporations
Small business owners and startups usually choose from these two basic types of
corporations. The C Corporation is the most dated of the arrangements, and is more
often employed by large companies. With a regular corporation, the company’s losses
or profits are directly absorbed into the business. On the other hand, with the S-
Corporation, the business’s losses and profits are usually directed to the company’s
stakeholders.
The S-Corporation option was actually put in place by the federal government in
recognition of the fact that the working challenges faced by large businesses and small
businesses can actually be very different. As a matter of fact, the S-Corporation was
actually designed specifically for small business owners. S-Corporations give their
owners the limited-liability protections offered by corporate status, while also providing
them with a more beneficial tax environment. Indeed, S-Corporation status puts
businesses in the same basic tax state as sole proprietorship and partnerships. On the
other hand, the C-Corporations are subject to double taxation, profits registered by an
S-Corporation are only taxed once, when they reach the company’s stakeholders.
!
!
!
!
!
!
Advantages of Incorporating
Your Business
!
Limited Liability
The main advantage to incorporate your company is the limited liability of the
incorporate company. Unlike the sole proprietorship or the general partnership, where
the business owner assumes all the debts and liability of the business, when a company
becomes incorporated, a person’s shareholder’s liability is limited to the amount that
he/she has invested in the company.
!
If you are a sole proprietor, your personal belongings, such as your car and house can
be seized to settle the debts of your business; as a stakeholder in a corporation, you
cannot be held responsible for the liability and debts of the corporation unless you
have given a personal guarantee.
!
In addition, a corporation has the same rights as a person; a corporation can incur
liabilities, sue or be sued, own property and carry on business.
Tax Savings
A general partnership or sole proprietorship will also miss out on some vital tax
advantage available to corporations. The following are some of the tax advantages that
you will get when you decide to incorporate your business:
Reduction in self-employment tax- When you work as a sole proprietor, your first
113,100 dollars of earnings for tax in the year 2014 is subject to self-employment taxes,
that is Medicare and Security, which is currently a combined 15.3 percent. With a
corporation, the only thing subject to taxes is salaries. You can generate significant tax
savings by allocating a corporation’s earnings between a reasonable salary and profit.
Medical Expenses- C-Corporations can offer medical compensation plan for their
owners, employees and officers, which allows you to subtract medical expenses not
covered by insurance. With a sole proprietorship or general partnership, medical
compensation plans may cover employees, but not the owner. Thus, uncompensated
medical costs are deductible only if they exceed 10 percent of AGI (adjusted gross
income).
Retirement plans and fringe benefits- There are quite a number of fringe tax benefits
that one can get when he or she incorporates his or her company. For instance, a
corporate tax-deferred retirement plans such as define benefits plans and define
contributions, can have higher contributions limits and can be more flexible.
Corporation are additionally allowed to pay for and deduct certain childcare expenses,
group disability insurance premiums, term group life insurance premiums, and certain
travel costs associated with shareholders’ and directors’ meetings.
Perpetual Existence
Corporations and LLCs continue to operate throughout management or ownership
changes within your company. General partnerships and sole proprietorship simply end
if an owner leaves the business or dies. Forming a corporation ensures that your
business’s legacy can be preserved, as well as continue to provide services for clients
and employment should any changes in ownership take place.
Accessing Loans and New Revenue
A general partnership or sole proprietorship depends on small loans and trickling
revenue streams to stay alive in different times. On the other hand, an incorporated
company can seek out larger loans from commercial banks that look at articles of
incorporation as signs of future success. Corporations can also seek raise more money
by using IPOs (initial public offerings) and additional offerings to selected investors.
Increased Business
Having Corp, Inc., or Ltd. As part of your business’s name may increase your company’s
earnings, as people perceive corporations as being more financial stable than
unincorporated businesses. For example, if you are a contractor, you may also find that
some companies will only work with incorporated companies, because of liability
issues.
Ease of Transfer
Ownership of the business can be transferred easily and fairly by simply selling stock.
On the other hand, a sole proprietorship or general partnership cannot be sold as a
whole. Instead, each of its permits, licenses and assets must be personally transferred.
!
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!
!
!
Operating a Corporation
!
In order to operate and maintain your corporation properly to ensure personal liability
protection, you will be required to comply with certain corporate formalities. Some of
the most vital ones include:
Shareholder and Director Meetings
Corporate stakeholders must meet annually to elect corporate directors. Directors are
also obliged to meet at least once yearly to elect corporate officers. You may
additionally be required to hold special meetings to approve special actions, such as
amending charter documents, purchasing another company, approving actions that fall
outside if the formal line of business and adding a new shareholder. During these
meetings, written minutes are always taken which record the actions that take place in
the meeting.
Separate Business Finances
Due to the fact that a corporation is a separate legal entity, corporate finances should
be kept separate from your own personal moneys. It’s important to have a corporate
bank account, and you will also be required to have a separate EIN (Federal Tax ID
Number).
Annual Reports
After the initial government fillings, most states require a yearly report that outlines the
names of the officers and directors as well as the corporations’ business address.
Basically, the state needs a filing fee with the yearly report.
Tax Returns
Corporations are also required to file a federal corporate tax return, either on Form
1120 for C-Corporations or Form 1120S for S-Corporations.
!
!
Limited Liability Companies
(LLCs)
!
A limited liability company is a hybrid form of legal structure that provides the
operational flexibility of a partnership and the limited liability features of a corporation
and the tax efficiencies.
Unlike stakeholders in a corporation, LLCs are not taxed as a separate business entity.
Instead, all losses and profits are passed through the business to each member of the
limited liability company. Just like the owners of partnerships, LLCs members report
losses and profits on their personal federal tax returns.
Limited Liability Company (LLCs) Compared to S-
Corporations
Less corporate formalities- corporations must hold meetings of the shareholders and
board of directors regularly and keep written corporate minutes. Conversely, the
managers and members of a limited liability company need not to hold regular
meetings, which reduces paperwork and complications, unless they chose to do so.
Simple Management Structure- Limited liability companies are not obliged to have a
formal board of directors. The owners and officers of a limited liability company can
make all vital company decisions directly.
Real Estate and Passive Income- A pass through tax structure should to be used to
reserve the advantages of capital gains treatment for asset distributions. Limited
liability companies have become the business entity of choice for real estate
investments as well as other passive income generating activities.
No ownership Restrictions- S-Corporations are not allowed to have more than 100
stakeholders, and each stakeholder must be a citizen or resident of the US. Such
restrictions do not apply on an LLC.
!
Greater Acceptance of Corporations- since LLCs are still relatively new on the market,
not everyone is well acquainted with them. In some cases, vendors or banks may be
reluctant to extend credit to a limited liability company. What’s more, some states
restrict the forms of business a limited liability company may conduct.
Potential Tax Disadvantage- By default, a limited liability company is usually treated as
a pass through entity for tax purposes, like a partnership or sole proprietorship.
Unfortunately, a limited liability company does not enjoy the same self-employment tax
savings as an S-Corporation. Instead, a single member limited liability company must
pay self-employment tax on both profit and salary. A limited liability company can,
however, make an election with the IRS to be taken as a corporation for tax purposes,
whether as an S-Corporation or C-Corporation.
!
!
!
!
!
!
!
Where to Incorporate
!
Businesses often choose to incorporate in the state where they are residing since you
don’t have to pay extra for a registered agent. But sometimes it makes sense to form
your corporation in a different state. For example, many high growth technology based
startups incorporates their C Corp in Delaware because it has a very efficient court
system that favors businesses and corporate law. There’s also some more administrative
ease than some other states and generally just garners a level of credibility with
investors and potential partners.
!
!
!
!
!
LawTrades Incorporation
Service
!
If you’re a startup founder, you need to protect your personal assets. Incorporating
your startup is one of the ways to do that. It will provide your with greater business
flexibility, save money in taxes, and make it much easier to attract investors and raise
capital.
LawTrades makes forming a corporation straight forward and more affordable than
using traditional law firms. Simply tell us about your business and receive instant
quotes from experienced startup lawyers starting as low as $379 plus state fees.
1. Get Introduced
Within minutes of telling us your legal need, we’ll introduce you to several lawyers who
can complete your legal job.
2. Compare
Each lawyer introduction will include a free consultation, transparent price quote, client
reviews, law office profile, and contact info.
3. Hire
Each lawyer introduction will include a free consultation, transparent price quote, client
reviews, law office profile, and contact info.
!
!
!
!
To learn more about the LawTrades Incorporation service or to get started, call us at
(646) 470-5298 Monday-Friday from 9:00am-9:00pm and Saturday from
10:00am-6:00pm EST.

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Startup Guide to Incorporating by LawTrades

  • 1. ! ! A Guide To Incorporating Your Startup Forming a C Corporation, S Corporation or LLC LawTrades.com Benefits of Incorporation - How to Maintain a Corporation - C Corps v. S Corps v. LLCs

  • 2. Introduction 3................................................................... Sole Proprietorship 3........................................................................................................... General Partnership 4.......................................................................................................... Corporations 4..................................................................................................................... S Corporations v. C Corporations 4.................................................................................... Advantages of Incorporating Your Business 6.................. Limited Liability 6................................................................................................................ Tax Savings 6....................................................................................................................... Perpetual Existence 7.......................................................................................................... Accessing Loans and New Revenue 7................................................................................. Increased Business 7.......................................................................................................... Ease of Transfer 8................................................................................................................ Operating a Corporation 9............................................... Shareholder and Director Meetings 9................................................................................. Separate Business Finances 9.............................................................................................. Annual Reports 9................................................................................................................. Tax Returns 9...................................................................................................................... Limited Liability Companies (LLCs) 10.............................. Limited Liability Company (LLCs) Compared to S-Corporations 10.................................... Where to Incorporate 12.................................................. LawTrades Incorporation Service 13................................. 1. Get Introduced 13........................................................................................................... 2. Compare 13..................................................................................................................... 3. Hire 13............................................................................................................................. Table of Contents
  • 3. Introduction ! Every startup founder considers whether or not to incorporate his or her business at some point. The legal entity you choose for your startup may be changed; you can change the legal structures of your business as it expands. A common scenario is for small businesses to start out as partnership or sole proprietorship and become incorporated at some point later when the business has grown. Incorporating a startup has many benefits for the founders. When a company or a business turns into a corporation, it becomes a legal entity separate from the individuals who own it. It has the same legal rights as the individual, but these are also separate from the owners. Incorporating a startup gives a long lasting business basis. For instance, if there were only one owner of the business, the demise of that owner would usually mean the end of the business. It could additionally mean legal battles with relatives and family members who could claim legal rights to the business. Incorporating the business means that it can continue regardless of the death of any shareholders, managers, or executive officers. What’s more, the ownership of the company can be transferred by selling stocks in the corporation. Sole Proprietorship A sole proprietorship is a form of business owned and managed by one person. Sole proprietorship is one of the simplest and easiest businesses to start. It’s also the most common and widespread form of business all over the world. Major characteristics of this form of business organization include: The owner contributes all the capital plus other resources, the owner gets all the business benefits, and lastly the owner shares all the debts and obligations. However, even with the low starting capital and simple operation, other factors can make sole proprietorship the most expensive business type in the long run. First, you are personally liable for all the business debts since your business liability is unlimited. Second, you may not be enjoying the benefits of a variety tax savings, such as the power to reduce self-employment taxes. Lastly, when it comes to passing on or selling
  • 4. your business, it can’t be done. This form of business cannot continue beyond the death of the owner. General Partnership Partnership is a relationship that it exists between two or more individuals jointly carrying out business with the aim of making a profit. There are two types of partnership that on can operate namely Limited Partnership and general Partnership. A general partnership is one in which all the members of the business have unlimited liability. Limited partnership is one in which the liabilities of some members is limited to the amount of capital they originally put in the business. Just like the sole proprietorship, when the owners of a general partnership die that marks the end of the business. In addition, if they fail to repay their debts in time, all their assets can be sold to account for the debts. Corporations A corporation is a separate legal entity that has been incorporated either directly through a registration process or through legislation established by law. The key benefit of a corporation is that its owners (shareholders or stakeholders), are not personally liable for the liabilities and debts of the corporation. Despite not being human beings, corporations are legal persons and have many of the same legal rights and responsibilities as normal human beings do. Corporation can exercise human rights against the state and real people, and they can themselves be liable for human rights violations. Corporations can own and operate a business, buy and sell goods and services, hire employees, enter into contracts, lease or buy real estate, maintain its own savings and checking accounts, and sue and be sued. A corporation is not affected in any way by the bankruptcy or death of any stakeholder, director or officer. Instead, it continues to operate as long as it complies with the corporate formalities and state requirements. S Corporations v. C Corporations Small business owners and startups usually choose from these two basic types of corporations. The C Corporation is the most dated of the arrangements, and is more often employed by large companies. With a regular corporation, the company’s losses or profits are directly absorbed into the business. On the other hand, with the S-
  • 5. Corporation, the business’s losses and profits are usually directed to the company’s stakeholders. The S-Corporation option was actually put in place by the federal government in recognition of the fact that the working challenges faced by large businesses and small businesses can actually be very different. As a matter of fact, the S-Corporation was actually designed specifically for small business owners. S-Corporations give their owners the limited-liability protections offered by corporate status, while also providing them with a more beneficial tax environment. Indeed, S-Corporation status puts businesses in the same basic tax state as sole proprietorship and partnerships. On the other hand, the C-Corporations are subject to double taxation, profits registered by an S-Corporation are only taxed once, when they reach the company’s stakeholders. ! ! ! ! ! !
  • 6. Advantages of Incorporating Your Business ! Limited Liability The main advantage to incorporate your company is the limited liability of the incorporate company. Unlike the sole proprietorship or the general partnership, where the business owner assumes all the debts and liability of the business, when a company becomes incorporated, a person’s shareholder’s liability is limited to the amount that he/she has invested in the company. ! If you are a sole proprietor, your personal belongings, such as your car and house can be seized to settle the debts of your business; as a stakeholder in a corporation, you cannot be held responsible for the liability and debts of the corporation unless you have given a personal guarantee. ! In addition, a corporation has the same rights as a person; a corporation can incur liabilities, sue or be sued, own property and carry on business. Tax Savings A general partnership or sole proprietorship will also miss out on some vital tax advantage available to corporations. The following are some of the tax advantages that you will get when you decide to incorporate your business: Reduction in self-employment tax- When you work as a sole proprietor, your first 113,100 dollars of earnings for tax in the year 2014 is subject to self-employment taxes, that is Medicare and Security, which is currently a combined 15.3 percent. With a corporation, the only thing subject to taxes is salaries. You can generate significant tax savings by allocating a corporation’s earnings between a reasonable salary and profit.
  • 7. Medical Expenses- C-Corporations can offer medical compensation plan for their owners, employees and officers, which allows you to subtract medical expenses not covered by insurance. With a sole proprietorship or general partnership, medical compensation plans may cover employees, but not the owner. Thus, uncompensated medical costs are deductible only if they exceed 10 percent of AGI (adjusted gross income). Retirement plans and fringe benefits- There are quite a number of fringe tax benefits that one can get when he or she incorporates his or her company. For instance, a corporate tax-deferred retirement plans such as define benefits plans and define contributions, can have higher contributions limits and can be more flexible. Corporation are additionally allowed to pay for and deduct certain childcare expenses, group disability insurance premiums, term group life insurance premiums, and certain travel costs associated with shareholders’ and directors’ meetings. Perpetual Existence Corporations and LLCs continue to operate throughout management or ownership changes within your company. General partnerships and sole proprietorship simply end if an owner leaves the business or dies. Forming a corporation ensures that your business’s legacy can be preserved, as well as continue to provide services for clients and employment should any changes in ownership take place. Accessing Loans and New Revenue A general partnership or sole proprietorship depends on small loans and trickling revenue streams to stay alive in different times. On the other hand, an incorporated company can seek out larger loans from commercial banks that look at articles of incorporation as signs of future success. Corporations can also seek raise more money by using IPOs (initial public offerings) and additional offerings to selected investors. Increased Business Having Corp, Inc., or Ltd. As part of your business’s name may increase your company’s earnings, as people perceive corporations as being more financial stable than unincorporated businesses. For example, if you are a contractor, you may also find that some companies will only work with incorporated companies, because of liability issues.
  • 8. Ease of Transfer Ownership of the business can be transferred easily and fairly by simply selling stock. On the other hand, a sole proprietorship or general partnership cannot be sold as a whole. Instead, each of its permits, licenses and assets must be personally transferred. ! ! ! ! ! ! ! ! !
  • 9. Operating a Corporation ! In order to operate and maintain your corporation properly to ensure personal liability protection, you will be required to comply with certain corporate formalities. Some of the most vital ones include: Shareholder and Director Meetings Corporate stakeholders must meet annually to elect corporate directors. Directors are also obliged to meet at least once yearly to elect corporate officers. You may additionally be required to hold special meetings to approve special actions, such as amending charter documents, purchasing another company, approving actions that fall outside if the formal line of business and adding a new shareholder. During these meetings, written minutes are always taken which record the actions that take place in the meeting. Separate Business Finances Due to the fact that a corporation is a separate legal entity, corporate finances should be kept separate from your own personal moneys. It’s important to have a corporate bank account, and you will also be required to have a separate EIN (Federal Tax ID Number). Annual Reports After the initial government fillings, most states require a yearly report that outlines the names of the officers and directors as well as the corporations’ business address. Basically, the state needs a filing fee with the yearly report. Tax Returns Corporations are also required to file a federal corporate tax return, either on Form 1120 for C-Corporations or Form 1120S for S-Corporations. ! !
  • 10. Limited Liability Companies (LLCs) ! A limited liability company is a hybrid form of legal structure that provides the operational flexibility of a partnership and the limited liability features of a corporation and the tax efficiencies. Unlike stakeholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all losses and profits are passed through the business to each member of the limited liability company. Just like the owners of partnerships, LLCs members report losses and profits on their personal federal tax returns. Limited Liability Company (LLCs) Compared to S- Corporations Less corporate formalities- corporations must hold meetings of the shareholders and board of directors regularly and keep written corporate minutes. Conversely, the managers and members of a limited liability company need not to hold regular meetings, which reduces paperwork and complications, unless they chose to do so. Simple Management Structure- Limited liability companies are not obliged to have a formal board of directors. The owners and officers of a limited liability company can make all vital company decisions directly. Real Estate and Passive Income- A pass through tax structure should to be used to reserve the advantages of capital gains treatment for asset distributions. Limited liability companies have become the business entity of choice for real estate investments as well as other passive income generating activities. No ownership Restrictions- S-Corporations are not allowed to have more than 100 stakeholders, and each stakeholder must be a citizen or resident of the US. Such restrictions do not apply on an LLC. !
  • 11. Greater Acceptance of Corporations- since LLCs are still relatively new on the market, not everyone is well acquainted with them. In some cases, vendors or banks may be reluctant to extend credit to a limited liability company. What’s more, some states restrict the forms of business a limited liability company may conduct. Potential Tax Disadvantage- By default, a limited liability company is usually treated as a pass through entity for tax purposes, like a partnership or sole proprietorship. Unfortunately, a limited liability company does not enjoy the same self-employment tax savings as an S-Corporation. Instead, a single member limited liability company must pay self-employment tax on both profit and salary. A limited liability company can, however, make an election with the IRS to be taken as a corporation for tax purposes, whether as an S-Corporation or C-Corporation. ! ! ! ! ! ! !
  • 12. Where to Incorporate ! Businesses often choose to incorporate in the state where they are residing since you don’t have to pay extra for a registered agent. But sometimes it makes sense to form your corporation in a different state. For example, many high growth technology based startups incorporates their C Corp in Delaware because it has a very efficient court system that favors businesses and corporate law. There’s also some more administrative ease than some other states and generally just garners a level of credibility with investors and potential partners. ! ! ! ! !
  • 13. LawTrades Incorporation Service ! If you’re a startup founder, you need to protect your personal assets. Incorporating your startup is one of the ways to do that. It will provide your with greater business flexibility, save money in taxes, and make it much easier to attract investors and raise capital. LawTrades makes forming a corporation straight forward and more affordable than using traditional law firms. Simply tell us about your business and receive instant quotes from experienced startup lawyers starting as low as $379 plus state fees. 1. Get Introduced Within minutes of telling us your legal need, we’ll introduce you to several lawyers who can complete your legal job. 2. Compare Each lawyer introduction will include a free consultation, transparent price quote, client reviews, law office profile, and contact info. 3. Hire Each lawyer introduction will include a free consultation, transparent price quote, client reviews, law office profile, and contact info. ! ! ! ! To learn more about the LawTrades Incorporation service or to get started, call us at (646) 470-5298 Monday-Friday from 9:00am-9:00pm and Saturday from 10:00am-6:00pm EST.